This is the second in a continuing series reviewing the economic policies of President George W. Bush. In the first post, I discussed why the temporary nature of the 2001/2003 tax cuts drained them of any deep economic benefit. While that fiscal policy was bad enough (without the permanence, it was pure Keynesian opium), monetary policy for much of the Bush the Younger Administration was just as bad.
From 2002 to 2005, interest rates were kept well below what would have normally been the case in the 1980s and (most of) the 1990s. Because the Federal Reserve does this largely via buying U.S. Treasury notes, the effect merely compounded the inflationary effect of the temporary tax cuts. As I noted yesterday, the inflation of the aughts was especially notable in resources – including land, which average Americans saw as the housing bubble.
Of course, when it comes to monetary policy, there is precious little an incumbent president can do – except when the Fed Chairman’s term is up. Bush had a unique opportunity to make it clear that ad hoc monetary policy engineered by Alan Greenspan in 2002 was not his policy, and make a change.
Instead, Bush quickly renominated Greenspan for another term in 2004.
Now, some may note that Bush might not have wanted to “rock the boat” in an election year. Except that in a much more obviously political position, he did just that in the same year when he appointed Porter Goss – a longtime critic of American intelligence operations – as CIA Director. So Bush the Younger was clearly up for taking risks. Unfortunately for the American economy, fixing a growing monetary mess wasn’t on Bush’s agenda.
As a result, not only did the bubble/credit cycle continue to spin out of control, but when it burst, the Fed’s already low interest rates couldn’t go much lower – and the Fed resorted to qualitative easing (now three times) under Greenspan’s successor – Ben Bernake, whom Bush nominated to replace Greenspan.
In other words, two men were largely responsible for the Fed going off the rails on monetary policy, and thus unintentionally making it nearly impotent today…and President Bush appointed both of them.
Cross-posted to Virginia Virtucon