As Congress convenes this week, expect its Democrat leaders to plead their case that the financial meltdown of 2008 was all Bush’s fault. He deregulated financial markets; he failed to heed warnings about the impending disaster; he was a shill for corporate greed.

Political memo to Sen. Reid: blaming Bush is a losing strategy. First off, none of the common accusations is true. Bush did not deregulate anything. In fact he enacted one of the most sweeping corporate accountability laws ever, which apparently did not help. Bush actually proposed year after year to reign in government guaranteed mortgage entities that over levered the middle class, but his requests fell on deaf ears. Finally, the Bush administration was actually hyper aggressive in its pursuit of corporate wrongdoers like Bernie Ebbers, Jeffrey Skilling, and the partners of Arthur Andersen. Any effort to hang a disproportionate amount of blame on Bush is a short term tactic at best. As Reid’s smokescreen lifts, the Democrats culpable for propping up Fannie Mae to the very end will only look more guilty.

Still, since this is blame season, this blog wishes to add a new entry to the long list of contributors to the 2008 meltdown: the US Tax Code, which forces corporations to assume excessive risk. Because debt is favored by the Tax Code over equity financing, companies, especially financial ones, must take on excessive risk to be competitive.

Risk, for the purpose of the 2008 meltdown, is the chance that a company will fail due to its inability to service its debts. JP Morgan invented a common risk measurement tool, called Value At Risk (VAR), that basically says “we expect to lose no more than X dollars 99% of the time,” where X is the VAR. As the fourth quarter of 2008 has demonstrated, the circumstances of the remaining 1% do eventually come to pass, and corporations can be on the hook for much more than their VAR. Too much debt compounds the damage when losses exceed the VAR. On the other hand, equity financed entities are better equipped to ride out unusually bad economic weather.

Why did companies like Lehman finance their operations with so much debt when any simple analysis would show an exposure to disaster? The US Tax code forced them to do so in order to be competitive with their peers. Unlike equity financing, debt financing is tax deductible. Uncle Sam pays for about one third of a corporation’s interest expense (the cost of debt financing). Dividends (the cost of equity financing) are not supported by tax incentives. Therefore, a company that finances its operations through equity will suffer a cost disadvantage to its peer who uses debt.

In order to be cost competitive in the short term, companies must assume as much debt as possible because of this twist in the Tax Code. Indeed, the ever quickening race to the bottom by such companies as Lehman was partly fueled by the Tax Code favoritism of debt over equity financing. This imbalance that rewards excessive risk taking can be addressed in several ways:

First, Congress can make equity investment competitive with debt by making preferred share dividends fully tax deductible and on a par with interest expense. That would give companies an attractive, lower risk means of financing their operations. Since failure to pay a preferred share dividend is not a cause for bankruptcy, the worst case scenario becomes considerably less dire.

Second, Congress can dramatically reduce the corporate tax rate. Part of the incentive for excessive debt is due to the 34% corporate tax rate, among the highest in the world. If the rate were cut in half, the debt incentive would also be cut in half. If the corporate tax were eliminated, as it should be, debt and equity would be on an even footing.

So, add government interference in the market to the causes of the financial collapse of 2008. Not only did the US Government encourage cheap debt, it discouraged less risky financing options. Add that to implicit guarantees for questionable mortgage securities, social programs that demanded issuing risky loans, omnipresent lobbying of Congress by the very entities feeding on these programs, and the Government stands tall as the chief villain in this tragedy.