How The War on Terror and Obama’s Bailout is Still Costing America

0:08Katty Kay:Welcome back to All the Wrong Moves, How America Made Trump. So last week we told you how we got the first thing wrong. In Seattle, 1999, watching those protesters who didn't want China to be admitted into the World Trade Organization, thinking that they just didn't understand the future. Well, it turns out I was wrong and that when you break a promise to American workers once, you don't just get to walk away from it. You pay it forward. And that's exactly what happened next.

0:46Anthony Scaramucci:So this week, we're looking at two more catastrophic decisions, back to back, each one making the last one worse.

0:53Katty Kay:First, George W. Bush decides to fight a multi-trillion dollar war in Iraq and Afghanistan while cutting taxes at the same time. No sacrifice asked for anyone, just borrowed money and a promise that someone someday would pay it back.

1:15Anthony Scaramucci:And then just a few years later, Wall Street gambles that borrowed money on a housing bubble. The whole thing collapses, and it's President Obama who has to decide who gets saved and who loses their home.

1:28Katty Kay:That's right, Caddy. Two different presidents and two different parties. And in both cases, the bill landed on the same people, the poorest, the angriest, and the most desperate for change. That's the anger Donald Trump would eventually walk in and claim as his own.

1:48Anthony Scaramucci:So let's go to the second catastrophic decision, what you call war without taxation. And a quick scene setter here. Bill Clinton has just left office in January of 2001, and America has experienced a moment of peace and prosperity. They've had a post-Cold War decade of booming prosperity and peace around the world. And Bill Clinton has managed to bring down the deficit, and he has created a$236 billion federal budget surplus. And during the election between George George W. Bush and Al Gore, the debate had been over what to do with that surplus. Al Gore wanted to use it to fund more welfare programs.

2:28Anthony Scaramucci:George W. Bush wanted to use it to cut taxes, arguing that that is what would create growth. It's the same old debate, right, that you've heard for decades between the two parties. It feels like it's a little stale, nothing new, but it's where the duopoly, as you call it, is stuck.

2:45Katty Kay:You know, Katty, this is something that needs to be understood. There was actually a period of good executive leadership in the country. Whatever you thought of George Herbert Walker Bush, George W. Bush's dad, or Bill Clinton, they agreed on a certain principle that got started in the Bush I administration. And it's very important to bring this up. There was legislation passed by George Herbert Walker Bush in 1990, which effectively became called the pay go legislation or pay as you go. He actually reached out to Dick Gephardt, a personal friend of mine, and he convinced Dick Gephardt to get many Democrats to vote for constraints on the Congress.

3:31And so put simply, if you wanted a tax cut, you had to cut social services in the budget

3:39Katty Kay:and bring down spending. If you wanted to increase social services, well, that's no problem. Then you had to have a tax increase. Bush signed this into law, Caddy. We then had the accidental Gulf War I where the Iraqis invaded Kuwait. It put the Americans in a recession. Bush wanted more social services spending. And so he broke his pledge. If you remember, read my lips, no new taxes, but he just signed this PAYGO legislation. And so he raised taxes. In comes Ross Perot to disrupt that election. But this is very important for people to understand. Bill Clinton adhered to this Republican policy.

4:20Katty Kay:And there was a very famous debate. Bob Woodward wrote about this in the book called The Agenda in March of 1993. They called it the Battle of the Two Bobs. Robert Reich, my old law school professor, who was Secretary of Labor, and Bob Rubin, my old boss, who was an economic advisor to Clinton. They were fighting in the Roosevelt Room. Reich wanted more deficit spending. Rubin told Clinton, if you want that social services, go get the tax increase. And, Cady, you may remember this. It was the largest tax increase in U.S. history. No Republican voted for it. We had to get Al Gore out of the Naval Observatory like O.J.

