The following is an excellent excerpt from the book “BUSH” by Jean Edward Smith from Chapter Twenty-Four: “Financial Armageddon” on page 607 and I quote:
“I felt like the captain of a sinking ship.” —George W. Bush
As president, George Bush sought to establish what he called the ownership society. He was especially fond of the term, and in 2002 began using it as a substitute for compassionate conservatism to describe his domestic agenda. [FOOTNOTE: The term was coined by the Cato Institute, a libertarian Washington research center, in the late 1990s. As defined by the institute, an ownership society “values responsibility, liberty, and property. Individuals are empowered by freeing themselves from dependence on government handouts and making them owners instead, in control of their own lives and destinies. In the ownership society, patients control their own health care, parents control their children’s education, and workers control their retirement savings.”” http://www,cato.org/special/ownership/society/boaz.html.] The slogan was more popular with GOP’s conservative base than compassionate conservatism, and by the end of his first term Bush was using it almost exclusively. FDR ad the New Deal, Truman had the Fair Deal LBJ had the Great Society, Ronald Reagan has is New Federalism, and George W. Bush had the Ownership Society.
For the first six years of his presidency, Bush seemed to be making progress pursuing his goal. After a brief recession in 2001, the American economy appeared to be thriving and the benefits were widely shared. Although the wars in Iraq and Afghanistan, plus the massive tax cuts in 2001 and 2002, had caused the federal deficit to soar–from a surplus of $128 billion when Bush took office to a shortfall of $248 billion in 2006–personal income had grown from $8.5 trillion to $11.3 trillion (an increase of 33 percent) during that period. Unemployment stood at 4.6 percent, new home construction exceeded two million units annually, and mortgage foreclosures stood at a record low of less than one percent.
Speaking to the Republican convention in New York City following his renomination in 2004, Bush said that the priority for his administration in its second term would be “to build an ownership society, because ownership brings security and dignity and independence.” He then laid out plans to increase home ownership, make health care plans privately owned, review the tax code, and amend Social Security to provide for personal accounts. “In all of these proposals, we seek to provide not just a government program, but a path to greater opportunity, more freedom and more control over your own life.”
Bush repeated the message in his inaugural address in January 2005. Once more he pledged to build an ownership society. “”We will widen the ownership of homes and businesses, retirement savings, and health insurance, preparing our people for the challenge of life in a free society. By making every citizen an agent of his or her own destiny, we will give our fellow Americans create freedom from want and fear, and make our society more prosperous and just and equal.” In his State of the Union address that February, the president boasted that “home ownership is at its highest level in history,” and went on to advocate the establishment of private retirement accounts for younger workers. “Here’s why the personal accounts are better,” said Bush. “Your money will grow, over time, at a greater rate than anything the current system can deliver. . . . You’ll be able to pass along the money that accumulates. . . to your children and/or grandchildren. And best of all the money in the account is yours, and the government can never take it away.”
As it turned out, Congress was uninterested in tampering with Social Security, Bush’s proposals to reform the tax code and abolish inheritance taxes fell on deaf ears, and his efforts to further privatize the health care system went nowhere. The one element of the ownership society that seemed to fall on fertile ground was increased home ownership. By the end of 2005, homeownership in the United States stood at a record 69 percent–69 percent of all Americans lived in their own home. Over six million homes were sold that year, at a median price of $240,000–almost double what it was ten years before–and minority ownership had soared. Bush called for an increase in the number of minority homeowners by 5.5 million families by the end of the decade, and in 2006 had signed into law the American Dream Downpayment Act to help forty thousand families each year with their down payment and closing costs.
In 2005, thirty-year mortgage rates averaged 5.9 percent. Buyers with modest incomes or poor credit ratings were able to purchase homes with no down payment, mortgages were frequently written to require interest-only payments, and interest was often adjustable. Many of these were subprime mortgages. [FOOTNOTE: “Subprime mortgages involve more than simply low-income purchasers. Many factors go into the underwriting process of a home mortgage, including the purchaser’s income, credit history, credit score, employment history, as well as the property value and appraisal. A subprime mortgage is one that comes out of the underwriting process with a low grade. Income is important but not decisive. A borrower with a low income could be party to a prime mortgage when all of the factors are considered, just as a high-income borrower could be party to a subprime mortgage.] Local banks unloaded their subprime mortgages to Wall Street investment houses, who in turn packaged them into highly leveraged subprime-mortgage-backed securities sold to eager investors. This created a housing bubble of immense proportions, but it went largely unrecognized. So long as house prices continued to rise, the danger of a collapse in this market appeared remote.
