During the Bush Presidency the American economy seemed to stall.  The American economy was fairly strong, but not growing, certainly not at the rate that it had been used to over the years since the end of World War Two.  And it seemed that the primary way that the economy, and Americans themselves, could maintain the nation's prosperity was by going into debt, not a good thing over the long term. Americans sensed the dangers, but were not quite sure what to do about the situation.

By the beginning of the last full year of the Bush presidency (2008) the debt of the U.S. government had climbed to around ten trillion dollars, more than double what it had been when he took office at the beginning of 2001.  This figure meant that every American citizen, man, woman and child, each shared about $30 thousand of their government's debt or about $60 thousand for each tax-paying worker.

During those seven years the national economy registered dollar growth, but not nearly as fast a rate as the public debt.  In 2001 the public debt stood in size at about 57 percent of the figure for the national economy or Gross Domestic Product (GDP).  By the beginning of 2008 that figure had grown to 70 percent.

The U.S. Treasury Department could not simply print money to cover that debt. Instead it had to sell its debt as "securities" to investors who were willing to buy these securities, with the promise that the owners' investments would be paid back in the future along with accumulated interest earnings.  Americans themselves bought some of that debt in the form of government bonds (EE bonds being the favorite).  Retirement programs and insurance companies bought some of the debt as a low risk (but also low paying) investment.  Interestingly nearly half of that debt was bought by the government itself, in particular the nation's Social Security program (which at this point held about two trillion dollars of the debt) and other U.S. government trust funds.

Slightly more than another quarter of the U.S. public debt was held by foreigners, either governments or banks, as part of their hard currency reserves (the U.S. dollar gradually replaced gold as the international monetary standard, and at that point was still constituting about 60 percent of the world's hard-currency reserves).  The two biggest holders of dollars were by far China and Japan with each of them possessing about 20 percent of these foreign holdings.

There are several reasons for anyone wanting to purchase U.S. government securities.  But one of these reasons certainly is the interest payments that the government had to make to the owners of these securities.  This could however get to be a very expensive part of the government's operating budget, as in the past when the Federal Reserve forced American interest rates up to about 20 percent.  Such a high interest rate would mean that the government could have been paying $200 million a year on each $1 billion in debt, something the government simply could not have sustained.

Actually, toward the end of the Bush presidency the Federal Reserve was holding that interest rate to under 1 percent!  This made the size of the government's interest payments on the debt quite manageable.  But such low rates were most exceptional historically.  If people and countries were to lose confidence in the American economy, they could certainly have demanded higher interest payments before they would be willing to continue to buy these securities.  Having to raise interest rates on these securities would have been a blow to the government budget, which would have had to raise taxes, cut back on programs or raise more debt, or a bit of all three of these measures.  This would have put a great strain on the economy and set off a round of fears about the economy that could have escalated into even greater problems in selling the national debt.

While there was no question about how bad the American national debt was, the question of the huge imbalance in American trade was much more debatable: was it a bad thing or a good thing?  Americans were importing more goods than they were exporting.  This produced what is called a deficit in the balance of trade.  Since 1997 this deficit had grown monumentally.  By the last years of the Bush presidency the size of the trade deficit was about $700 billion annually.

The biggest source of the imbalance in trade was China.  America was importing more than four times the value in goods that it exported to China.  This trade deficit with China made up about a third of the total American trade deficit.  As a result of this, China had been accumulating huge dollar holdings, some of which it used to purchase U.S. debt, and some of which was used to buy up assets around the world, such as oil, minerals, corporations, etc.

Originally (back in the 1980s and 1990s) America had been willing to open up its markets to Chinese goods as a means of helping China convert from a Communist (Socialist) economy to a free-market or capitalist economy.  At the same time, the Chinese markets were allowed to be protected against sophisticated American goods, in order to help China develop its own free-market industries.  And the Chinese currency, the renminbi or yuan, was allowed to be held artificially low to help keep the prices of Chinese goods low so that they could be more competitive in the international (and particularly the American) market.

But those years of infancy in the Chinese industry at this point were gone. China had the second largest national economy in the world, and was continuing to grow rapidly around 8 percent to 10 percent a year.  But the protections remained in place, despite American complaints that it was time to let the renminbi float to a natural market level and to end China's restrictions against the importation of foreign goods.  But America had to tread warily, because it needed China to buy continuing (growing) American debt.  The loss of the Chinese investor in the American debt would spell serious trouble for the American government.  In a sense, America now found itself in a financial trap of its own making – with no good means by which to get out of this situation.  This was indeed very bad for America – and possibly for the world, at least the world that America was trying to support.

