George W. Bush's Free Market Presidency

I am a free market sort of guy who Joseph Stigltiz might brand a free market fundamentalist. Critics of the Bush administration believe that it was marked by massive deregulation of the economy, laissez faire run amok. Free markets did not run amok. The Bush administration frequently imposed its will on markets rather than let markets allocate resources spontaneously.

Arianna Huffington expresses the typical, but incorrect view that President Bush was an unbridled market enthusiast. Writing for the Huffington Post (Laissez Faire Capitalism Should Be As Dead As Soviet Communism, December 22, 2008) she opines,

It's time to drive the final nail into the coffin of laissez-faire capitalism by treating it like the discredited ideology it inarguably is...

In a comprehensive piece on what led to the mortgage crisis and the subsequent financial meltdown, the New York Times shows how the Bush administration's devotion to unregulated markets was a primary cause of our economy to ruin.

The link to the New York Times article (White House Philosophy Stoked Mortgage Bonfire, December 21, 2008) was in Huffington's article. The substance of the article does not support the view that the Bush administration favored markets. Its premise is that

Eight years after arriving in Washington vowing to spread the dream of homeownership, Mr. Bush is leaving office, as he himself said recently, “faced with the prospect of a global meltdown” with roots in the housing sector he so ardently championed.

A pro market, laissez faire administration might try to remove government restrictions on building in some parts of the country, but would not vow to "spread the dream of home ownership." That is a decision that individuals make through markets. The authors write that,

He pushed hard to expand homeownership, especially among minorities, an initiative that dovetailed with his ambition to expand the Republican tent — and with the business interests of some of his biggest donors. But his housing policies and hands-off approach to regulation encouraged lax lending standards.

Pushing hard to expand home ownership is not "hands-off." Housing policies that encourage or impose lax lending standards are a type of bad over regulation in which the government's goal to extend home ownership takes presidence over the lender's goal to make a good loan. They then write,

The president also leaned on mortgage brokers and lenders to devise their own innovations. “Corporate America,” he said, “has a responsibility to work to make America a compassionate place.”

And corporate America, eyeing a lucrative market, delivered in ways Mr. Bush might not have expected, with a proliferation of too-good-to-be-true teaser rates and interest-only loans that were sold to investors in a loosely regulated environment.

I would not absolve mortgage brokers of as much guilt as the authors, but to the extent that President Bush "leaned" on mortgage brokers, he was regulating the industry.

Finally, they claimed that President Bush deregulated the banking industry by removing state authority over national banks. They miss the main point. The Bush administration was replacing one set of regulations for another; those that advanced their agenda.

Nick Gillespie, in an oped piece for the Wall Street Journal (Bush Was a Big-Government Disaster, January 24, 2009), exposes the Bush administration's regulator zeal. Please not that Gillespie gives objective measures about government's growth, and does not make unsubstantiated claims. Certainly, one could question his measures and subsequent conclusions, but at least he provides evidence, and the evidence supports his claim.

The most basic Bush numbers are damning. If increases in government spending matter, then Mr. Bush is worse than any president in recent history. During his first four years in office -- a period during which his party controlled Congress -- he added a whopping $345 billion (in constant dollars) to the federal budget. The only other presidential term that comes close? Mr. Bush's second term. As of November 2008, he had added at least an additional $287 billion on top of that (and the months since then will add significantly to the bill). To put that in perspective, consider that the spendthrift LBJ added a mere $223 billion in total additional outlays in his one full term.

If spending under Mr. Bush was a disaster, regulation was even worse. The number of pages in the Federal Registry is a rough proxy for the swollen expanse of the regulatory state. In 2001, some 64,438 pages of regulations were added to it. In 2007, more than 78,000 new pages were added. Worse still, argues the Mercatus Center economist Veronique de Rugy, Mr. Bush is the unparalleled master of "economically significant regulations" that cost the economy more than $100 million a year. Since 2001, he jacked that number by more than 70%. Since June 2008 alone, he introduced more than 100 economically significant regulations.

Laissez faire capitalism may or may not work, but it was not tried during the Bush administration.

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What Can Regulators Regulate?

In an important article titled, "What Can Regulators Regulate? The Case of Electricity" written in 1962, George Stigler and Claire Friedland observe,

The literature of public regulation is so vast that it must touch on everything, but it touches seldom and lightly on the most basic question one can ask about regulation: Does it make a difference in the behavior of an industry?

As the House Committee on Oversight and Government Reform hearings begin, the washingtonpost.com reports that

Internal Freddie Mac documents show that senior executives at the company were warned years ago that they were offering mortgages that could pose dangers to the firm, hurt borrowers and generate more risky loans throughout the industry.

The documents also suggest that the GSE's executives knew their firms were falling behind private sector firms in product innovation and market share. Parenthetically, this suggests that the GSE's were not the culprit of the housing bubble, its bursting, or the ensuing financial crisis, but rather a somewhat late player. Fannie's CEO, Daniel Mudd expressed concern in 2005 that

A business presentation in 2005 expressed concern that unless it didn't [push into new markets], Fannie could be relegated to a "niche" player in the industry. Mudd later reported in a presentation that Fannie moved into this market "to maintain relevance" with big customers who wanted to do more business with Fannie, including Countrywide, Lehman Brothers, IndyMac and Washington Mutual.

In a wonderful Cato Policy Report touching on the social value of free markets and the impact of regulation, titled, "Are We Ailing from Too Much Deregulation," David R. Henderson notes that the GSE's were important players in the mortgage industry

Of the more than $15 trillion in mortgages in existence in early 2008, about one third were owned by, or were securitized by, Fannie Mae, Freddie Mac, Ginnie Mae, the Federal Housing and Veterans Administration and other government agencies [GSE's] that subsidize mortgages.

Despite falling behind private financial companies, the GSE's knew their importance in the industry. The washingtonpost.com reports that

The documents suggest than Fannie and Freddie knew they were playing a role in shaping the market for some types of risky mortgages. An e-mail to Mudd in September 2007 from a top deputy reported that banks were modeling their subprime mortgages to what Fannie was buying.

When Representative Darrell Issa (R-Calif.) who said (washingtonpost.com) that the executives at the GSE's need to take responsibility for their actions and the companies failure, and other members of Congress who have said similar things should remember with some humility their institution's failures to oversee their creations. Regulators, both those at the Office of Federal Housing Enterprise Oversight (OFHEO), and in Congress were unable to successfully regulate Fannie Mae and Freddie Mac. Particularly egregious were members of Congress who blocked regulatory reform.

Why did regulation fail? Henderson suggested two reasons: regulators have little incentives to regulate well, and regulatory agencies are often captured by the industry they regulate. Slate's Jack Safer beautifully illustrates political capture by Fannie and Freddie in, "Fannie Mae and the Vast Bipartisan Conspiracy." Let me suggest a third reason regulators, congressional or otherwise, fail: they do not have the knowledge needed to control a spontaneously and organically growing market, nobody does.

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