The Bush administration and the Federal Reserve were largely unaware of the fragility of the housing market. Alan Greenspan, chairman of the Federal Reserve, speaking to the Economic Club of New York on May 20, 2005, denied there was a housing bubble. There might be a few local bubbles–he called them “froth”–but they did not pose a national problem. “Even if there are declines in price,” said Greenspan, “the significant run-up to date has so increased equity in homes that only those who have purchased very recently. . . are going to have problems.”
Princeton professor Ben Bernanke, then head of the president’s Council of Economic Advisers, was equally dismissive. After briefing Bush of the economy at the ranch in Crawford on August 9, 2005, Bernanke met with the White House press corps. Asked by a reporter whether the housing bubble had been discussed and whether he was concerned about it, Bernanke replied:
“We talked some about housing. There’s a lot of good news about housing. The rate of home ownership is at a record level, affordability still pretty good. The issue of the housing bubble is one that people have–whether there is a housing bubble is one that people have raised. Housing prices have certainly come up quite a bit. But I think it’s important to point out that house prices are being supported in very large part by very strong fundamentals. . . . We have a strong economy, we have lots of jobs, employment, high incomes, very low mortgage rates, growing population, and shortages of land and housing in many areas. And those supply-and-demand factors are a big reason for why housing prices have risen as much as they have.”
Bush saw the issue the same way. Attending a meeting on the national economy organized by the chamber of commerce of Loudoun County, Virginia, on January 19, 2006, Bush was asked about the cost of housing. “Economies should cycle,” the president replied. “If houses get too expensive, people will stop buying them. . . . Let the market function properly. Your kind of question has been asked throughout the history of homebuilding. . . . things cycle. That’s just the way it works.”
Alan Greenspan stepped down as chairman of the Federal Reserve on January 31, 2006. He had been appointed by Ronald Reagan to succeed Paul Volcker in 1987, and had won the nation’s respect for having presided over an extended period of economic growth. To replace Greenspan, Bush nominated Bernanke. Testifying before the Joint Economic Committee of Congress prior to his confirmation, Bernanke made clear once again that he did not believe the national housing boom was a bubble about to burst. House prices may have risen by 25 percent in the last two years, he told Congress, but these increases “largely reflect strong economic fundamentals.” The Senate confirmed Bernanke by voice vote (no roll call) on January 31, 2006.
In June 2006, Bush replaced Treasury Secretary John Snow with Henry Paulson, head of the legendary Wall Street firm of Goldman Sachs. Paulson was Bush’s third secretary of the treasury. Paul O’Neill, the president’s first secretary, did not hit it off with Bush or the White House staff and was replaced after two years by Snow, the chief executive of CSX railroad. Snow, like O’Neill, also did not win many friends in the White House, and after three and a half years was shown the door. As Bush expressed it, “both John and I felt it was time for a fresh face.” Paulson was initially reluctant to take the post, but eventually agreed. Unlike his predecessors, Paulson insisted that he, not the White House staff, would preside over the administration’s economic policy, and Bush agreed. Also unlike his predecessors, Paulson was a financier, not an industry executive. He understood markets and how Wall Street functioned. Paulson was confirmed unanimously by the Senate following a brief confirmation hearing before the Senate Finance Committee. He was not asked about a housing bubble, nor did he comment on one.
Just as Bush met frequently with his national security advisers at Camp David, he convened a session there with his financial team on August 18, 2006, to review the economy. The housing bubble was not discussed. Edward Lazear, who had succeeded Bernanke as chairman of the Council of Economic Advisers, led off with a discussion of wages and tax initiatives. Rob Portman, head of the Office of Management and Budget, dissected the federal budget. And Al Hubbard, director of the National Economic Council, spoke about entitlements. Then it was Paulson’s turn. Paulson had been in office little more than a month, and chose to speak about crisis management. “I explained that we had to be prepared to deal with everything from terror attacks and natural disasters to oil price shocks, the collapse of a major bank, or a sharp drop in the value of the dollar. . . . I was convinced we were due for another disruption.”
