Harvey Golub, former chairman and CEO of American Express, writes in a WSJ op-ed today that for American to solve our financial problem for ourselves and future generations “we must get back to our historic reliance on personal responsibility and market forces, and get government out of economic management. It doesn’t do a good job, as the current economic mess amply proves.” In the commentary he looks at the roots of the crisis, which he defines as a government failure, not market or capitalistic failure:
To begin to understand today’s problem, we have to have a sense of how we got there. Between 1994 and second quarter 2008, the U.S, housing stock more than doubled in value from $7.6 trillion to $19.4 trillion. Almost three quarters of that increase was due to a speculative bubble, the root cause of which was government policies designed to increase home ownership, largely among people who would be considered nonprime borrowers — i.e., people without sufficient documented income or employment history and little or no savings or credit history. The intellectual start of this mess was in a flawed Boston Federal Reserve study published in 1992 that purported to show that minorities were treated less well than whites. That study led to increased political pressure on banks to modify their standards with increased emphasis through the Community Reinvestment Act, and aided by U.S. Department of Housing and Urban Development regulations in the Clinton administration that required parity of outcomes in the lending process. The effect of all of this meddling was compounded by the lax or incompetent supervision of Fannie Mae and Freddie Mac. All in all, the government got into the business of encouraging and then forcing lending institutions to make mortgage loans to people who could not pay them back. What we ended up with is a failure of government, which we have erroneously termed a failure of capitalism.
As a solution, Mr. Golub suggest we focus long-term. He agrees that the government’s spending to-date will help reliquidate the market, but that a short-term view will kill us in the long run if we don’t have an eye to the future impact of our decisions.
Relying on growth alone implies a growth rate higher than we have ever experienced in our nation’s history. Nonetheless, our public policy must encourage economic growth by lowering tax rates for corporations and individuals while at the same time avoiding what would be growth killers, including “card check” legislation and trade restrictions. Public policy should support higher savings rates, and avoid encouraging increased consumer spending funded by further debt, which may be helpful in the short term but catastrophic in the longer term.
Read the full commentary here.