Sunday, September 30, 2012

Beware of Clintons bearing gifts

Published in The Tennessean, Sunday, September 2, 2012 and in FORBES with archives.

by Richard J. Grant

To summarize the economic performances of American presidents, a well-known economic adviser once remarked, “I like principled conservatives and unprincipled liberals.” This, by way of introducing former president Bill Clinton who, in his recent convention speech, is widely believed to have boosted the reelection chances of President Barack Obama. But Clinton's greatest gift to Obama was placed under the tree almost 20 years ago.

Clinton recognized the untapped potential in some Carter-era legislation, the Community Reinvestment Act (CRA), which would give his administration leverage over financial institutions to increase loans to members of key voting blocs despite their relatively poor credit ratings. The subprime market had always existed because the higher risks were balanced by higher fees and interest rates, but the CRA pressured banks to increase loans and to hold down fees. From the early 1990s, the dollar amount of CRA loans began a steep decade-long climb.

The Federal Reserve is one of the agencies that oversee CRA compliance. It describes the CRA as “intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods, consistent with safe and sound operations.” The theory must be that without the CRA, entrepreneurs wouldn't know what to do. Apparently someone from Washington must tell them that their role is to serve customers.
The real effect of the CRA was to give arbitrary regulatory powers to federal agencies and to give shakedown powers to any community group that could threaten to bring a complaint against a target bank. This alone would be sufficient to tag the legislation as immoral, but it also coerced banks to direct scarce resources into risky uses and away from more productive uses. When combined with Federal Housing Administration guarantees and easy money from the Federal Reserve, mortgage lenders were induced to lower their standards in a moral surrender that spread beyond the subprime market.
As long as real estate prices continued to rise, troubled homeowners could avoid default on their mortgages by selling their properties to cover the loan obligations. The real estate boom was fueled not only by the CRA but also by favorable tax treatment and by the Fed's active lowering of interest rates. The end result of such policy-induced booms is always a bust; the only question is when it will break and how sharply.
The answer in this case came near the end of President George W. Bush's administration. The CRA remained in place throughout the Bush administration, which reaped whatever electoral advantages it offered. But they also reaped the reputational destruction that comes with being in office when a crash breaks.
They were not innocent – they aggressively promoted home ownership – though, in fairness, President Bush did eventually try to restrict the lending of Fannie Mae and Freddie Mac only to be rebuffed by a hostile Congress.
Thus was Clinton’s unintended gift delivered. The timing of the crash was Obama's good luck.
The CRA remains in place and is actively exploited by the Obama administration. The Federal Reserve continues to compensate for Obama's poor fiscal and regulatory performance with repeated rounds of quantitative easing to prop up mortgage and home values. But there is no boom: GDP growth approaches 1 percent, business startups are down, and median income is down, all because our governmental burdens continue to grow.

Richard J. Grant (Lipscomb University and the Beacon Center of Tennessee) appears every other Sunday. E-mail:

Sunday, September 16, 2012

Economic Recovery: How Did Successful Presidents Do It?

Published in The Tennessean, Sunday, September 2, 2012 and in FORBES with archives.

by Richard J. Grant
From a political perspective, the best time for a new president to take office is either during or immediately after a recession. Given the pattern of political and business interaction over the past century, any new president is likely to inherit the politically induced economic imbalances bequeathed by previous presidents and congresses. Recessions are the painful but necessary corrections of those imbalances, when businesses readjust their production, processes, and workforces to better fit the demand for their products.
In this, the Obama administration has two reasons to be thankful for their inheritance. Although Democrats already controlled the Congress in 2008, their opponents’ party held the White House when the recession hit. That eased their way to power and they entered office with the economy in the process of cleaning itself out. All they had to do was to let businesses sort themselves out, let the legal system do its job, and to wind down the bailout programs implemented by their predecessor.
But, as we know, they didn't do that. Instead, they added more money and their own politically inspired micromanagement of the bailouts and “stimulus” programs. The February 2009 stimulus package added more than $700 billion to a budget that was already in deficit. While it might have made life easier for a few mayors and governors, it saddled each American with an increase of more than $2000 as their share of new public debt. This was followed by the passage of two Leviathan-sized regulatory bills: one that pulled more of the healthcare and insurance industries under federal control, and another that further centralized federal control over the financial industry.

Sunday, September 02, 2012

How Reagan Was Compromised

Published in The Tennessean, Sunday, September 2, 2012 and in FORBES with archives.
by Richard J Grant

A politician who leads with compromise is like a prize fighter who leads with his chin. If you're in a real fight, you're not going to last long.

Some months ago, “compromise” was one of most popular words in political discourse. But the calls for compromise were suspiciously unidirectional. We were treated to portrayals of President Ronald Reagan as “the great compromiser” who, despite his professed intention to reduce marginal tax rates, actually “raised taxes 11 times.” Clearly this was a call to conservatives and Republicans, in the name of a man for whom they had great respect, to follow his example and compromise with those who wish to raise tax rates, perhaps in return for spending cuts, in order to reduce the budget deficit.

But should Reagan be remembered as a great compromiser? It is unlikely that the striking air traffic controllers or the Soviets would agree.  The art of principled compromise entails giving up a lesser value to achieve a greater value. The strikers and the Soviets asked Reagan to do the opposite; they ended with nothing.