When Bush pressed Paulson for specifics, the treasury secretary talked about the enormous amount of leverage that had crept into the financial system, and then gave a quick primer on hedge funds and how they operated “We can’t predict how the net crisis will come, but we need to be prepared.” Paulson said it was impossible to know what might trigger a big disruption, but it was like a forest fire. How the blaze started was less important than containing it. “I was right on guard,” Paulson wrote later, “but I misread the cause and the sale of the coming disaster. Notably absent from my presentation was any mention of the problems in housing or mortgages.”
The housing market crested in 2005, and started to become choppy in 2006. Prices remained high–averaging over $250,000 nationally–but demand was slackening. Housing starts hit a peak of 192,000 in August 2005, but a year later were down to 146,000 and by December 2006 to 112,000. And the backlog of unsold houses had increased by 20 percent. More ominously, mortgage foreclosures were mushrooming. In the first quarter of 2005, only 188,000 homes were in foreclosure proceedings. By the last quarter of 2006, the number had risen to 346,000, an increase of 84 percent. In Detroit, one of every twenty-one houses faced foreclosure; in Atlanta, one of every twenty-three; and in Dallas, one of every twenty-six.
Because prices remained high, the weakness of the housing sector was not generally recognized. But the subprime market, which had expanded from 5 percent of the mortgage market in 1994 to 20 percent in 2006–an estimated $2 trillion–was in turmoil. On February 7, 2007, HSBC Holdings, the world’s third largest bank, said it was setting aside $10.6 billion to cover losses in its subprime portfolio in the United States. On April 2, New Century Financial, the nation’s largest subprime lender, filed for bankruptcy. Other lenders in the subprime market were in trouble. The administration showed little concern. Paulson, speaking in New York on April 20, 2007, said the housing market was bottoming out, and that the subprime problem was unlikely to spread. “I don’t see subprime mortgage troubles imposing a serious problem. I think it’s going to be largely self-contained.” At the Federal Reserve, Bernanke was equally unconcerned. Speaking at the Federal Reserve Bank of Chicago on May 17, 2007, Bernanke said, “We believe the effect of troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system.”
As Bernanke later wrote in his memoirs, “Seen from the vantage point of early 2007, the economy’s good performance, combined with the realtively small size of the subprime mortgage market and what appeared to be a healthy banking system, led me and others at the Fed to conclude that subprime problems. . . were unlikely to cause major economic problems.
The housing market continued to shrink. In March 2007, sales were down 13 percent from the previous year and prices down 6 percent. Holders of subprime mortgages were desperate. American Home Mortgage, a midsize mortgage lender, declared bankruptcy on August 6, 2007. Ten days later, Countrywide Financial Corporation, the nation’s largest across-the-board mortgage firm, narrowly escaped bankruptcy by securing emergency loans from backup banks totaling $11.5 billion. And it was not just the mortgage firms that were in trouble. Investment banks and hedge funds, heavily leveraged with subprime mortgages, could find no buyers for their securities.
Bush met with his economic advisers at the Treasury Department on August 8, and afterward spoke to the press. There was no indication that the subprime crisis had been considered at the meeting. “My administration follows a simple philosophy,” said the president. “Our economy prospers when we trust the American people with their own paychecks. . . . Since 2003, our economy has added more than 8.3 million new jobs and almost four years of uninterrupted growth. The economy continues to grow at a steady pace, and during the most recent quarter, it grew at a steady pace, and during the most recent quarter, it grew at an annual rate of 3.4 percent.” Bush went on to say he appreciated that Paulson–“one of the world’s most successful investment bankers”–had joined his administration. “Here’s how he [Paulson] puts it. He said, ‘This is far and away the strongest global economy I’ve ever seen in my business lifetime.’ In other words, not only is our economy strong, but so is [sic] the economies around the world.”
