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Federal deficit spending out of control

By Scott Tibbs, October 22, 2009

MSNBC.com paints a grim picture of the federal budget deficit:

WASHINGTON - The federal budget deficit has surged to an all-time high of $1.42 trillion as the recession caused tax revenues to plunge while the government was spending massive amounts to stabilize the financial system and jump-start the economy.

The imbalance for the budget year ended Sept. 30 more than tripled last year's record. The Obama administration projects deficits will total $9.1 trillion over the next decade unless corrective action is taken.

Yes, after Democrats spent eight years lambasting George W. Bush for the budget deficit, President Obama is presiding over record deficit spending. Of course, the fiscal year that ended 9/30 isn't Obama's baby - it was enacted during the Bush administration. That said, Obama has proposed record increases in government spending including the "stimulus" bill. It just so happens that much of the "stimulus" will be spent as Democrats try to hold onto their majority in the House and turn back a GOP effort to repeat 1994.

Of course, Democrats argue that the objections to Obama's deficit spending is based on race. That's silly. A number of Republicans have been very critical of Bush, specifically Bush's signature on a law that expanded the federal government's role in primary and secondary education, a failed effort to grant amnesty to illegal aliens, his signature on a law creating a brand new federal entitlement program and his signature on the obscene "campaign finance reform" law authored by failed 2008 Republican Presidential nominee John McCain. One of the most consistent voices critical of Bush was none other than radio talk show host Rush Limbaugh.

Democrats love to point to tax cuts signed by Republican Presidents as the reason for large deficits, and accuse Republicans of "hypocrisy" when we criticize President Obama's deficit spending. Do we really need to go through this again? As I pointed out last February, federal tax revenue was $599 billion in 1981, and had increased to $991 billion 1989. The federal government took in $1.99 trillion in tax dollars in 2001. White House estimates for tax revenue in 2008 is a whopping $2.66 trillion. So what caused the large deficits? Answer: government spending.

If we want to expand the economy, we need allow people to keep more of what they earn. We need to reduce the tax burden on business so it is easier to invest and create jobs. That strategy worked under John F. Kennedy, it worked under Ronald Reagan, and it worked for George W. Bush.

It worked for Bush, that is, until a number of stupid mistakes (including the disastrous Community Reinvestment Act) caused the meltdown in the financial markets that crashed the global economy. (See below for more on the CRA.) Democrats engaged in shameless race-baiting as conservatives pointed out the folly of the CRA, but the bottom line is that "encouraging" banks to loan money to people who cannot pay it back, no matter the race of the borrowers, is foolish and dangerous. Bad fiscal policy has nothing to do with race.

Obama is repeating the mistakes of the past, blinded by an ideology that places the "wisdom" of 535 legislators in one city on the East Coast above decisions made by 300 million Americans in their household budgets, small businesses and workplaces. If we want the United States so succeed, we need to give the American people the chance to be the best that they can be, by reducing the tax burden (which has been proven to increase government revenue), lowering government spending, and reducing the regulatory burden.

The Bush Administration pretended to be "fiscally conservative" while significantly increasing the size and power of the federal government. If Obama truly wants change we can believe in, he should not simply build on the big-government policies of George W. Bush. But since that is Obama's plan, I hope he fails.

It all started, innocently enough, in 1994 with President Clinton's rewrite of the Carter-era Community Reinvestment Act.

Ostensibly intended to help deserving minority families afford homes — a noble idea — it instead led to a reckless surge in mortgage lending that has pushed our financial system to the brink of chaos.

Fannie and Freddie, the main vehicle for Clinton's multicultural housing policy, drove the explosion of the subprime housing market by buying up literally hundreds of billions of dollars in substandard loans — funding loans that ordinarily wouldn't have been made based on such time-honored notions as putting money down, having sufficient income, and maintaining a payment record indicating creditworthiness.

With all the old rules out the window, Fannie and Freddie gobbled up the market. Using extraordinary leverage, they eventually controlled 90% of the secondary market mortgages. Their total portfolio of loans topped $5.4 trillion — half of all U.S. mortgage lending. They borrowed $1.5 trillion from U.S. capital markets with — wink, wink — an "implicit" government guarantee of the debts.

Source: Investor's Business Daily, September 22, 2008

Many monumental errors and misjudgments contributed to the acute financial turmoil in which we now find ourselves. Nevertheless, the vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

How did we get here? Let's review: In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

It is important to understand that, as GSEs, Fannie and Freddie were viewed in the capital markets as government-backed buyers (a belief that has now been reduced to fact). Thus they were able to borrow as much as they wanted for the purpose of buying mortgages and mortgage-backed securities. Their buying patterns and interests were followed closely in the markets. If Fannie and Freddie wanted subprime or Alt-A loans, the mortgage markets would produce them.

Source: Wall Street Journal, September 23, 2008

The painful readjustments in the housing market are a direct result of failed government policies that fueled the housing bubble. A political bias that favored home ownership (through the tax code and programs such as the Community Reinvestment Act, coupled with the implicit — now explicit — federal guarantee of the government-sponsored enterprises Fannie Mae and Freddie Mac, led to a housing boom fueled by loans that were often not worth the paper they were written on. At the same time, ratings agencies, under the auspices of the SEC, vouched for the quality of these loans, allowing them to be bundled into new financial instruments and sold around the world. The Federal Reserve aided and abetted these distortions with loose monetary policies that distorted price signals, artificially boosted investments in the housing sector, and ultimately throughout the financial services sector as mortgages were securitized and repackaged for sale across the globe.

Despite the publicly voiced concerns of many of us — both in and out of government — about Fannie and Freddie, the GSEs’ defenders in Congress turned a blind eye to the inherent weaknesses in the system. The financial system held together as long as housing prices continued to increase. As the housing market weakened, it became evident that the value of mortgages underlying the new financial instruments was too low to meet the necessary financial obligations. As the true market value became evident, the market for these mortgage backed securities (originated by Fannie and Freddie) dried up as investors triggered a flight to safety. Considering the fact that many of these firms were leveraged by as much as 30-to-1, the retrenchment was severe.

Source: National Review, September 29, 2008