Greenspan Admits Tax Cuts for the Wealthy Were a Bad Idea
Tax cuts for the rich were the centerpiece of the republican financial plan for the nation. The idea is that we cut their taxes and they invest the money in wonderful new ventures that produce jobs and drive the economy forward. In the meantime, we borrow money from other people to pay our bills, running up huge deficits, which will be repaid from the new tax revenues from all the new investments. So, how did that work out?
This is from Greenspan’s prepared testimony today:
What went wrong with global economic policies that had worked so effectively for nearly four decades? The breakdown has been most apparent in the securitization of home mortgages. The evidence strongly suggests that without the excess demand from securitizers, subprime mortgage originations (undeniably the original source of crisis) would have been far smaller and defaults accordingly far fewer. But subprime mortgages pooled and sold as securities became subject to explosive demand from investors around the world. These mortgage backed securities being “subprime” were originally offered at what appeared to be exceptionally high risk-adjusted market interest rates. But with U.S. home prices still rising, delinquency and foreclosure rates were deceptively modest. Losses were minimal. To the most sophisticated investors in the world, they were wrongly viewed as a “steal.”
The consequent surge in global demand for U.S. subprime securities by banks, hedge, and pension funds supported by unrealistically positive rating designations by credit agencies was, in my judgment, the core of the problem.
Greenspan thought that markets were acting wisely in allocating so much money into houses in the US, so despite having the authority to intervene, he did absolutely nothing. He didn’t demand transparency, he fought regulation, and he refused to use his consumer protection powers to protect borrowers.
Why exactly did he think investment in housing was going to create tax revenues? How was it going to drive the US economy? What it does do is create massive debt owed by citizens. That debt can only be repaid from their own income. But where will the jobs come from to create that income? The short-term jobs created by building those houses and furnish them with appliances vanish when we saturate the housing market. Where will those people find work and income to pay the debt when the jobs start disappearing?
Suppose the vast amount of capital Wall Street allocated to houses had actually been invested, in green jobs, drilling, infrastructure or biotechnology or any of the hundreds of other possible job-creating ventures. We would not be where we are today.
Republican ideology says markets will allocate capital wisely, and that government should keep away. Even Ayn Rand disciple Greenspan acknowledges that he was wrong about that. When will the rest of them?