Noted economist and New York Times columnist Paul Krugman says yes, but that's just nonsense. The seeds of today's crisis were planted before the Gipper even took office.
By Bill Fleckenstein
This week . . . a rant.
First of all, let me say that I almost never read Paul Krugman's New York Times column, as I noticed several years ago that he has an uncanny ability to understand a problem but totally misdiagnose the cause.
During the "W." years, Krugman would frequently outline an economic problem, then go out of his way to blame the president. A lot of poor decisions did flow from George W. Bush, as he was basically in over his head. But this Nobel Prize-winning economist was a Johnny-one-note when it came to W.
But I did read Krugman's May 31 column because of its headline: "Reagan did it" (registration required). I thought, wow, I need to see what this is all about. Here goes:
The devil in deregulation
Krugman wants us to believe that all of our financial ills can be traced directly back to the presidency of Ronald Reagan and deregulation. As usual, he finds the source of trouble -- almost. He identifies a specific piece of legislation that he claims started us on the path to so much financial trouble: the deregulatory Garn-St. Germain Depository Institutions Act of 1982.
Close but no cigar. The actual offending cancerous legislation that kicked off the move toward extra reckless lending did involve then-Rep. Fernand St. Germain, a Rhode Island Democrat. But the problem legislation was the Depository Institutions Deregulation and Monetary Control Act of March 31, 1980.
It's important to note that the law was enacted two years before the act Krugman cites -- and nearly a year before Reagan took office. The earlier legislation contained a provision that increased the limit for deposit insurance from $40,000 to $100,000 at a time when $100,000 was a lot more money than it is today.
Tracing the roots of reckless lending
Believe it or not, I felt in 1980 that it was a bad law that would lead to recklessness. That's because the excessive increase became an incentive for depositors to be less disciplined regarding the health of their depository institutions.
I made this very point at the height of the tech mania in a speech titled "Spinning Financial Illusions: The Story of Bubblenomics," which I gave at the Contrary Opinion Forum on Oct. 1, 1999:
The seeds of this bubble were sown way back in 1980 when Congress passed the Depository Institutions Deregulation and Monetary Control Act, calling for the phasing out of Regulation Q, which allowed financial institutions to compete with money market funds. A piece of that legislation was financial cancer: raising the insured deposit maximum to $100,000.
That seemingly innocuous change (thank you, Fernand St. Germain) spawned "brokered deposits," the primary driver of the reckless lending practices of the 1980s. Money sought out the highest bidder with no regard as to how it might be used.
As a result, we witnessed the funding of overleveraged LBOs and the overbuilding of real estate long after the 1986 Tax Act made it uneconomical to speculate in property. It is hard to overstate the significance of this legislation in creating the excesses of the 1980s, which set the stage for the even greater excesses of the 1990s.
Back to Krugman's column: He wraps up his indictment with a statement that demonstrates his utter lack of understanding about what has transpired over the past quarter-century: "There's plenty of blame to go around these days. But the prime (my emphasis) 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."
That is just nonsense. The person to blame for the increase in deposit insurance was none other than St. Germain, who saw to it that the deposit insurance increase was put into place.
The Greenspan factor
Besides, does anyone really think Reagan is more culpable than former Federal Reserve chief Alan Greenspan? Greenspan deserves the lion's share of the blame, and Reagan had essentially nothing to do with it (other than having had the bad judgment to appoint Greenspan).
It's ironic that Krugman doesn't even understand the fallacy of his own argument.
Boosting the cap by 150% took away market discipline as depositors dropped their guard about what the wild men running the savings and loans were doing with their money. In fact, that change of regulation -- i.e., fiddling with the deposit insurance limit in the deregulation legislation -- is precisely what started the lax-lending-standards problem that ballooned into "too big to fail" and ultimately morphed into "too big to bail out" in 2008.
If the remote cause of our current troubles was an unwarranted increase in deposit insurance, the immediate cause was Greenspan's incompetence -- in the form of monetary policy and "leading" the Fed's own inept effort at regulation, the twin drivers of this debacle.
Greenspan personally helped give deregulation a bad name through his wrongheaded cheerleading -- an example of this being his advocating (in 1999) that the remnants of the Glass-Steagall banking regulations be repealed in the wake of the collapse of Long-Term Capital Management in 1998!
(Although I happen to be generally in favor of deregulation, that doesn't mean I favor deregulation always and everywhere.)
Perpetrators on parade
However, even that poorly thought-out idea would not have been as disastrous as it has been had the Securities and Exchange Commission possessed the common sense not to allow financial companies to essentially leverage themselves to infinity.
Also culpable are other "government-sponsored" bodies, such as ratings agencies and the Financial Accounting Standards Board. They helped perpetrate the illusion of safety while the country attempted to speculate its way to prosperity, from whence we blew up.
Deregulation didn't cause this disaster. Incompetence and greed did. The implication from Krugman's article, that regulation or re-regulation would solve the problem, is nonsense. What must happen is for people in positions of regulatory authority to do their jobs.
But the Fed, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and some congressional committees -- aka the "regulators" that Congress entrusted with powers of oversight -- did nothing as our financial problems built and built in plain sight. (All along the way, as these excesses built, many of us pointed them out in real time.)
More rules for regulators to ignore?
New rules won't solve anything and will cost businesses and individuals more money, which they can ill afford to spend. A classic example: the Sarbanes-Oxley accounting reforms of 2002, which caused a huge increase in paperwork and costs but did nothing to help prevent the financial system from nearly vaporizing.
No, Mr. Krugman, Reagan didn't do it. Greenspan did it, aided and abetted by almost everyone in the regulatory apparatus who abdicated their responsibility.
- Re: Blame Reagan for our financial mess?posted on 06/09/2009
Bill Fleckenstein:
Deregulation didn't cause this disaster. Incompetence and greed did. The implication from Krugman's article, that regulation or re-regulation would solve the problem, is nonsense. What must happen is for people in positions of regulatory authority to do their jobs.
当大总统宣称“政府不是解答,政府即是问题”时,你能期望政府干它的活?怎么对付贪婪?给卖盗夫这样的人念圣经?
里根是自由市场迷信的总代表,自然也是最容易找的靶子。 - posted on 06/09/2009
Bill Fleckenstein:
Deregulation didn't cause this disaster. Incompetence and greed did. The implication from Krugman's article, that regulation or re-regulation would solve the problem, is nonsense. What must happen is for people in positions of regulatory authority to do their jobs.
I don't have time to read this long article, but can't stand Bill's nonsense.
Incompetence and greed did? Incompetence and greed exist forever.
"What must happen is for people in positions of regulatory authority to do their jobs."
SEC has been in business long time, but it didn't stop the financial meltdown. The people in regulatory positions need new authorities, namely new regulations, in order to do their jobs.
- posted on 06/11/2009
It's a pissing contest: to see who can find a more obscure piece of legislation to blame. :-)
But the entire exercise of finding an exact moment that this deregulation train is set to motion is missing the point. It's the whole philosophy of capitalists being able to police themselves that the prevailing economical and political snake oil salesmen trying to shove down our throat for the last 40 years is the culprit.
And yeah, blaming Greenspan is original, as if he is NOT the cheerleader-in-chief of deregulation. - Re: Blame Reagan for our financial mess?posted on 06/12/2009
豆大师哪去了?还是里根主席不算政府?
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