But China was not the only country benefiting from an American trade imbalance. Nearly every one of America's major trade partners enjoyed a large surplus in trade (and thus a strengthening of their dollar holdings) due to the fact that Americans purchased more than they sold abroad.  The argument was often put forward that this was actually a very good thing for the world economy.  The American consumer market was the engine that ran the world's economy.  It was important not only to China, but also to Japan, Mexico, Korea, Germany, Britain, and in fact the European Union in general, where American purchases of their goods added greatly to the profitability of their companies.  Only Canada, America's largest trade partner, traded at anything like parity with America (but Canada too ran a small 5 percent surplus in its trade with America).

America had never been a country of people with more or less equal incomes. There have been times, however, when American incomes approached this ideal, as in the 1940s, 1950s and 1960s, and times when that income inequality has been much greater than the ideal, as in the late 1800s.  Since the 1970s there had been a large increase in income inequality in America.  Indeed, America had come to possess one of the largest income spreads or inequalities of any of the modern industrial nations.  This was because American incomes at the very top of the economic ladder had been increasing rather rapidly over the previous quarter of a century, while incomes in the lower economic rungs had demonstrated only slight real growth.

A study put out by the Center on Budget and Policy Priorities (January 23, 2007), based on figures released by the Congressional Budget Office, showed how American after-tax incomes had changed over the period 1979 to 2004.  The lowest fifth of income earners had advanced only by 6 percent during that 25-year period.  The next highest fifth had advanced by 17 percent, the middle fifth by 21 percent, and the next highest fifth by 29 percent.  But the incomes of the highest fifth group had advanced during that time by 69 percent; and of that last group the top 1 percent of income earners had advanced by 176 percent.  The gap between the richest and poorest Americans was widening rapidly.  This was an economic profile looking very much like the massive inequality that developed in the late 1800s – the "Gilded Age" of the industrial "robber barons" (America's super-rich families)!

A similar study published in The New York Times (March 29, 2007) pointed out that during the one year alone of 2005 the national income figure increased by almost 9 percent.  That sounds like great growth for the country.  However, the study pointed out that nearly all that growth occurred with the top 10 percent of income earners; the lower 90 percent actually showed a slight dip in incomes of 0.6 percent.  And of the top 10 percent, it was the top 1 percent that registered the largest growth, namely 14 percent.  Indeed, the top 0.1 percent of the population (some 300,000 individuals) had almost the same total income as the bottom 50 percent or 150 million Americans.  Their incomes were 440 times the average income of the lower half of the economic scale, almost twice the disparity that it was in 1980.

There were all kinds of explanations for this growing gap.  The loss in the late 1970s and early 1980s of decent-paying blue-collar industrial jobs overseas to countries that pay their workers less was certainly one of the factors.  Another was that as America turned away from manufacturing to service industries in the areas of banking, insurance, medicine, law, high tech communications, etc. more education was required of America's workers.  The high-school diploma was no longer adequate, and thus more expensive post-secondary and even post-collegiate graduate study was required, necessitating the increase in salaries of those employed in these service industries in order to cover the schooling expenses they had incurred.  Also the figures were skewed downward by the huge influx of foreign workers (documented and undocumented) who filled the very low-paying manual-labor jobs unwanted by Americans.  Certainly these factors contributed to the income gaps between the richest and poorest in America.

But the gaps were widening at a pace faster than could be explained by simply the shift in American industry from manufacture to the service industries.  The statistics for the shift in the one year alone, 2005, demonstrated the size of the problem.  Incomes went up at that rate because some people simply expected their incomes to go up at that rate.  Other Americans were forced to be content merely with holding their own.

For example, in the field of medicine each year the size of the average medical insurance premium jumped anywhere from 6 to 10 or 12 percent.  In no way could anyone say that the medical industry had improved that much over the previous year, that it therefore justified an annual increase in payments of that size.  Everyone in the medical industry pointed to others in the medical industry. Hospitals got the biggest blame, right along with trial lawyers specializing in medical malpractice suits.  But people who sued doctors (encouraged by the trial lawyers) were to blame.  So were the doctors who in the past made sure that there was a scarcity of medical schools training new doctors.  Thus many American medical students went abroad for their studies, and many practices had recently been taken up by English speaking immigrants from Pakistan or India in order to fill the gap.

Or the field of higher education as another example. Here too expenses (tuition, room, board and books) had been climbing much faster than the national inflation rate.  For middle and lower-income families this made a higher education almost beyond reach.  Scholarships were available, though these were pegged to the performance of the economy, which had not been growing much over the past decade or so.  Where did this tuition money go?  More classrooms and teachers? Not usually.  America had not only the fanciest hospitals in the world, it had the fanciest college stadiums, research laboratories, libraries, student centers and administrative buildings (and administrative salaries) in the world.

