Finger-pointing in financial crisis directed at Bush

WASHINGTON — For his entire presidency, George W. Bush has tried to avoid the fate of his father, brought low by a feeble economy. Now, as the financial crisis radiates far beyond Wall Street, Bush faces an even grimmer prospect: being blamed, at least in part, for an economic breakdown.

"There will be ample opportunity to debate the origins of this problem," Bush said Friday in the Rose Garden. "Now is the time to solve it."

But in Washington, on Wall Street and on the presidential campaign trail, the debate already has begun. Democratic presidential nominee Barack Obama denounces what he calls the Bush administration's "failed philosophy." GOP rival John McCain claimed Friday that "the administration did nothing" to rein in mortgage giants Fannie Mae and Freddie Mac, even though the White House did push some reforms on Capitol Hill.

And while economists and other experts say there are plenty of culprits — Democrats and Republicans in Congress, the Federal Reserve, an overzealous home-lending industry, banks and also Bush's predecessor, Bill Clinton — they do agree that the Bush administration bears part of the blame.

These experts, from both political parties, say Bush's early personnel choices and overarching antipathy toward regulation created a climate, that, if it did not set off the turmoil, almost certainly aggravated it. The president's first two Treasury secretaries, for instance, lacked the kind of Wall Street expertise that might have helped them raise red flags about the use of complex financial instruments that are at the heart of the crisis.

To his credit, Bush accurately foresaw the danger posed by Freddie Mac and Fannie Mae, and began calling as early as 2002 for greater regulation. But experts say the administration could have done even more to curb excesses in the housing market, and much more to police Wall Street, which transmitted those problems around the world.

Vincent Reinhart, a former Federal Reserve economist at the conservative-leaning American Enterprise Institute, said that, in retrospect, "it would have helped for the Bush administration to empower the folks at Treasury and the Federal Reserve and the comptroller of the currency and the FDIC [Federal Deposit Insurance Corp.] to look at these issues more closely." He said it also would have helped "for Congress to have held hearings."

Instead, voices inside the administration for tougher policing of Wall Street found themselves with few supporters. William Donaldson, a former Wall Street executive with respected Republican credentials who became chairman of the Securities and Exchange Commission (SEC) under Bush, quit after facing resistance from the White House and Republican members of the agency, who criticized his support for stiffer regulations on mutual funds and hedge funds.

Today, even some sympathetic to Bush say he cannot disentangle himself from a home-lending industry that ran amok or a banking industry that mortgaged its future on toxic loans.

"The crisis definitely happened on their watch," said Kenneth Rogoff, a Harvard professor of economics who advises McCain. "This is eight years into the Bush administration. There was a lot of time to deal with it."

To some extent, Bush simply was following a deregulatory pattern set by his predecessor, President Clinton. Perhaps the most significant recent deregulation of the banking industry — the landmark act that allowed commercial banks to expand into other financial activities, such as investment banking and insurance — was signed into law by Clinton in 1999.

Bush also inherited a culture of borrowing and a frothy housing market that has become "deeply embedded in the American psyche," Rogoff said. And Reinhart said the markets seemed to be doing so well that few analysts, either in government or the private sector, had a critical eye.

"When everybody is doing better," he said, "it is difficult to see the underlying weaknesses."

Still, the White House, in the view of critics, fostered a free-market hothouse in which these excesses were able to flower. It avoided regulation of banks and mortgage brokers, leaving much of that work to the Federal Reserve, which, under Alan Greenspan, showed little appetite for regulation. By the time Treasury Secretary Henry Paulson proposed an overhaul of regulations governing the financial sector in April, the storm already was brewing.

The administration's push to rein in Fannie Mae and Freddie Mac was stymied by Congress.

Beyond the administration's deregulatory bent, some economists argue that its fiscal and tax policies made the United States more dependent on foreign capital, which inflated the bubble in housing prices.

"A different Treasury would have taken a different approach," said Lawrence Summers, a Treasury secretary during the Clinton administration. "I don't think the economy has been well-managed, and that has certainly been crucial for the problems we're facing."

The White House and Congress wanted to make housing affordable to more Americans, and freeing up lending markets was a way to do that. As Rogoff said: "It was a market-based way to help poor people. There was an incredible belief in free markets."

For all that faith, Bush's first two Treasury secretaries, Paul O'Neill and John Snow, came from top jobs in industry, not Wall Street. They were viewed in Washington as advocating the interests of business, and being less comfortable with the mysteries of markets.

Neither was seen as having much influence with the White House, and the Treasury Department lost some of the primacy in economic policy it had enjoyed under Summers and his predecessor, Robert Rubin. O'Neill and Snow declined to be interviewed for this article.

"The primary agency responsible for keeping an eye on these things is, and should be, the Treasury Department, and I think the president erred in the first place by appointing two secretaries who had no background in finance," said Bruce Bartlett, a Republican economist who worked for President Reagan and President George H.W. Bush.

Critics say the SEC has been less active under its current chairman, Christopher Cox, a former Republican congressman from California. It has spent less on enforcement and imposed less in fines on wrongdoers, according to the Government Accountability Office.

In other areas, the Bush administration's failures seem more a case of inaction. The administration, economists said, did little to curb the practices of mortgage brokers, who are regulated by the states. But Democrats in Congress were equally to blame for this, these people said.

"The Democrats pushed affordable-housing goals, even in the face of evidence that people who got the loans shouldn't have gotten them," said Robert Litan, a senior fellow at the Brookings Institution.