On August 9, 2007, the day after Bush spoke to the press, BNP Paribas, France’s largest bank, announced it was halting withdrawals from three of its investment funds because of their exposure to the U.S. subprime mortgage market. Citing “a complete evaporation of liquidity” in the subprime mortgage market, BNP Paibas said it had become impossible to value assets invested in the funds. The European Central Bank responded immediately by opening lines of credit to all European banks exposed to the American mortgage market. Within hours, forty-nine of Europe’s banks borrowed 94.8 billion euros–$130 billion. After BNP Paribas’s announcement, world stock markets plummeted. In New York, the Dow Jones Industrial Average, which had climbed to record levels in July, experienced its second largest decline in the past five years.
Later that day, Bush held a press conference in the White House. He began by boasting about the economy–apparently oblivious to the collapse of the subprime mortgage market. “Real after tax income has grown by an average of more than $3,400 per person since I took office,” said the president. “The American economy is the envy of the world. . . . Our economy is growing in large part because America has the most ambitious, educated, and innovative people in the world, men and women who take risks, try out new ideas, and have the skills and courage to turn their dreams into new technologies and new businesses.” Most of the questions that followed during the press conference dealt with the war in Iraq. But toward the end of the session David Gregory of NBC News asked about the volatility of the financial markets and falling house prices. “Is this a correction or a crisis, in your view?”
Bush replied that he had been briefed by his economic advisers as to whether there would be a precipitous decline in the housing market or a soft landing “and it appears at this point that it looks like we’re headed for a soft landing. And that’s what the facts say.”
As the housing market continued to decline and as more mortgages were foreclosed, the Democrats in Congress stepped up their criticism of the administration. Bush responded on August 31 by announcing a limited plan to assist homeowners facing foreclosure. “The recent disturbances in the subprime mortgage industry are modest,” said the president. “But if you are a family–if your family is one of those having trouble making the monthly payments, this problem doesn’t seem modest at all.” Bush went on to say that the government had a limited role to play. “It’s not the government’s job to bail out speculators or those who made a decision to buy a home they knew they could never afford.” He then laid out a limited program to expand the Federal Housing Administration’s ability to guarantee loans for borrowers with modest incomes and to revise the tax code to make it easier to restructure mortgages. Bush also said that he had instructed Treasury Secretary Paulson and Alphonso Jackson, the secretary of housing and urban development, to launch a “foreclosure avoidance initiative to help struggling homeowners find a way to refinance.”
After he had concluded his remarks, Bush was asked by a reporter about hedge funds and banks overexposed to the subprime market. “That’s a bigger problem,” said the reporter. “Have you got a plan?””
(THE FOLLOWING IS ABOUT THE AUTHOR AND ON THE INSIDE JACKET COVER AND I QUOTE:
JEAN EDWARD SMITH is professor emeritus at the University of Toronto and has been a visiting scholar or professor at Columbia, Princeton, Georgetown, and Marshall universities. George Will has called him “America’s greatest living biographer.” He is the author of Eisenhower in War and Peace, FDR, winner of the 2008 Francis Parkman Prize of the Society of American Historians; Grant, a 2002 Pulitzer Prize finalist; John Marshall: Definer of a Nation, and Lucius D.Clay: An American Life. He is also the editor of The Papers of General Lucius D. Clay (two volumes), and a member of the editorial board for the Grant papers.
INSIDE JACKET COVER:
“Nearly eight years after George W. Bush left the White House, his legacy still shapes American policy at home and abroad. Award-winning historian and biographer Jean Smith has written the most complete account of the Bush presidency in this revelatory biography of America’s forty-third president.
A lackluster student with a fondness for alcohol, “W” became a born-again Christian and turned his life around. His deep religious faith rescued his character, but it gave him a worldview that oversimplified complicated problems. For Bush, life was a struggle between good and evil, and he never doubted that he was God’s agent for good. In the fight against the evil of terrorism, other countries were either with us or against us, as he once said. Certain of the morality of his actions, he had no misgivings about detaining terrorist suspects indefinitely at Guantanamo or authorizing unconstitutional surveillance activities in the name of fighting terrorism.”
LaVern Isely, Progressive, Overtaxed, Independent Middle Class Taxpayer and Public Citizen Member and USAF Veteran