Corporate salaries of company CEOs were another example of the kind of social differentiation that was going on, one that set some Americans way above others in social rewards, prestige, and the ability to demand even more.  The explanation was that if companies did not offer such salaries to their executives, they would lose out in the salary-bidding game to their competitors.  And this game got more competitive over time.  That is why the top salaries were growing at such a stupendous rate (that included also the salaries of hospital administrators and university presidents as well as industrial and commercial presidents).

Another reason that the upper income earners were able to get away with the large annual increases in their incomes was because the average American believed that people should be able to have as much as they felt entitled to.  There was, so far, little grudging of the huge incomes of the top earners by those who were making far less. "Get what you can out of life" was almost a national mantra (especially with the rise of the Boomers).

In line with this same mentality was the fact that despite the slow growth in the income level of most Americans, nothing had stopped them from accumulating the material blessings that would have come their way had their incomes actually increased.  They simply purchased what they wanted on credit, with the vague idea that eventually they would pay down their debts – someday.  Credit card companies had been willing to extend credit limits fantastically beyond what people were realistically able to carry – even though this would produce a high likelihood of eventual default or bankruptcy on the part of their customers.  Like the stock market craze of the latter half of the 1920s, greedy expectations had blinded Americans to the need to bring this destructive thinking under some kind of discipline.

But then the huge run-up of the national debt seemed to fit well with this same mentality.  The government had been able to accumulate this massive, virtually unrepayable, national debt – without alarming the country too much, because indebtedness set off no alarms to a huge number of Americans any more.  Massive indebtedness had simply become part of the American way of life.

This economic mentality was very much a part of the housing boom and house-pricing bubble that started to climb in the mid-1990s, and by around 2005-2006 had hit a very dangerous peak (note however that this was not just an American phenomenon during this period but almost universal in the industrial world).  People were watching the prices of houses climb rapidly during this time (the average price of an American home doubled during that ten-year period), to a point where two thoughts worked together to get people into the housing market – and way over their heads in mortgage debt.  Firstly, for first-time buyers, they had a feeling that if they waited, the prices of their dream houses would get even further beyond their reach. Secondly, they speculated (as people do typically in times of a growing bubble) that if they found themselves overstretched with mortgage payments, they could always sell their houses later at a much higher price, and even come away with a nice profit in the process.  But as with all such bubblesque or speculative thinking, that was presuming that prices would continue to climb skyward continuously.

Also most of these buyers financed these expensive homes with adjustable-interest mortgages (ARMs), which initially were always a bit lower than fixed-interest mortgage rates.  But of course adjustable interest-rates could do just that, adjust over time, normally in an upward direction.  All of these factors were a recipe for financial disaster.

Banks were aware that people were buying houses they could not afford, but they continued to extend to them anyway subprime mortgages ("subprime" because they were highly risky in terms of the borrower's real financial ability to meet future payments), throwing caution to the wind.  Banks were competing in the numbers game to see which of them had the largest dollar amount of assets.¹

The awaiting disaster finally hit in 2007 when housing construction finally began to outpace housing sales, leading contractors to have to start lowering house prices in order to clear their inventory of completed but empty houses.  Therefore, people needing to move were finding that they too had to lower the prices on their houses in order to make a sale.  Soon the competition to find buyers heated up and housing prices began to drop dramatically. Banks began to get nervous and rescheduled adjustable-rate loans at higher interest rates.  Many subprime borrowers found that they could not keep up the payments at these higher rates, and lost their houses to the lending banks.  But the banks really did not want the houses, they wanted the mortgage payments.  Now the banks had to turn around and sell the houses – often for less than the banks themselves had invested in them in terms of the original mortgages.  Thus the banks began to fall into trouble right along with the failed homeowners.  The housing bubble was bursting.

Americans expected banks and financial experts to be well-informed and wise about investing in highly risky ventures such as the subprime mortgage market. After all, housing and commercial property bubbles occurred all the time.  And disasters accompanied these bubbles all the time.  But banks, major banks, seemed unwilling to move into the housing market cautiously during the 1995-2005 skyrocketing of housing prices.  The fear in the short-term of missing out on the opportunity to gain huge profits from these risky investments outweighed the fear of being left, in the long term, holding worthless assets should the heady speculation cease.  And thus banks jumped greedily into the waiting catastrophe.

¹A mortgage owed by a family to a bank is considered a bank's asset, because mortgage interest is a vital way that banks earn money.  And, after all, the house is also legally the bank's until the mortgage is fully paid off.

