Who's To Blame? Krugman Thinks He's Found The Culprit For The Current Economic Implosion: Reagan

Zero accountability for out of bounds politicians

The Republican ideological mania for mindless deregulation-- supported by more than a few corporatist Democrats-- is generally blamed, along with clueless Bush Regime mismanagement and unprecedented corruption, for the financial collapse that led the economy down the toilet. In his newest column, Reagan Did It, Paul Krugman does some forensic journalism and comes up with an exact time, place and culprit when everything began to go wrong. On October 15, 1982 Ronald Reagan signed H.R. 6267, the Garn-St. Germain Depository Institutions Act (also known as the Net Worth Guarantee Act).

Jake Garn was a very conservative Republican senator from Utah, and Fernand St. Germain was a very corrupt Rhode Island Democrat (who, as Chairman of the House Banking Committee, was majorly on the take from the S&L industry). Their bill sounded innocuous enough; it was meant to "revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans." St. Germain was determined to remove all caps on what S&L's could charge in interest, and it was Reagan who fell in love with the concept of 100% financing (no down payments) and allowed real estate developers to buy their own S&Ls from whom they could borrow.

Reagan called H.R. 6267 "the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.”

He was, as it happened, wrong about solving the problems of the thrifts. On the contrary, the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe. But he was right about the legislation’s significance. And as for that jackpot-- well, it finally came more than 25 years later, in the form of the worst economic crisis since the Great Depression.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn-- the turn that made crisis inevitable-- took place in the early 1980s, during the Reagan years.

Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence... [and] the increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America’s financial rules was Reagan’s biggest legacy. And it’s the gift that keeps on taking.

The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry-- whose deposits were federally insured-- a license to gamble with taxpayers’ money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money.

But there was also a longer-term effect. Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending-- restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down.

Of the original 28 co-sponsors in the House, only two are still in Congress, each with immensely more power and each continuing to tilt towards the banksters who have been so very, very generous to their careers. One is Steny Hoyer, the Democratic Majority Leader who works closely with the GOP to keep progressive financial legislation in check. To his career the financial, insurance and real estate sector have directly "contributed" over $3 million dollars. The other co-sponsor is the now-Senator from Wall Street, Chuck Schumer who has sucked up more than four times that ($12,909,246). Aside from direct "donations," the FIRE sector has helped each man build his power base in the Congress by financing Democratic candidates they prefer and cutting off funds to candidates they oppose. (Would it surprise you to know that each prefers conservative Democrats and staunchly opposes progressives?)

So it was really a combination of ideological Republicans hell-bent to wreck the New Deal reforms that were meant to protect consumers from financial predators and corrupt Democrats (and Republicans), like Schumer and Hoyer, who were eager to sell out to the institutional predators instead of protecting their constituents.

Krugman concludes-- without mentioning the role of corruption and Democrats-- that responsibility should also be put on the shoulders of ordinary American consumers who bought into the societal allure of spending more than you make. "We weren’t always," he writes, "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." Greenspan said this was all hunky-dory because of the ever increasing-- uh oh-- value of stock portfolios and homes. And "what goes up must come down?" It seems that the immutable law of physics no longer applied-- not when so much money was there to be scooped up by our political and business elites. Krugman puts the blame squarely on the shoulders of "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," and they deserve plenty of it. But he turns a blind eye on the politicians on both sides of the aisle who couldn't wait to get their share, even if it meant condemning their constituents to the tender mercies of powerful-- and essentially unregulated-- corporate criminals.