5:00Katty Kay:in the Bronco. I remember CNN posting this. He was driving down Pennsylvania Avenue to go up to the Congress to cast the deciding vote on the tax increase, Caddy. The Republicans said this is going to be a nightmare for the economy. It's going to cripple us. But it didn't do that, Caddy. That additional tax revenues set the stage for that budget surplus. Moreover, the CBO, the nonpartisan congressional budget office said we were going to have a$5 trillion surplus by the end of 2010. And Bush said, well, I want to give it back to the American people. And Gore said, well, I'm going to spend it on infrastructure, the environment and education.

5:43Katty Kay:And of course, Bush narrowly and very famously won. And he began cutting taxes. And of course, 9-11 happened. And that's where the real problem started.

5:51Anthony Scaramucci:So we get the shock of 9-11. It was obviously a moment that everybody remembers. And I think it's a little easy now to look back and say, well, 9-11 happened and then America launches the war on terror and it goes to war in Afghanistan and then Iraq. And that was all a disaster. And how can they have been so stupid? But I want to take people back to that morning. I was covering it as a journalist. I arrived at the Pentagon 20 minutes after the plane struck the side of the building. I interviewed soldiers who were visibly shaking from that attack. And we all know what happened. I sat there at night and listened to the military jets flying over Washington and wondering what was going to happen to the country.

6:30Anthony Scaramucci:We had in our cupboard in Washington, D.C., a kind of emergency go pack in case there was going to be some kind of a nuclear bomb or some kind of a dirty bomb led off in the capital. We didn't know that that was it, that 9-11 was the sum total, awful as it had been. but we all thought there was going to be more that was coming. And I think I remind people of that because a little bit like coming out of the Cold War influenced the decisions of the 1990s, coming out of 9-11 influences the decisions of the George W. Bush administration. And of course, he doesn't want to repeat the mistakes of his father.

7:07Anthony Scaramucci:It is legendary in the Bush family and in all Republican circles, that George H.W. Bush lost in 1992 a second term because of going back on his promise not to raise taxes. And George W. Bush, who is a Republican and wants to cut taxes anyway and feels that way anyway, probably thinks he's got a kind of child's duty to do what his father didn't do and he wants to cut his taxes. But I think 9-11 is the shock that increases the spending, along with the tax cuts, and against the backdrop, Anthony, of a 2000 election where those people from the outside, Pat Buchanan and Ralph Nader, who we mentioned earlier, have got 0.4 % of the vote for Pat Buchanan and 3 % of the vote, less than 3 % of the vote for Ralph Nader.

8:01Anthony Scaramucci:And you can see why George W. Bush in that context, along with 9-11, is thinking, of course, I have to do what normal politicians will do. I believe it anyway. I believe in these tax cuts. And 9-11 triggers the global war on terror. And there isn't really an outside threat to him. I mean, you look at Ralph Nader and Pat Buchanan and you think, well, they didn't get anywhere. And so, let's just go that conventional path. And so, he does this thing where he has two aims, right? One is to pursue the terrorists, whatever it costs, and the other is to cut taxes. and he doesn't compromise on either.

8:37Katty Kay:Yeah, you know, when I think about it, Katya, I've got to ask you this question because you're living in DC at the time. Tell us about the political environment in DC post 9-11. Was there warmongering? Were the Democrats wanted the war? The Republicans wanted the war? Was it only Bush that wanted the war? Set the scene for us so that we can explain to people where America was 25 short years ago.

9:01Anthony Scaramucci:So I think what was interesting about that period, Antony, and it contrasted very much with the Cold War. And I feel like the Cold War kind of unified Democrats and Republicans in opposition to the Soviet Union, broadly speaking. They had a common enemy. That unity was sustained through decades. After 9-11, there was a period of unity. There was a period of Capitol Hill, Democrats and Republicans, New York, Washington, everybody coming together. But it didn't last terribly long. And it didn't last terribly long because quite quickly, the administration, the Bush administration, went from attacking Afghanistan, which had broad support, not just in the United States.

