Obama’s State of the Union: A Study in Bubbles

In anticipation of this year’s State of the Union Address, president Obama began issuing a series of “spoilers” to give a glimpse of what he intends to communicate to the country. The themes, broadly categorized, are the resurgence of the American manufacturing sector, the housing market, and access to higher education.

At first glance, these may appear to be wildly divergent subjects, but there is actually a common thread running through them. In all three cases, Obama is claiming credit for “rescuing” damaged industries through the interventionist policies of his administration. In essence, this is to be a boasting speech about how great Obama has been for the country, but as is so often the case with this president, it turns out all to be illusory, as well as very temporary.

Let’s take the housing market first. At this point, it’s common knowledge that the financial collapse in 2008 was the result of a collapse in housing markets. Many people blame greedy bankers for bundling and trading subprime mortgage loans which were eventually revealed to be worthless. While there is some truth to this, the broader problem was that the incentives set up by government ensured that bad loans were made, that never would have otherwise been issued. Given the government incentives in place, bankers and investors had little choice other than to do what they did, and the collapse was always going to happen one way or another.