Economic historian Brian Domitrovic has an interesting post up at his Forbes blog, Past & Present, on the proximate causes of the 2008 meltdown. According to Domitrovic, uncoordinated, even “weird” fiscal and budgetary policy in the early 2000s kept investors on the sidelines, and then flooded the system with easy money. The chickens came home to roost in 2008 (and they’re still perched in the coop).
In 2000, as the stock market was treading water in the context of the mammoth surplus and the electoral contest over fiscal policy, it was indicating that investors wanted to see what would ensue. What came was poorly-crafted tax policy and movement to gobble up the surplus on the spending side.
[After the crash of 2001-2003 and brief recession] the Federal Reserve stepped in to try to pick up the slack since fiscal policy had gotten weird. It was then, 2001-2003, that the Fed plumbed new lows in the federal funds rate
Finally, in 2003, Bush announced that the marginal rate of the income tax would be taken down immediately and somewhat substantially, to 35%. The Fed pivoted to raise rates, giving us an approximation of the Reagan-Volcker policy mix of the 1980s of real tax cuts and tight-ish money.
But for several years, too much money had been in the system, and it proceeded to migrate to monetary policy hedges, above all oil and land, the latter especially desirable because housing debt was fulsomely guaranteed.
Not only were these policies imprudent from a cold hard economic point of view, they weren’t capable of producing the human benefits they were supposed to. The false compassion of Bush-era conservatism is tied up with both the over-spending of the 2000s and the imprudent loans encouraged by an ultra-low interest rate environment and the “Ownership Society” of the 2004 campaign.
Government compassion does nothing to empower the poor—rather than pulling them out of poverty, it encourages reliance and assails their dignity. No matter how nice everyone’s being, nothing changes. And while some of the instincts behind the Ownership Society were right, the idea that it would be good for people to own houses they couldn’t properly afford was destructive. It severed the natural connection between labor and its results.
Domitrovic goes on:
The primary question we must ask about the 2000s is not what caused the crisis as the decade came to a close, but why was growth so subpar the whole time? Ultimately financial crises reflect the declining potential of the real economy to deliver…
And of course the economy will not grow and wealth will not be created under policies which undermine the dignity of Man’s labor. By reducing economics to fiscal calculus, academics and policy makers throw out half their toolbox: if the fiscal and budgetary warnings weren’t enough from 2000 to 2008, there were also human and moral warnings. Domitrovic (who, to be clear, is not one of those who has thrown out half his toolbox) concludes:
By rights, today we should not be mired in economic malaise; rather, we should be enjoying a fourth decade of prosperity on the heels of the roaring 1980s, 1990s, and 2000s.
By rights indeed, but our economists have cast off right, and reduced their science to a materialist one.