9:47Anthony Scaramucci:The day after 9-11, the headline in Le Monde newspaper in Paris is, nous sommes tous Américains. We are all Americans. There is a coalition of the willing to go after Afghanistan. The trouble is Dick Cheney, perhaps because George H.W. Bush failed to do it. I don't know. Somebody hasn't written the Shakespeare play on the Bush family yet, but maybe they should do. Dick Cheney is thinking, I want to do what George H.W. Bush didn't do in the first Gulf War, and I want to get rid of Saddam Hussein. And it's that decision to pivot from Afghanistan to Iraq, and then all of the consequences that follow, and the death and destruction towards American troops and treasure in Iraq that causes the unity to fray.

10:35Anthony Scaramucci:And by the time we get to the 2004 election, when John Kerry is running, I still think if Democrats have been able to wield a better candidate, they had a chance to take that election because there was so much dissatisfaction with George W. Bush's war policies. But what's interesting about your book is I was covering that from a political national security point of view, but you're looking at it from an economic point of view.

10:58Katty Kay:Well, Gatti, listen, it was very close in Ohio. You remember late in the evening on election night, we thought Kerry was going to win. It was very close in Ohio. But going back, I think it's very important, and I lay this out for people. We went to war without a tax increase. Moreover, we went to war with a tax cut. And so this PAYGO legislation that I was describing was expiring in 02. Bush could have renewed it. He did not. He sent a trajectory to the stratosphere of deficit spending. And you remember this very well. He gave advice to people saying that there would be no sacrifice. They said, well, what do you want us to do, sir?

11:40Katty Kay:Do you want us to give blood? Do you want us to do X, Y, Z? No, he said, I want you to go shopping. I want you to go to Disney World.

11:46Anthony Scaramucci:I remember that. I remember that speech. It's as if the American people were allergic to the idea of sacrifice.

11:53Katty Kay:Yeah, well, he was allergic to it because his number one thing was to get reelected. You know, Karl Rove slipped up and said, you know, got to get this war started in Iraq before Labor Day of 2003. Because if we do that, we'll be a wartime president and wartime presidents have popularity. We got to get this guy reelected. But they took fiscal discipline started by Bush's father, adhered to by Bill Clinton, and they threw it to the wayside.

12:25Anthony Scaramucci:Can I ask you a quick question on that, Anthony? Because you point out in the book that there are models in history that George W. Bush could have looked at. There is the War of 1812. There is the Vietnam War that he could have studied and seen that you cannot go to war without making sure that that war pays for itself, or at least without raising taxes to help fund that war. And he didn't look at that or ignored that lesson. Do you think he thought he was in a quantifiably different moment of history and actually that the war would somehow pay for itself magically? Or was it just politically convenient as a Republican whose father had gone back on a taxation promise to just not think about it?

13:13Katty Kay:So listen, it's a great question. I think it's a little bit of both. So I think one was my father raised taxes, it cost him the election. I'm not going to do that. He also remembered Ronald Reagan saying, I'm not going to raise your taxes. Walter Mondale said, and I quote, I'm going to tell you guys the truth. We have a deficit crisis. I'm going to raise your taxes. And Reagan said, I'm not raising your taxes. And Donald Trump said, I'm not touching Social Security. I'm not touching Medicare. The second thing that he was influenced by was the consensus thinking that these wars were going to end very quickly.

13:51Katty Kay:It was a special operation in Afghanistan. The Iraqis, Dick Cheney said, are going to greet us as liberators and they're going to be chanting glory to America. And these wars lasted decades, Gaddy. And when a war lasts decades, it bleeds out the treasury. And by the way, as I point out in the book, this is exactly what Osama bin Laden said would happen. He said, hey, I brought down the Russian Empire with the help of the Americans. Now I'm going to bring down the American Empire. Well, how are you going to do that? Well, on the dark web, bin Laden said, I'm going to strike America in its homeland.

14:26Katty Kay:They're going to wildly overreact. They're going to come to bomb our huts. They're going to drop bombs in the sand. They're going to kill our people. and we don't care because we're very sacrificial. They're going to bleed out their treasury. They're going to disavow their civil liberties. You remember the Patriot Act, Caddy? So bin Laden basically said, this is what America is going to do. And we went from George Washington to George Walker Bush,$7 trillion. Caddy, we've spent $33 trillion of deficit spending between President Obama, Trump, Biden, and President Trump. So four terms of the presidency,$33 trillion.

