Why the Revenue fell in the Bush Years

Now as to why the revenue fell in the Bush years, they were two fold.  First was the attack on the Twin Towers that not only put a hurt on the U.S. economy, but dictated large spending by the government to prosecute the War on Terror.  Now you may argue that the war against Iraq was an unnecessary war, but the Congress at the time did not, and they authorized the funds to fight it.  This is not mentioned Obama’s  campaign, of course not.

The next major thing, and it was mentioned in the video but just barley, and that was the mortgage market collapse.  This was not that long ago, but I doubt if you understand just what brought it about.  It started with the Community Reinvestment Act, a law passed in 1977 and implemented by Federal Reserve Board Regulation BB, revised in 1995, encouraging depository institutions to help meet the credit needs of communities in which they operate, including low- and moderate-income neighborhoods. The Act requires federal agencies responsible for supervising such institutions to evaluate their compliance periodically and to take their records into account in considering applications for deposit facilities.

While Gerald R. Ford was the President the Democrats ran the Congress with a veto proof 61 Senators and a majority in the House.  What this law did was to force the banks to lend to people who did not have the income to justify their getting a mortgage.  Because of their lack of credit worthiness their loans were deemed Subprime.  Now enters Freddy Mae and Fanny Mac, they bought all the banks’ mortgage, both prim and subprime.  They then put these papers together, sliced they called it, both prim and subprime, into a derivative.  It is/was called a derivative because its value derived from its income stream as the mortgage is paid.  These were sold all over the world, and were allowed to count as a bank’s reserve if they bought them.  AIG got into the act by insuring these investments.

Great idea, worked great, Freddy Mae and Fanny Mac bought the banks’ mortgages which freed up the banks’ to make more mortgages, etc., etc.,…  Whops!  The people who did not have the income to pay their mortgages started to default.  Because the papers were sliced, even the prim mortgages holders making their payment on time could not the Freddy Mae and Fanny Mac’s derivative from becoming worthless.  The income stream guaranteed to investors dried up.  The reserves in the banks’ had to be built back up to meet their requirements, AIG was called upon to make good on the policies they had issued.  Loan dried up not only for mortgages but for everything else as well.  Businesses’ could not expand, and started contraction, leading to layoff.  This led to an increase in government expenditure in form of unemployment insurance and welfare payments.

In the month before the shit hit the fan Charle Rangel  was insisting that Freddy Mae and Fanny Mac were doing just great and was a boon to all the poor people in the USA!  He was one of the big pushers for subprime loans, and led the charge to stop any reform of Freddy Mae and Fanny Mac that Bush had tried to get through Congress.  There is no doubt that this recession was caused by the housing collapse, which in turn was fueled by the Community Reinvestment Act

This melt down led to Bush pushing for and getting TARP, The Troubled Asset Relief Program to purchase assets and equity from financial institutions to strengthen its financial sector.  Now I did not agree with this, I thought, and still think, that all these institutions should have been allowed to fail, but Congress, in all its wisdom, decided otherwise.  Of course TARP raised the deficit.  You take these two things, 9/11 and the housing collapse and they well explain why Bush’s spending way out striped his tax revenue.