In late September President Bush introduced a financial bill into Congress called the Emergency Economic Stabilization Act of 2008.  This bill authorized the U.S. Treasury to extend to various financially distressed firms (especially the country's largest banks) available loans totaling $700 billion, termed the Troubled Assets Relief Program (TARP), to purchase some of the assets of these companies in order to restore investment confidence in them.  Fears of there being another stock market crash along the lines of the crash of 1929 if action were not taken immediately were circulated in an attempt to draw support for this bill from a reluctant House of Representatives heavily loaded with most Republicans (and many Democrats) who fervently believed that the government had no right to get involved with American business.

But despite extensive White House efforts to line up the necessary support, the bill failed to pass on September 29th when put to a vote: 205 in favor (Democrats 140; Republicans 65), 228 in opposition (Republicans 133; Democrats 95).

However, the scenario of another Great Depression in the making became more believable when immediately after the House vote the Dow Jones stock market averages showed a loss of 777 points, the largest single-day loss (up to that point) in the history of the stock market.²  $1.2 trillion had been lost in stock value in less than three hours!  Two days later the Senate moved on the bill (heavily amended with "extras" designed to sweeten its provisions), approving the amended version of the Act, 74 to 25. It then returned in its amended form to the House where on October 3rd it was finally approved 263 in favor (Democrats 172; Republicans 91) to 171 opposed (Republicans 108; Democrats 63).  Only hours later Bush signed the bill into law.

This set an interesting precedent – as some would term it, a "moral hazard" – that somehow it was the government's job to rescue the capitalist market, in particular firms that were too big to fail when these companies messed up with bad investment decisions.  True, the TARP very likely would pay for itself in the long run, presuming that most of these troubled firms recovered and the government could sell off its holdings in these companies.  But this event provided one more occasion, one more precedent, where the federal government saw that it had to expand its involvement into new areas of American life.  It had to be the governing backup to the American economy.

It was not just the American banking industry that had fallen into trouble in 2008. America's "Big Three" (Ford, General Motors and Chrysler) auto manufacturers were in trouble, especially GM and Chrysler.  The manufacturers' production capacity was 17 million cars a year; in 2008 the production rate had dropped to only 10 million cars.  One of the reasons for the drop was that car purchases were often financed through second mortgages secured on homes (2 million cars were financed that way in 2007).  But with the mortgage banking crisis in 2008, those types of loans were very hard to obtain.  Also the automobiles of the Big Three were becoming more expensive than foreign models, because the costs of health care and pensions for an older work force had to be passed on to the consumer, while at the same time foreign manufacturers producing their models in the United States operated with a younger (and largely non-union) work force and thus cost the foreign manufacturers less in terms of health and pension costs.  This allowed their models to be sold for less than similar Big Three models.  Thus foreign models were taking a larger market share.  In 1998 the Big Three accounted for 70 percent of the auto market.  By 2008, only ten years later, that figure had dropped to 53 percent.  Another problem was that the Big Three tended to want to manufacture SUVs and pickup trucks, where the profit margin was much larger (about 15 percent to 20 percent profit on each vehicle), rather than smaller sedan type car (only about 3 percent profit per vehicle).  But the price of oil had been climbing, and so also gasoline prices at the pump, reaching $4 per gallon in 2008, causing consumers to back away from the purchase of the gas-hungry SUVs.

By mid-2008 the panic that had set in concerning the value of the mortgage banks was also reaching to the Big Three auto corporations.  During the previous several years, GM had been registering an operating loss which was growing with each year ($10.6 billion loss in 2005; $38.7 billion loss in 2007).  By mid-2008 its rate of sales compared to 2007 were down by 45 percent, and its reserves that it was drawing from to pay workers' benefits and pensions were almost completely gone. In mid-November of 2008, representatives of the Big Three went to Congress to plead for government loans totaling $25 billion to keep their companies from going bankrupt.  Republicans were inclined to let the companies fall into bankruptcy, for this would let them restructure and get out from under all the expensive workers' benefits they were forced to accept by the unions.  However, Democrats, fearful of the loss of millions of jobs in the automotive industry, advocated for an immediate bailout.  Meanwhile the shares of the auto companies dropped away drastically on the stock market.

Finally, after both management and labor agreed to a reduction in salaries and benefits, an immediate bailout of $13.4 billion in federal loans and an additional $4 billion early next year was offered the industry by Congress and Bush out of the TARP fund (which drew strong criticism as that was supposed to be only for financial institutions).  Along with this went the demand that the companies had to seriously restructure, before any other TARP funds would come their way.

²On March 10, 2020, the Dow Jones Industrial Average fell by 2000 points on that day alone, caused by the panic that developed over the spread of the Coronavirus, which was impacting the world, and making its way towards America.