Can U.S. Afford Political Gridlock Already?

By: Sy_Harding

With the near collapse of the financial system in 2008, the Bush Administration, with the Republican party in control of both houses of Congress, took aggressive, unprecedented action. The government was not grid-locked. Decisive action was possible and was taken.

As President Bush described it in his just-released book Decision Points, credit markets had seized up, panic was rampant, the financial system was on the brink of collapse, and an already severe recession threatened to drop the economy off a cliff into another Great Depression.

So the Bush Administration, with Treasury Secretary Henry Paulson and Fed chairman Ben Bernanke as point men, brokered the sale of troubled investment bank Bear Stearns and brokerage firm Merrill Lynch to stronger financial firms, took over giant housing lenders Fannie Mae and Freddie Mac, and in the near-panic after the collapse of Lehman Brothers, rescued giant financial firm AIG with an infusion of $85 billion (in exchange for warrants on the company’s stock that made the government 79.9% owner of the company).
There were plenty of critics. Responses at the time to my columns supporting government intervention mostly ran along the lines of, “Let the banks collapse, they asked for it with their greedy actions.” “Why should the government use tax-payer money to bail out home-owners who bought houses they couldn’t afford?” “Let a depression come and wipe everyone out. Then we can start over again and do it right.”

In the continuing financial crisis the Treasury Department next established the Troubled Asset Relief Program (TARP), funded with $700 billion to purchase the troubled assets of financial institutions. The Federal Reserve launched a quantitative easing program to buy more than a $trillion of mortgage-backed securities and U.S. treasury bonds.

In his book, Bush acknowledges that the actions his administration took were “a breath-taking intervention in the free market. . . . My friends back home in Texas were going to ask what happened to the free market guy they knew. . . . But markets had ceased to function.”

His administration used the same reasoning in its November, 2008 decision to bail out the auto industry. In his book he explains that “With the free market still not functioning, I had to safeguard American workers and families from widespread collapse.”

Fast forward to 2009.

Unhappy that the Bush administration decisions had not already ended the worst recession since the Great Depression, voters had passed the baton to President Obama and the Democratic party, providing it also with control of both houses of Congress.

The Obama administration made much the same assessment of the still plunging economy, continued freeze up of the financial system, and need for continuing the unprecedented government intervention in the free market system.

As the recession worsened in the early months of 2009, and the stock market continued its bear market plunge, the Obama administration (and Democratic-controlled Congress) extended the Bush administration TARP program, provided an additional $60 billion credit line to AIG, launched a more expensive auto industry bail-out when the Bush Administration’s $19 billion bailout effort failed to prevent the bankruptcies of Chrysler and General Motors, introduced costly bonuses to home-buyers and ‘cash for clunkers’ programs, and continued the high levels of government spending.

Timothy Geithner had replaced former Treasury Secretary Henry Paulson, and used reasoning similar to his predecessor for intervening in the free market system, saying, “Critical parts of our financial system are damaged, international trade is contracting sharply as finance has dried up, and the recession is worsening. This is a dangerous dynamic and we must arrest it. Too many Americans have lost their jobs and too many businesses will fail, creating more job losses, if we don’t take forceful actions.”

A year later, even though the stock market had launched into an impressive new bull market in March, 2009, and the recession had officially ended in June, 2009, it did not seem that conditions had improved to voters, dismayed that the housing industry remained in shambles, unemployment remained high, and the federal budget deficit was still hitting new record highs.

So in the mid-term elections, voters decided to make another change, this time creating potential government gridlock, putting one party in control of the House, and leaving the other in control of the Senate. The popular opinion is that a government that can’t get anything accomplished is preferable to having either party in power.

Voters don’t seem to remember the magnitude of the previous crisis or that both parties, when separately in power, were in agreement that temporary intervention in the free market system was necessary. A poll by the non-partisan Pew Research Center a few months ago found that fifty percent of Republicans, 46% of Democrats, and 44% of Independents did not remember that the government bailouts of financial institutions (and auto companies) were launched during the Bush Administration and Republican control of Congress, incorrectly believing they were launched after Obama became president in 2009.

Actually if the efforts succeed, they can share the credit. If they fail they can share the blame.

Meanwhile, there have been other times in the past when having one party or the other in the White House and in the majority in Congress was critical to the government being able to take timely actions in the face of serious financial problems or military threats. There have been other times of financial stability and good times when gridlock and the inability of politicians to play their games was a good thing.

Hopefully, voters got it right in the mid-term elections, that we are now in one of those long benign periods of financial stability when gridlock is preferable, when government will not need the ability to make quick and decisive responses to unexpected developments.

Sy Harding is president of Asset Management Research Corp, publishers of the financial website www.StreetSmartReport.com, and the free daily market blog, www.SyHardingblog.com.

© 2010 Copyright Sy Harding- All Rights Reserved

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