George W. Bush was president from 2001-2008. Near the end of his second term, a crisis hit the financial markets, linked largely to concern about risk associated with mortgage-backed securities. This panic lead to the Great Recession of 2007-2009. Joe Biden was inaugurated in 2021 and is facing a similar financial crisis. This time it’s inflation.
What do the two have in common? Each president received or is receiving more blame for the situation than they really deserve(d).
In Bush’s case, the instability resulting from the proliferation of mortgage-backed securities throughout the economy has roots in both the Reagan and Clinton administrations. At the risk of oversimplifying, Reagan-era deregulation created the opportunity for these financial instruments to even exist. Clinton-era policies made it much easier for lower income individuals and couples to qualify for mortgages. These two realities converged and created a perfect storm few saw coming.
When large numbers of these low-income mortgage holders began to default, investors realized that they hadn’t properly accounted for the risks that owning those mortgage-backed securities brought into their portfolios. These securities had permeated the economy like a virus and the economy didn’t realize it was sick until 2007, under Bush’s watch. While there were a few “voices in the wilderness” like Michael Lewis of The Big Short fame, warning against this possible scenario, they were largely unknown until after the crash.
Even though Bush policies didn’t cause or even exacerbate the crisis, his political opponents seized on the crisis and he became a victim of circumstance. Barak Obama and the Democrats were extremely aggressive in 2008 attacking Republicans on their handling of the economy. It worked.
In Biden’s case, the nation is experiencing its worst period of inflation since the 1970s. Unlike Bush’s recession, however, there are some Biden administration policies exacerbating the inflation. But it is unfair to put all of the blame on Biden. Financial analysts and economists have been predicting inflation as a result of government deficit spending as long as I have been following politics. The Obama recovery was so slow due to what some would say was over-regulation that we didn’t see inflation during that period. The Trump tax cuts were the first stimulus to start the economy growing at a faster rate. Had there never been a COVID crisis, the economy may have heated up at a rate that we would have seen some inflation, even during a second Trump term.
But COVID did happen. And between Trump-era tax cuts and direct fiscal stimulus from both Trump and Biden administrations, there is simply too much cash for not enough goods and services in the economy. We were already seeing a worker shortage in 2019, but that problem exploded post-COVID as some workers were slower to return to the workforce than economists predicted. The competition for workers has driven up wages in every sector, also adding to inflationary pressure.
Now critics of Biden have some grounds. There is no question that Biden energy policies have contributed to inflationary pressure. But probably not as much as Republicans and Fox News would have you believe. Biden’s executive orders signaling a major change in domestic oil policy had a greater impact on prices than on actual domestic oil supply. There is a perception that the administration is hindering production more than it actually is. But the optics of the administration negotiating with Iran, Venezuela and Saudi Arabia for more supply while the public perceives that domestic production is significantly down is going to continue to be problematic for Democrats. Oil and gas prices are speculative and sensitive and have always reacted swiftly to any perceived shocks. Remember how gas prices shot up 45 cents per gallon immediately after hurricane Katrina? This spike occurred well before inventories fell and actual shortages were felt.
Likewise, Democrats pushing for more government spending through various iterations of Build Back Better at a time when too much government spending in the past is coming back to haunt only fuels inflation fears, and perhaps actual inflation, even more. Like Bush, Biden would have been unlikely to predict that the combination of excessive government deficit spending since the 1980’s, significant direct stimulus payments to individuals and corporations to help survive a pandemic, some environmental executive orders to satisfy his base, and a war in Ukraine, would result in another perfect storm. This time for aggressive, unplanned inflation.
Biden is trying to blame it all on Putin. The Republicans are blaming it all on Biden. The voters will probably side with the Republicans in the mid-terms. I’m sure George knows how Joe feels.