15:11Katty Kay:This is a major catastrophic decision. I put them in chronological order, WTO number one, because it happened in 1999. This is sort of 304 debacle. But this is the worst of the decisions, because this put us on a deficit trajectory that we can't get out of unless we get braver, bolder political leadership.

15:36Anthony Scaramucci:So this is exactly the moment when the financial buffer that was protecting ordinary Americans, which had already been thinned out by the China decision, disappears completely. And the country is spending an enormous amount of money on the war on terror. It is relentless in its pursuit. It becomes, I think, Antony, really a third rail of American spending. You've got healthcare and social security, and suddenly you've got terrorism, anti-terrorism spending as well, and no one can touch it politically. That was what was interesting from a Washington political point of view is this became untouchable in politics.

16:16Anthony Scaramucci:No one felt that they could say anything about it because of 9-11. So now the buffer that Americans have in the country is starting to disappear. And what happens next? We get to the third catastrophic decision, and that is the Wall Street bailout. We're coming out of talking about a war in Iraq, and then we're going to be talking in a second about a housing crisis and mortgages. And they don't seem like they're connected economically, but are they?

16:49Katty Kay:Well, Katty, the thread actually goes back to Bill Clinton. So again, this arrogance, this halo, this peace dividend, Bill Clinton says we got to have more people in America have to own a house. That is the American dream. And so Bill Clinton signs legislation that pushes the banks into what's called subprime lending. And so typically in the United States, 65 % of the households own their homes, 35 % rent their homes. And so Clinton says, we've got to get this thing up into the mid-70s. And so he goes to the banks and he says, listen, I want you to create some laxity in your underwriting standards.

17:32Katty Kay:You can charge them a little bit higher of an interest rate, but I want poorer Americans to own their own home. That's a way for them to build equity as opposed to just throwing the rent out the window. And so George Bush adheres to that. And both sides now are practicing this promotion of home ownership and this promotion of pushing the banks to create some lax underwriting standards.

17:58Anthony Scaramucci:At a time when interest rates are higher because of the war.

18:01Katty Kay:Exactly. But interest rates are higher because of the war, because you're spending a lot more money in the deficit spending. And so you have one little hiccup in the economy, that sensitivity analysis is such that it starts tipping dominoes. In addition to that, a Republican administration typically deregulates and a Democratic administration particularly overregulates. overregulates. And so what ends up happening is we're deregulating the banks. We're allowing for the banks to take on more leverage. And we also have lax rating agency standards. So, Caddy, we have these subprime mortgages are rated AAA, meaning they're like as good as the U.S.

18:42Katty Kay:Treasury in terms of the rating on them, but they're actually not AAA. They're quite faulty and And they're susceptible to the potentiality of credit default. And so lo and behold, the economy starts to tip over in 2006 into 2007. And guess what, Caddy? People start missing their mortgage payments. Poor people, middle class people. They bought too big of a house. They bought too many flat screens. And they start missing their mortgage payments. And the dominoes start clicking. And Ben Bernanke says in 2007, don't worry about this. It's a$90 billion problem. You don't have to worry about it. We understand how to handle these things now.

19:30Katty Kay:Milton Friedman said that the banks caused the Great Depression, the central banks caused the Great Depression in the 1920s, early 1930s, but not us. We're smarter than our grandparents, Caddy, and we're not going to do that.

19:45Anthony Scaramucci:Oh, the arrogance. The arrogance.

19:48Katty Kay:And so what ends up happening is this$90 billion problem. They don't contain it. It rages out of control like a prairie fire. And it becomes a$6 trillion problem. And the Americans now have to bail out the banks. And then they have to create balance sheet on the Federal Reserve side, meaning they have to start buying toxic assets and they have to start buying treasuries or effectively said differently, they have to start printing money. Okay. They print money to stave off a full-on global depression, Caddy. Hey guys, you've been listening to a snippet of episode two of our new series, which is based on my book, All the Wrong Moves.