So where do we begin? Under Reaganomics, there were large reductions in tax rates, along with a significant drop in federal spending and a decrease in business regulation. Unlike the tax, spend and regulate policies of previous administrations, revenues for the government soared, as did growth in the economy. This continued through the administration of President Reagan's Vice-President, George H.W. Bush, and later under President Clinton after the Republican-controlled Congress passed a set of laws entitled the "Contract with America." Though the growth had slowed slightly, when George W. Bush took office in 2001, he wished to see it come roaring back, as did the American people. So with that sentiment in mind, President Bush signed some of the largest tax cuts of our nation's existence into law. However, September 11th changed perspectives. Federal spending took off like a shot in order to fund the War on Terror. Furthermore, in 2002, President Bush signed the No Child Left Behind Act (a bill that pumped a massive amount of money into the federal Department of Education) and Medicare Part D (a bill that pumped another massive amount of money to pay for prescription drugs), which made more demands for money to fund the federal government, along with its various responsibilities. The economy, however, was not in the same boat. It was growing, particularly in the real estate business. The "American Dream" was redefined from being able to pursue one's own happiness, to owning your own house. The problems really began when bankers, being pressured by individuals in Congress and the White House, and being out of customers with good credit to loan money to, lowered their standards and began loaning money to people with bad credit. We've seen the ads on TV, on billboards, cries of loan approval regardless of your circumstances, or your ability to pay back the money to be loaned. Furthermore, the structure of loans in general was changed. Originally, when you went to the bank for a home loan, the bank was the one giving you the money, leading them to be careful about just who they lent money to. Now, the bank is not the originator of the lending money. The money comes from investment banks, whose money comes from private investors. The money lent, along with debts from items such as credit card debt and car loans, is consolidated into something called a CDO (Collateralized Debt Obligation). These CDOs are then graded by credit rating agencies, and investors back them based on their rating. When banks gave loans to debtors who would likely not pay back their loans, ratings agencies would often still rate these "subprime" mortgages as AAA, the highest possible rating, since that was how the ratings agencies got paid. Because of this, when they eventually defaulted on the loans, the banks wouldn't be on the hook, it'd be the investors.
These conditions produced a bubble of increasing prices in the real estate business, along with a boom of building new houses. When 2008 came around, the bubble finally came crashing down. Subprime mortgage holders defaulted in droves, making worthless millions of dollars of investor's dollars. This caused the investment banks who had organized the investing to topple. This, coupled with a loss of confidence in the banking system and stock market, caused the current recession. President Barack Obama's solution, which was followed by the Democrat-controlled Congress, was to pump billions of dollars into bailing out the larger investment banks, along with a few private companies who were hit hardest by their failing.
In my humble opinion, this course of action was incorrect. In our current financial state, where we are borrowing more money that we're earning from our economy, it would possibly be better to let firms which made bad financial decisions to fail, rather than reward them for their mistakes by borrowing more money that we don't have.
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