The Other Big Lie

There have been two big, and I mean really big, lies about the financial crisis. These lies get repeated over and over often by those who should know better and usually by those whose interests are served when these lies are believed.

I have already written extensively here, here, and here about the first big lie, which is the housing bubble and resulting financial crisis was primarily caused by Fannie Mae and Freddie Mac. The evidence is overwhelming the the sub-prime crisis was caused by private lenders, the great majority of which were outside of the scope of federal regulation (think Countrywide or Ameriquest), responding to Wall Street's insatiable demand for securitized mortgage instruments. Mortgage originators and the Wall Street financiers did this because they made lots of money in the process. Raghuram Rajan has written a widely-discussed article in Foreign Affairs in which he repeats this trope and doesn't even mention (doesn't even mention!) the role of securitization. Simply ignoring the weight of evidence to the contrary seems to be about the best the promoters of this view can do these days.

As infuriating as this Big Lie is, it pales in comparison to the second Big Lie. After all, competing narratives about government regulation and Wall Street securitization are pretty wonky stuff. You can easily get lost in the details. By way of contrast, Big Lie 2 is much simpler. For a succinct summary of Big Lie 2, enter David Gergen, who should know better. I quote:

President Obama had a Democratic Congress when he arrived. He passed a stimulus bill which he, Nancy Pelosi, and the Democrats agreed on, and they promised that unemployment would not go above 8%. . . . To ignore the fact that president Obama had a Democratic majority, he did get the stimulus bill he wanted. . . .is all very one-sided.

 Where to begin?

1. Having a "Democratic Congress" is not sufficient to get legislation through the Senate, as Mr. Gergen well knows. You need 60 votes to overcome a filibuster, which certainly would have been the GOP strategy. The Democrats did not have a filibuster-proof majority in the Senate at the time. They were able to pass the bill only with the support of moderate Republicans, Olympia Snow, Susan Collins, and Arlen Specter (Snow has since announced her retirement and Specter subsequently changed parties and then lost his re-election bid, which tells you something about the status of the "moderate Republican" in the contemporary GOP). Their contribution to the bill was to reduce it size, primarily by cutting aid to the states, in retrospect a disastrous decision.
2. Obama never "promised" that unemployment would go above 8%. The stimulus was signed into law by President Obama on February 17, 2009. Three weeks later, long before any of the provisions of the act had been implemented, the Bureau of Labor Statistics announced that the unemployment rate for the February was already 8.3%. The "Obama-promised-unemployment-wouldn't-go-above-8%" line originates from a study that Christine Romer (see below) conducted in December 2008 and released in January 2009.
   Romer's prediction was wrong only because it underestimated how deep the recession was. The economy was much worse than she or most other economists realized at the time. The Bureau of Economic Analysis initially projected that the economy shrank at an annual rate of 3.8% in the last quarter of 2008. We only learned in 2011 that the economy actually shrunk by 8.9% that quarter, which made it one of the worst quarters for economic growth in U.S. history. This is a classic case of an economic projection that proves inaccurate because of faulty data that is subsequently revised. This happens all of the time.
3. It is not entirely true that the administration got the stimulus it wanted in any case. Romer's initial projection as to the desired size of the stimulus was $1.2 trillion (and this was based on her belief that the economy was better than in fact it was). This amount was lowered by the administration's political wing. They just didn't believe that they could get a package that large through Congress. The stimulus that passed the House was $820 billion. To win the votes of the aforementioned moderate Republicans, the size of the stimulus was reduced further. $787 billion was the final figure. Furthermore, to attract Republican support, the administration included in the package over $200 billion in tax cuts.

To sum up, the Congress was not controlled by the Democratic party when the stimulus was passed. Getting it through the Senate required Republican support. Second, the administration never promised that unemployment would never go above 8% if the stimulus were passed. Indeed, unemployment was already over 8% when Obama signed it into law. If the administration can be faulted at all it would be for underestimating the depth of the recession and the effect this had on their economic forecasts. Third, the administration's economic team wanted a $1.2 trillion stimulus, the political team reduced its size and included tax cuts to attract GOP support, and then Senate Republicans reduced its size yet again. Given these undeniable facts, it is misleading at best to argue that Obama "got the stimulus he wanted." In fact, he got the best stimulus he thought was practically possible given the determined political opposition.

If you ever hear someone say that the stimulus failed because it failed to keep unemployment below 8%, they are offering a rather low grade partisan spin, which is the main reason why I am a little surprised that David Gergen would stoop to this.

Note that this projection sees unemployment topping out at 9%. In fact, the peak of the unemployment curve was 10.1%, yet another indication that the economic assumptions on which it was based were too optimistic.