Who Built the Recession?

Bill Clinton, who rode a recession into office and left the scene just before another one began, knows something about the blame game. Addressing the Democratic convention on Wednesday night, he made a full-throated effort to defend the Obama presidency by putting it in the context of past Republican failure.

“They want to go back to the same old policies that got us into trouble in the first place,” he warned, listing tax cuts, financial deregulation, defense spending, and domestic budget cuts as examples. Clinton’s argument was an inch deep, but it recalled the fact that the economic catastrophe that primed Obama’s 2008 victory and has dogged his incumbency remains a liability to Republicans four years later.

If Clinton and his party believe that tax cuts can cause a financial crisis, that’s a new line of attack. If they believe that financial deregulation did it, they have never made a comprehensive case for exactly how. If it was too much spending on defense rather than entitlements, then they should review the boom of the 1980s. The Democrats have never really made a coherent argument of how the GOP caused such misery—they only pointed the finger. Meanwhile, Republicans act as if life began in January 2009.

There remains one explanation that has escaped both sides’ scrutiny because they share culpability for it. Beginning in 2001, easy money from the Federal Reserve flooded the markets with cheap credit, creating asset bubbles and finally tipping the American financial system on its side. This was a period of legitimate economic success (52 consecutive months of job growth under President George W. Bush) mixed with fake wealth attached to real estate and financial assets. No Republican is eager to wade into that story, while no Democrat wants to admit that their current strategy is reminiscent of it: Lean on the Fed to juice the economy.

Reliance on a loose-money Fed did not end well for the presidents who attempted it (Nixon, Carter, both Bushes), while Reagan and Clinton, by contrast, saw the fruits of a strong dollar. But even those relatively successful monetary policy records showed signs of dysfunction beneath the surface. Reagan was fortunate the rest of the world was eager to finance the deficit spending he failed to curb. For Clinton, the tech bubble collapse snowballed into a recession, but only on his way out the door.

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