13. AMERICA STUMBLES

ECONOMIC CATASTROPHE (2008)

But at this point, Bush had big problems at home to deal with – actually huge problems, because the American economy was facing a meltdown, such as it had not seen since the early 1980s, and possibly even since the days of the Great Depression.  Much of the cause was foolish economic policies undertaken by the Bush Administration when the long economic growth experienced since those early 1980s and extended through the 1990s seemed to lose considerable steam in the early 2000s (the rapid expansion of the computer/electronic media industry had slowed up considerably, again because of relative market saturation).  To encourage continuing economic growth, Bush decided to set aside regulations carefully put in place in the early 1930s – regulations designed to protect the American financial world from falling into a speculative bubble, such as the one that burst at the end of the 1920s.  And yes, at first it looked as if the new "freeing up" of the world of American finance was giving the American economy the medicine it needed to get up and moving at the pace it had been doing so formerly.

But this was timed with (and part of the cause) of another economic issue developing at the time:  the huge growth in the American national debt.  It went from 57% of the nation's total economic output per year to 70% of that amount in Bush's eight years in office, actually doubling from $5 trillion to $10 trillion in that same time.  So critical had the national debt become that it looked as if merely paying the interest at the normal rate of about 6% on that debt would take up most all of the federal government's discretionary funding (the part that is not already mandated, such as Social Security funding, and thus not accessible for government spending) leaving little funding available for the government's operational programs – including the very, very expensive war in Iraq.

So a simple solution was offered by the Federal Reserve Bank:  to lower the Fed's discount rate – that is, the interest rate that the Federal Reserve charges the banking world for the financial backup banks need to conduct their own financial operations (a complete reversal of the high interest rate strategy enacted 30 years earlier by Federal Reserve chief Volcker!).  Reducing that rate would also lower greatly the interest rate that the government would have to pay to cover its own enormous (and rapidly growing) debt.  And thus it was that the Federal discount rate steadily came down, to a point where by 2008 it was running at the unheard of rate of less than 1%!!!

This cheapening of dollar-financing not only helped the federal government cover its growing debt expenses, and not only did it help America's world of financial capital (the bankers) give a boost in supporting America's world of industrial capital (the producers), it also gave ordinary Americans a major incentive to finance the purchase of a new car (why not an expensive SUV?) or a much nicer and bigger home.  With car and house loans running at amazingly low interest rates, why not?

And thus there was a rush to purchase these new goodies – especially in a hungry housing market moving faster than the rate of production (at first anyway) of these items, driving up their prices steadily (the price of a typical house would double over a ten-year period from the mid-1990s to the mid-2000s). Nonetheless, with interest rates so low, and with Americans now believing that financial indebtedness was simply a natural part of American life, Americans jumped into the market anyway – to pick up these items before the prices got any higher.

Banks also jumped into the frenzy, not wanting to be left behind in the buildup of their "assets" (the number of loans and mortgages they were holding), to make themselves rank higher in the numbers game played in the heart of this competitive financial world.

And now, with financial restrictions greatly eased, they could even extend "subprime" home mortgages to borrowers whose actual financial abilities (the ability to continue to make regular payments on loans over a 15 to 30-year period) were at best very shaky.  This was most unwise.  But the logic was that if the holders of the loan found that they could not continue to make payments, then the house could be sold – and, with the continuing rise in the cost of houses, everyone could even make a bit of a profit in the deal.

But wasn't this cultivating exactly the same philosophy or financial mentality that led America into the grand stock-market crash of 1929?