Joseph Stiglitz (via Mark Thoma):
"The story goes back to the recession of 2001. With the support of US Federal Reserve Chairman Alan Greenspan, US President George W. Bush pushed through a tax cut designed to benefit the richest Americans but not to lift the economy out of the recession that followed the collapse of the Internet bubble."
"Given that mistake, the Fed had little choice if it was to fulfill its mandate to maintain growth and employment: it had to lower interest rates. ... But, given that overinvestment in the 1990s was part of the problem underpinning the recession, lower interest rates did not stimulate much investment.
"The economy grew, but mainly because American families were persuaded to take on more debt, refinancing their mortgages and spending some of the proceeds. And, as long as housing prices rose as a result of lower interest rates, Americans could ignore their growing indebtedness.
"In fact, even this did not stimulate the economy enough. To get more people to borrow more money, credit standards were lowered, fueling growth in so-called "subprime" mortgages. Moreover, new products were invented ... making it easier for individuals to take bigger mortgages. ...
"Alan Greenspan egged them to pile on the risk by encouraging these variable-rate mortgages. But did Greenspan really expect interest rates to remain permanently at one percent - a negative real interest rate? Did he not think about what would happen to poor Americans with variable-rate mortgages if interest rates rose, as they almost surely would? ...
"Fortunately, most Americans did not follow Greenspan's advice to switch to variable-rate mortgages. Even as short-term interest rates began to rise, the day of reckoning was postponed... [But the] housing price bubble eventually broke, and, with prices declining, some have discovered that their mortgages are larger than the value of their house.
"Too many Americans built no cushion into their budgets, and mortgage companies, focusing on the fees generated by new mortgages, did not encourage them to do so.
"Just as the collapse of the real estate bubble was predictable, so are its consequences... By some reckonings, more than two-thirds of the increase in output and employment over the past six years has been real estate-related, reflecting both new housing and households borrowing against their homes to support a consumption binge.
"The housing bubble induced Americans to live beyond their means - net savings has been negative for the past couple of years. With this engine of growth turned off, it is hard to see how the American economy will not suffer from a slowdown.
"There is an old adage about how people's mistakes continue to live long after they are gone. That is certainly true of Greenspan.
"In Bush's case, we are beginning to bear the consequences even before he has departed."
The economic downturn will intensify the political storm building around Bush, and he will well deserve it, because it is all of his own making. But, what of those, who made Bush?
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