Academic journal article The Cato Journal

The Financial Crisis: Why the Conventional Wisdom Has It All Wrong

Academic journal article The Cato Journal

The Financial Crisis: Why the Conventional Wisdom Has It All Wrong

Article excerpt

Like many of you, I am appalled at the political environment and gridlock that continues to exist in this town. I simply cannot understand nor do I accept why our elected officials continue to concentrate on party politics and the next election above doing what's right for America, especially as we endure the past five years of economic stagnation and high unemployment. Nothing is more debilitating and unfair than a head of household willing to work but who cannot find a job. Why hasn't job creation been the number-one focus of our government during this economic crisis?

Don't believe for a moment those economic theorists who tell us the reason for our slow growth, economic malaise, and continued high unemployment is due to the uniqueness of a financially led economic recession. Rather, it is due to the failure of the leaders in this town to adopt those monetary, regulatory, and fiscal policies that have successfully worked in the past while, alternatively, focusing on a political agenda that did not put economic growth and jobs at the top of the list. In my opinion, the early 1980s' economic recession--with its exceptionally high 10 percent inflation, 20 percent interest rates, and 12 percent unemployment--was far more difficult to correct and resolve. Yet our economy bounced back in 18 months with GDP growth of over 7.5 percent the next year. In the 1980 recovery, GDP growth averaged 4.9 percent, and for all recoveries since the Second World War, the average was 4.1 percent. The current recovery has been a paltry 2.2 percent.

With the appropriate monetary, regulatory, and fiscal policies our economy should be growing at 3 percent or even higher, which is what is needed to bring employment, our budget deficits, and the labor participation rate to acceptable levels.

One of the many reasons our economy is growing at historically low rates is the extraordinary and unprecedented increase in regulations facing job creators--the most by any administration ever. For example, small businesses have always been the major source of new jobs in our country as compared to large companies. Not this time, however. Why? According to small business polls over the past five years, the job malaise is due to excessive regulation, higher taxes, and increased health care and other costs--the exact opposite of job creation policies that have worked well in the past.

My focus today will be on financial regulation, but similar regulatory burdens are impacting all industries. For example, the Kauffman Foundation, a think tank, reveals in a survey that small businesses, the primary job creators forever, feel more over-regulated than even overtaxed. The Competitive Enterprise Institute estimates that the total cost of complying with America's federal regulations in 2013 was $1.86 trillion, about $15,000 per household. I will also address why I think the conventional wisdom has it all wrong as to what and who caused the 2008 financial crisis and why the response to it was irresponsibly implemented and can be summarized as "senseless panic." I will posit that recent financial regulation would not have prevented the last financial crisis nor prevent the next one. I believe that because of the Dodd-Frank legislation, and the current monetary policies of the Federal Reserve, the bottom 25 percent of Americans on the economic ladder will have restricted access to mortgage and personal loans and will incur much higher fees for banking services, all of which is inhibiting economic growth and significantly widening the income inequality gap.

Origins of the Financial Crisis: TARP, a Massive Government Failure

So how did we get into this mess? The last time I was in Washington was in October 2008, for the infamous TARP (Troubled Asset Relief Program) meeting between the Treasury Department, regulators, and large bank CEOs. I believed at that time, said so at the meeting, and I still believe today that forcing all banks to take TARP funds, even if they didn't want or need the funds, was one of the worst economic decisions in the history of the United States. …

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