A crisis made in the Oval Office

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By Dean Baker

A financial panic provoked by President Bush was designed to stampede Congress into passing the bail-out for Wall Street

This is the first time in the history of the United States that the president has sought to provoke a financial panic to get legislation passed through Congress. While this has proven to be a successful political strategy - after the House of Representatives finally passed the bank bail-out plan today - it marks yet another low point in American politics.

It was incredibly irresponsible for George Bush to tell the American people on national television that the country could be facing another Great Depression. By contrast, when we actually were in the Great Depression, President Roosevelt said: "We have nothing to fear, but fear itself."

It was even more irresponsible for President Bush to seize on the decline in the stock market five days later as evidence that his bailout was needed for the economy. President Bush must surely understand, as all economists know, that the daily swings in the stock market are driven by mass psychology and have almost nothing to do with the underlying strength in the economy.

The scare tactics of President Bush, Henry Paulson, the Treasury secretary, and Ben Bernanke, chairman of the Federal Reserve, created sufficient panic, so that by the time of the first vote on the emergency package in Congress, much of the public believed that the defeat of the bail-out may actually have had serious consequences for the economy. Millions of people have changed their behaviour because of this fear, with many pulling money out of bank and money market accounts, and adjusting their financial plans in other ways.

This effort to promote panic is especially striking since the country's dire economic situation is almost entirely the result of the Bush administration's policy failures. First and foremost, the decision of Paulson and Bernanke (and previously Alan Greenspan) to ignore the housing bubble, allowed for the growth of an $8tn bubble, which is now collapsing.

It is the collapse of this bubble - which has already destroyed more than $4tn in housing wealth, and is likely to destroy another $4tn over the next year - that is at the root of the economy's problems. While competent economists were warning of the bubble and the dire consequences of its collapse, the top officials in the Bush administration were celebrating the rise in homeownership rates.

The Bush administration made the crisis even worse by deregulating Wall Street. This led to the huge over-leveraging of financial institutions, which has vastly complicated the country's economic policies. It is especially disturbing that Secretary Paulson personally profited from these policies, earning millions of dollars in compensation from Goldman Sachs during his years there as its chief executive.

The collapse of the housing bubble, while falling short of the magnitude of the Great Depression, is likely to lead to the worst recession since the second world war. Repairing the damage caused by this bubble will be a long and difficult process. Cleaning up the damage to the political system from President Bush's unprecedented fear campaign may prove to be even more difficult.