I believe that when history is written the period beginning in late 1999 and continuing to the present (and frankly with no end in sight) will be one of the worst periods of Fed policy in history. Furthermore, I believe that Bush's economic record record has been unfairly hit due to multiple Fed policy mistakes.
This is a historical chart of prime rate over the last ten years. The first thing that should become obvious is that the Fed has spent more time adjusting rates than they have keeping rates at a level they were comfortable at. This is an inherent indictment of the policy itself. The goal of the fed is to find an interest rate level that moves the economy in a manner that produces growth without overheating it. Yet, in the last nearly ten years, the Fed has, for the most part, been either desperately trying to raise or lower rates in order to in order to head off the next economic crisis. Ironically, most of the time, it was previous Fed policy that created the environment that would lead to these crises.
Starting in 1999, Fed chairman, Alan Greenspan, began briskly raising rates. The motivation for this is still unclear and I have surmised that Greenspan was attempting to pop the internet bubble. What it did do was set the stage for the recession that would hit Bush nearly immediately into his first term. While Bush was campaigning during a period of economic growth, he immediately stepped into office during a period of economic crisis. This crisis can be laid directly at the feet of the Federal Reserve. Partly as a result of Bush's well timed tax cuts, the recession that Bush stepped into was rather mild. Still, while Bush was organizing historically large tax cuts, Alan Greenspan was cutting interest rates just as aggressively. By the time he was done, the fed funds rate, the rate banks charge each other, was down to .75%. There is no doubt in my mind that these obscenely low rates lead directly to an environment of irresponsible lending that created the mortgage crisis.
In the aftermath of the mortgage crisis, the new Fed Chair, Ben Bernanke, began lowering rates nearly as aggressively as Alan Greenspan did previously. Bernanke was attempting to head off the recession that he saw on the horizon. Unfortunately, the aggressive downward rate posture also put pressure on an already weak dollar, and the weak dollar put upward pressure on already high gas and commodity prices. (all of which are priced in dollars)
Despite the fact that we had a perfect storm of the internet bust was followed by 9/11 which was follow by accounting scandals, the recession of 2001-2003 was rather mild. Throughout his two terms, Bush has received scant credit for the tax cuts that kept this mild.
Bush continues to get heavy criticism for his hand's off approach to the mortgage market. Fed policy gets little if any criticism for setting into motion the economic environment that lead to excess. Furthermore, Bush gets criticized for rising oil and commodity prices for which the Fed has just as much responsibility for creating.
Then, there is the nebulous criticisms in which Bush opponents use terms like "income gap" and "wage stagflation". Of course, his critics rarely can point to specific policy proposals that have created these supposed maladies. Rather they pound myths like "tax cuts for the rich" in order to convince the public that Bush policies have really benefitted the few at the expense of the many. How can any economy thrive when interest rates are always in a constant state of motion? Wouldn't it be the middle class most affected by constantly shifting interest rate policy? Yet, it is Bush and not the Fed that has taken the hit for what I believe has been a clearly lacking Fed policy that has infected the economy throughout his tenure.
Don't get me wrong. Bush is by no means without fault on the economy. Then again, no President is. He could have directed the Treasury to buy dollars in the open market to keep the dollar stable. His biggest failing is allowing spending to spin out of control in his first four years. He could have done more to create oversight in mortgages, however most of his critics were just as silent during the boom. Furthermore, I am weary of anyone that thinks that government can prevent speculative markets, like that of the real estate boon. Still, on the whole just like Reagan, his domestic policy will forever be most linked with the well timed tax cuts of his first term. Those tax cuts receive little if no credit for their economic stimulus and in the meantime, he has taken an enormous hit for economic malaise that I would put much more closely to the feet of the Fed and their policy makers.