Thursday, June 4, 2009

Did Reagan Cause the Financial Meltdown or Not?





We have Paul Krugman arguing in the affirmative:


We weren’t always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent.

All this, we were assured, was a good thing: sure, Americans were piling up debt, and they weren’t putting aside any of their income, but their finances looked fine once you took into account the rising values of their houses and their stock portfolios. Oops.

Now, the proximate causes of today’s economic crisis lie in events that took place long after Reagan left office — in the global savings glut created by surpluses in China and elsewhere, and in the giant housing bubble that savings glut helped inflate.

But it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise.

These defaults in turn wreaked havoc with a financial system that — also mainly thanks to Reagan-era deregulation — took on too much risk with too little capital.

There’s plenty of blame to go around these days. But the prime villains behind the mess we’re in were Reagan and his circle of advisers — men who forgot the lessons of America’s last great financial crisis, and condemned the rest of us to repeat it.


While Robert Scheer, no fan of Reagan himself, rebuts:

They won the day with the passage of the Commodity Futures Modernization Act, which put the OTC derivatives beyond the reach of any government agency or existing law. It was a license to steal, and that is just what occurred. Between 1998 and 2008, the notational value of the OTC derivatives market grew from $72 trillion to a whopping $684 trillion. That is the iceberg that our ship of state has encountered, and it began to form on Bill Clinton's watch, not Reagan's.

How can Krugman ignore the wreckage wrought during the Clinton years by the gang of five? Rubin, who convinced President Clinton to end the New Deal restrictions on the merger of financial entities, went on to help run the too-big-to-fail Citigroup into the ground. Gramm became a top officer at the nefarious UBS bank. Greenspan's epitaph should be his statement to Congress in July 1998 that "regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." That same week Summers assured banking lobbyists that the Clinton administration was committed to preventing government regulation of swaps and other derivatives trading.

Then-Rep. Leach, as chairman of the powerful House Banking Committee, codified that concern in legislation to prevent the Commodity Futures Trading Commission or anyone else from regulating the OTC derivatives, and American Banker magazine reported that the legislation "sponsored by Chairman Jim Leach is most popular with the financial services industry because it would provide so-called legal certainty for swaps transactions. ... "


I wonder if Krugman will read Scheer's rebuttal. It's an interesting debate to have, and I'm sure some arch-conservative will find a way to rebut them both and say, "No, it was actually Jimmy Carter's fault..."

3 comments:

cdrake said...

The government would still be taking more than half of my paycheck if it were not for Reagan.

Zaid at UGA said...

Instead your stagnated wages and higher healthcare costs are.

Brett said...

Income taxes were higher under Reagan than they were under Clinton and are now under Obama.