Page last updated at 18:09 GMT, Wednesday, 7 January 2009

Did Bush cause the financial crisis?

By Greg Wood
BBC North America Business Correspondent, New York

"Consider the terrible consequences of the 'anything goes' Bush Administration, whose irresponsible non-regulation of financial institutions has led to this crisis."

George W Bush
President Bush was not always a champion of deregulation

Those words, from the Democratic Speaker of the House of Representatives Nancy Pelosi, sum up the charge against George W Bush - that in the eight years of his presidency he actively pursued policies of deregulation which caused the biggest financial and economic meltdown since the Great Depression.

It is a grim legacy for President Bush to contemplate as he enters his final days in office - but is it true?

Market collapse

He certainly presided over a widespread failure of regulation.

On his watch, the US authorities did little to prevent the sale of millions of mortgages to people who could never afford them.

They failed to police the market in mortgage-backed securities which has now collapsed with such devastating consequences.

And credit default swaps, those multi-billion-dollar bets on other people going bust, went virtually unregulated.

In recent days, Congress has been holding hearings to determine how the regulators at the Securities and Exchange Commission (SEC) missed numerous warning signs - "Red Flags" - about Bernard Madoff, the man accused of running a gigantic Ponzi scheme which has defrauded investors of at least $50bn.

The image of Mr Bush as the arch deregulator and the Democrats as the champions of stricter rules for business does not quite tally with the evidence

Paul Kanjorski, the Democratic Representative who is chairing the hearings, argued that the SEC's failings were - in part - due to chronic understaffing, implying that the Bush Administration had starved the agency of the resources needed to do its job.

In the blame game for this financial crisis, George W Bush comes a close second to greedy and unscrupulous Wall Street bankers.

But there are serious flaws in this argument.

Deregulation started long before President Bush came to power, and it was enthusiastically pursued by both Democratic and Republican administrations.

Here is just one example:

The Glass-Steagall Act of 1933 separated the activities of commercial banks, which take deposits, from investment banks, which invest money. It was repealed in 1999.

That relaxation of the rules enabled commercial lenders, like Citigroup, to trade instruments such as mortgage-backed securities and collateralised debt obligations.

'Far-reaching reform'

Many see the repeal of the Glass-Steagall Act as a major, direct cause of the current financial crisis.

But it was signed by a Democratic President, Bill Clinton, and supported by many other Democratic politicians, among them the scourge of Bush deregulation Nancy Pelosi.

What is more, President Bush actually increased the burden of regulation on US companies, enacting in 2002 what he called "the most far-reaching reform of American business practices since the time of Franklin D Roosevelt", the Sarbanes-Oxley Act.

A response to a number of major corporate and accounting scandals, including the collapse of the energy group Enron, Sarbanes-Oxley significantly increased the reporting requirements and accountability of company boards and management.

As president, he bears the ultimate political responsibility and his party has paid the ultimate political price

So the image of Mr Bush as the arch deregulator and the Democratic Party as the champion of stricter rules for business does not quite tally with the evidence.

But Mr Bush is not entirely blameless.

Affordable home ownership, especially for African-American and Hispanic borrowers, who had traditionally found it difficult and expensive to get a mortgage, was a key policy goal of the Clinton administration and one enthusiastically carried forward by President Bush.

A laudable aim - but there is evidence that it led to severe political pressure on mortgage providers to lower their lending standards, spawning the now infamous "NINJA" loans for borrowers with "No Income, no Job or Assets."

The mortgage finance company Fannie Mae was also being urged to fulfil its mission of helping low income homeowners by buying up more and more risky loans.

This political pressure, as well as rock-bottom interest rates and unscrupulous lending practices, helped to inflate the sub-prime housing bubble.

President Bush must take his share of the blame.

There is no doubt that George W Bush is a natural supporter of deregulation and that his administration did nothing to stop all sorts of questionable financial activities in the private sector (even though it did not condone them).

As president, he bears the ultimate political responsibility and his party has paid the ultimate political price.

But this financial crisis has many causes, being - as it is - the product of conflicting human emotions and imperfect markets and organisations.

It is impossible to blame it all on one man.

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