While democrats and republicans argue about the stimulus effect and deficit consequences of extending the Bush tax cuts to the uber- wealthy, it’s time progressive re-framed the argument to take a broader view and seriously examine the effect the Bush tax cuts for the rich actually had in fueling the economic meltdown.
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To show the contributing role of the Bush tax cuts in the economic meltdown, it’s first important to establish how derivative trading led to the housing meltdown.
Frank Partnoy, author of FIASCO: Blood in the Water on Wall Street, describes the situation expertly in the following passage...
"The final months of 2008 marked the end of an unprecedented saga of excess. The mania, panic, and crash had many causes. But if you are looking for a single word to use in laying blame for the recent financial catastrophe, there is only one choice. Derivatives.
Without derivatives, leveraged bets on subprime mortgage loans could not have spread so far or so fast. Without derivatives, the complex risks that destroyed Bear Stearns, Lehman Brothers, and Merrill Lynch, and decimated dozens of banks and insurance companies, including AIG, could not have been hidden from view. Without derivatives, a handful of financial wizards could not have gunned down major mutual funds and pension funds, and then pulled the trigger on their own institutions. Derivatives were the key; they enabled Wall Street to maintain its destructive run until it was too late."
http://www.npr.org/...
Derivative trading is nothing new; in fact, Portnoy’s original version of FIASCO came out in the late 90’s and was given an update after the 2007 crash proved him eerily prophetic. What was new was the use of bundling groups of mortgages together and selling them as derivative investment products. The trouble happened when demand for derivative investments far outstripped the availability of sound mortgages in which to base those investments. This fueled a rush in the 2000’s to give mortgages out in order to create derivatives off their bundling.
Everything went along great until these new mortgages started to fail, and when it started to go bad it got really bad, really fast. A bump in foreclosures spooked investors and the derivative market crashed, killing Lehman brothers and causing the financial market crash. For a more detailed explanation, check this interview with Gillian Tett, whose book, Fools Gold, succinctly details J. P. Morgan’s part in the derivative crisis.
http://www.npr.org/...
So we have a clear picture of the economic engine that created the derivative bubble. But this engine, like all engines, needed fuel to run. So where did the economy get the money, the fuel, that helped this engine run our economy into the ground?
The obvious answer HAS to be the Bush tax cuts for the wealthy. This huge influx of cash at the top of the economic system coincides exactly with the out-of-control demand for derivatives that ruined our economy. The rich took their tax $ giveaways, sunk it into derivatives, and in turn ruined our economy.
While the conclusion that the Bush Tax cuts played a major role may be circumstantial, it is certainly more likely that the Bush tax cuts caused the crisis than the goper claim that the cuts stimulate the economy.
UPDATE:
After over 100 thoughtful and well-reasoned comments critiquing this article, some major semantic problems with the original article need to be addressed.
The title is hyperbolic and overstates the circumstantial case presented, as does the sentence "The obvious answer HAS to be the Bush tax cuts for the wealthy. "
A more appropriate title would be "DID the Bush tax cuts HELP cause the financial crisis?", a question that despite the arguments presented, I would still answer in the affirmative.
Additionally- what is "obvious" to me, as others have pointed out here, is unsupported by evidence(although commenter neroden does answer this lack of evidence below), other than the fact that rich people had a whole lot of extra money at the same time demand for exotic and risky investment tools skyrocketed. While I certainly think it was no coincidence, I see how a reasonable person could assert that it was a coincidence, and thus not obviously essential.
It has been argued that as a world –wide investment tool, demand for derivatives would not be dramatically greater because of increased capital for US investors. Also, the amount of the Bush tax cuts was far less than the derivatives market: estimated by one comment as no more than 10%
These are both great points, but a speculative bubble need not constitute ALL of the investments. And I would certainly argue that even a 10% increase in a trillion dollar investment tool is enough money to get the ball rolling towards bubble creation.
Finally I would like to thank commenter neroden who points out
" the relationship between low tax rates on capital and speculative bubbles."
"The low tax rates on the rich, and specifically on investment income, caused the speculative bubble, and Brad DeLong has given a set of references in his blog (some months ago) to the evidence for it.
Of course, the derivatives disaster was due to Phil Gramm's deregulation (the criminal Commodities Futures Modernization Act) -- but the fuel for it was, indeed, the money sloshing around in the pockets of the superrich looking for something to invest in...
..US money went into foreign stocks which invested in multinational banks which invested in derivatives...
...Much of that money-chasing-returns was invested in money market funds, and other parts were invested in supposedly high-grade bond funds. These funds were short on things to invest in, so new AAA securities needed to be invented to supply that demand. Those were invented by the creation of collateralized debt obligations (CDOs) on subprime mortgages and the rest is history."
And once again to all that have commented so far, I appreciate you input and thank you for taking time to consider my thoughts on this subject