|Statement on Congressional Approval of Bailout
By Dean Baker
THIS IS THE first time in the history of the United States that the
president has sought to provoke a financial panic to get legislation
through Congress. While this has proven to be a successful political
strategy, it marks yet another low point in American politics.
It was incredibly irresponsible for President Bush to tell the
American people on national television that the country could be
facing another Great Depression. By contrast, when we actually were in
the Great Depression, President Roosevelt said that, "we have nothing
to fear, but fear itself."
It was even more irresponsible for him to seize on the decline in the
stock market five days later as evidence that his bailout was needed
for the economy. President Bush must surely understand, as all
economists know, that the daily swings in the stock market are driven
by mass psychology and have almost nothing to do with the underlying
strength in the economy.
The scare tactics of President Bush, Secretary Paulson and Federal
Reserve Board Chairman Bernanke created sufficient panic, so that by
the time of the vote, much of the public believed that the defeat of
the bailout may actually have had serious consequences for the
economy. Millions of people have changed their behavior because of
this fear, with many pulling money out of bank and money market
accounts, and in other ways adjusting their financial plans.
This effort to promote panic is especially striking since the
country's dire economic situation is almost entirely the result of the
Bush Administration's policy failures. First and foremost, the
decision of Secretary Paulson and Chairman Bernanke (and previously
Alan Greenspan) to ignore the housing bubble, allowed for the growth
of an $8 trillion bubble, which is now collapsing.
It is the collapse of this bubble, which has already destroyed more
than $4 trillion in housing wealth, and is likely to destroy another
$4 trillion over the next year, that is at the root of the economy's
problems. While competent economists were warning of the bubble and
the dire consequences of its collapse, the top officials in the Bush
administration were celebrating the rise in homeownership rates.
The Bush administration made the crisis even worse by deregulating
Wall Street. This led to the huge over-leveraging of financial
institutions, which has vastly complicated the country's economic
policies. It is especially disturbing that Secretary Paulson
personally profited from these policies, earning hundreds of millions
in compensation from Goldman Sachs during his years there as its CEO.
The collapse of the housing bubble, while falling short of the
magnitude of the Great Depression, is likely to lead to the worst
recession since World War II. Repairing the damage caused by this
bubble will be a long and difficult process. Cleaning up the damage to
the political system from President Bush's unprecedented fear campaign
may prove to be even more difficult.
The Center for Economic and Policy Research is an independent,
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debate on the most important economic and social issues that affect
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