Bubble Economies

Hillary spends a lot of time complaining about the housing bubble. According to her it is all Bush's fault for not providing proper regulatory supervision. The "Clinton" administration diesn't get off so lightly. It played its own role in today's economy.

Hillary and Bill like to boast about how well the economy did under the "Clinton" administration (I'm using quotes because Hillary tries to take credit for her husband's administration). It did do well but there are a couple of things to remember. The first is that NAFTA and foreign trade certainly had a lot to do with the economy in the 1990s and Hillary is running against NAFTA. More relevant is the Internet bubble.

Al Gore didn't invent the Internet but he did talk about an Information Superhighway. He didn't mean the Internet, he meant a new proposed system but the term was quickly applied to the Internet, especially after the invention of the web browser. This led to an explosive growth in the Internet. Companies were formed on a shaky business plan and quickly went public making their investors millions. Thousands of new companies were founded based on doing business on the Internet. Many of these companies financed themselves by paying shares to other companies and to employees. Just the aura of the Internet was enough to boost a company's stock prices beyond all reason. Look at AOL which was not even making a profit buying media giant Time/Warner based on stock market value (and look at how well that turned out). This was actually one of the more successful Internet mergers. Both companies survived and are still around in some form.

The Clinton administration was ecstatic. They openly boasted that they had built a new economy which was recession proof because it was international. High stock markets values were not a sign of anything except the potential limitless profits to come. The coming crash was so obvious that Doonsbury joked about it for a couple of over years before it actually came. No regulatory oversight there.

In 1999, Bill signed into law a measure that allowed banks to merge across state lines. This lead to mega banks.

When Bush took office in 2001 the Internet bubble had already burst and the economy was in mild recession. In addition to tax cuts and a rebate, Bush got the Fed to lower interest rates to historic lows. This stimulated the economy but led to other problems.

First, low interest rates drove down the dollar. Investors don't want to put money into the US if it will get a poor return.

The other problem was the credit explosion. People were refinancing and either spending the difference or buying a larger, more expensive house. With interest rates so low, people could afford to pay more for houses. This drove house prices to unrealistic amounts. People were also taking out second (or third) mortgages based on the new value of their house. The new mega banks encouraged people to treat the increasing value of their homes as something to be spent.

The Fed left interest rates too low for too long but without the Internet bubble, they would not have needed to lower them in the first place and without the bank mergers, it is unlikely that banks would have wrapped loans into security vehicles.

So yes, things happened under the Bush administration that could have been minimized but the Clinton administration had similar problems as will the next administration. At least no one in the Bush administration boasted about building a recession-proof "new" economy.