Blame Bush? Blame Greenspan!

Listening to CNN hail some recent economic pessimism as an “It’s the economy, stupid” moment like the one which swept Bill Clinton to power in 1992, it not only sounded like a Democrat stump speech, but prompted me to give the US economy some thought. The proximate cause of the current low economic confidence is, no doubt, the mortgages problem. “Credit crunch”, “subprime crisis”, it’s all over the papers.

What I’m wondering is what this has to do with the current president, and how a different president with different policies would have done (or rather, would do) things differently.

To simplify somewhat (but not much): after the dot-com bubble burst, two things happened. Both were designed to ease the pain and soften the landing. Alan Greenspan lowered interest rates, and kept them at record lows for a long time. George Bush proposed a raft of tax cuts. So Greenspan made debt look attractive, by making the real interest rate (nominal rate minus inflation) negative, prompting a rush of zero-rate deals offered by banks. Bush, by contrast, took less money from people’s incomes, leaving more in their pockets for spending or investment.

Lots of people took the debt deals, with or without the elementary understanding that zero interest rates couldn’t possibly last, whether or not they could now afford it. Since then, interest rates have risen, but taxes have not.

So who’s the villain in this piece? The Fed chairman, who independently determines interest rates, or the president, who doesn’t? Granted, it’s always nice to blame your bank when you’re in trouble, or your spouse, or your kids, or your government, but it’s not always accurate. St Alan, not the devil in the White House, was most responsible for today’s credit crisis. Unlike the president’s remedy, the Fed’s medicine was at best a temporary salve. Greenspan is already gone, but his successor, Ben Bernanke, has as much power in controlling the price of money. Price controls don’t work anywhere else, so why would it work in the credit market?

And if you think the problem is larger than bad credit, and point, say, to the ever-weakening dollar, one can again point to the Fed’s inflationary monetary policy. If you’re printing money to keep consumer spending up, your currency is going to devalue. Ask Bob Mugabe.

Since Bernanke isn’t up for re-election, and the Federal Reserve isn’t up for a renewal of its charter, why would these issues even feature in a presidential election campaign? They have little, or nothing, to do with the current president. (Just like Congress’s profligate spending has nothing to do with the president if he doesn’t even have a line-item veto.) If I were an American voter, I’d be thanking the president for doing what he could do — cut taxes — and considering any candidate who looks sceptical enough of the Fed’s inflationary monetary policy to try to do something about it.

Why would CNN be telling us they’re critical election issues for Campaign 2008? This is misdirection, and partisan misdirection at that.