President Obama was at Georgetown University on Tuesday to deliver what the White House promoted as a "major speech" on the economy. It wasn't that, really -- nothing Obama said was news, or even really new. But it was a very good speech, one of the best explanations of the economic crisis and his administration's response that the president has given so far.
Perhaps the best part of the address was Obama's explanation for the genesis of the crisis. Obama's habit of reverting to his days as a professor when speaking sometimes doesn't serve him (or his audience) well, but this was one instance in which being in Professor Obama's economics class was interesting as well as informative. His rundown of how things came to this point was simple and concise, the kind of thing us non-economists could probably use more of. An excerpt, from his remarks as prepared for delivery:
This recession was not caused by a normal downturn in the business cycle. It was caused by a perfect storm of irresponsibility and poor decision-making...
As has been widely reported, it started in the housing market. During the course of the decade, the formula for buying a house changed: instead of saving their pennies to buy their dream house, many Americans found they could take out loans that by traditional standards their incomes just could not support. Others were tricked into signing these subprime loans by lenders who were trying to make a quick profit. And the reason these loans were so readily available was that Wall Street saw big profits to be made. Investment banks would buy and package together these questionable mortgages into securities, arguing that by pooling the mortgages, the risks had been reduced. And credit agencies that are supposed to help investors determine the soundness of various investments stamped the securities with their safest rating when they should have been labeled “Buyer Beware.”
No one really knew what the actual value of these securities were, but since the housing market was booming and prices were rising, banks and investors kept buying and selling them, always passing off the risk to someone else for a greater profit without having to take any of the responsibility. Banks took on more debt than they could handle. The government-chartered companies Fannie Mae and Freddie Mac, whose traditional mandate was to help support traditional mortgages, decided to get in on the action by buying and holding billions of dollars of these securities. AIG, the biggest insurer in the world, decided to make profits by selling billions of dollars of complicated financial instruments that supposedly insured these securities. Everybody was making record profits – except the wealth created was real only on paper. And as the bubble grew, there was almost no accountability or oversight from anyone in Washington.
The rest of the speech was largely devoted to an explanation and defense of the administration's response to the economic crisis, especially against charges that there's too much spending and too much growth in the deficit.
Obama also argued, as he has before, that when we emerge from the current crisis, we have to do so with an improved financial system that provides safeguards against this for the future -- and he reached back to the past to do so. "There is a parable at the end of the Sermon on the Mount that tells the story of two men. The first built his house on a pile of sand, and it was destroyed as soon as the storm hit. But the second is known as the wise man, for when 'the rain descended, and the floods came, and the winds blew, and beat upon that house… it fell not: for it was founded upon a rock,'” the president said.
"We cannot rebuild this economy on the same pile of sand. We must build our house upon a rock. We must lay a new foundation for growth and prosperity -- a foundation that will move us from an era of borrow and spend to one where we save and invest; where we consume less at home and send more exports abroad."
To do this, Obama said, his administration has what amounts to a five-point plan: New regulation on Wall Street, an improved education system "that finally prepares our workers for a 21st century economy," a move towards increased use of renewable energy, health care reform and an effort to find areas of the federal budget taht can be cut in order to bring down the deficit.