Paul Krugman's column on The New York Times.

Discussion in 'Economics' started by SouthAmerica, Jun 3, 2009.

  1. .

    June 3, 2009

    SouthAmerica: I agree with Paul Krugman’s analysis published on his column on The New York Times of June 1, 2009.

    Many policies from the Reagan era did screw up the future of the country in a big way.

    I wrote about that in many of my articles over the years, and also on the ET forums. Here is an example about a discussion on ET forum about Ronald Reagan:


    December 25, 2006

    SouthAmerica: You are thanking Reagan for this:

    Ronald Reagan (8 years in office) added to United States debt US$ 1.7 trillion dollars.

    In 2006 the United States still paying interest on Reagan’s debt let’s say at 5 annual percent rate we are talking about US$ 85 billion dollars per year in interest…

    You can read the entire thread at:


    Op-Ed Columnist
    “Reagan Did It”
    Published: May 31, 2009
    The New York Times

    “This bill is 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.” So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.

    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.

    On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us.

    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.

    These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded.

    Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.

    Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

    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.

    A version of this article appeared in print on June 1, 2009, on page A21 of the New York edition.

  2. Mav88


    It had nothing to do with CDOs, ok got it, blame Reagan. Everything was just fine before Reagan as well, why on earth would we change.

    Krugman is a hack, who cares what he thinks.
  3. Reagan was an a######.
    His charisma clouds his wrongdoings, unfortunately. But to me he will be know as the
  4. Some dumbass (R) politico even made the famous statement, "Reagan PROVED deficits don't matter".

    Now THERE'S a head-up-your-ass statement if ever there was one.

    Reagan deficits "set the tone" for budget-busting fiscal irresponsibility.
  5. Arnie


    Yep, it's all Reagan's fault........

    The Garn-St. Germain Depository Institutions Act of 1982 (Pub.L. 97-320, H.R. 6267, enacted 1982-10-15) is an Act of Congress, that deregulated the Savings and Loan industry. This Act turned out to be one of many contributing factors that led to the Savings and Loan crisis of the late 1980s.[1]

    The bill, whose full title was "An Act to revitalize the housing industry by strengthening the financial stability of home mortgage lending institutions and ensuring the availability of home mortgage loans," was a Reagan Administration initiative.[2]

    The bill is named after its sponsors, Congressman Fernand St. Germain, Democrat of Rhode Island, and Senator Jake Garn, Republican of Utah. The bill had broad support in Congress, with co-sponsors including Charles Schumer and Steny Hoyer.[3] The bill passed overwhelmingly, by a margin of 272-91 in the House.[4]

    Title VIII, Alternative Mortgage Transactions, allowed Adjustable rate mortgages [5]

    PS; Reagan is dead. These two guys are still there and now they want to "reform" health care. :D
  6. Krugman is becoming a comedy act. He never had any intellectual honesty. Even for him however, this is a new low.

    For the record, the S&L industry had been the prime source of mortgage funding for generations. Their business model had a fundamental flaw however. They were the classic borrow short term, lend long term investors. Their funding came from demand deposits, and they were limited by government regulation as to the rates they could pay. Their assets were typically all 30 year loans. This worked fine until two things happened. One, inflation got going in the late '60's and in earnest in the '70's. Two, the money market mutual fund industry was born. Suddenly getting 2 % or whatever the government-mandated S&L savings rate was didn't seem very attractive. Savers flocked to MM funds, putting the S&L industry at risk. As I recall, this legislation was designed to allow them to offer competitive , market-based rates.

    Of course, the S&L's still had the mismatch problem and were stuck holding a ton of 4% mortgages when rates when ballistic. Congress in its wisdom greatly increased the FDIC deposit guarantee limit, which was the real source of the S& L crisis that unfolded later. The '87 Tax Reform act that basically destroyed the property market also contributed.

    Krugman's "analysis" is a joke, even for a worm like him. I am confident Reagan would have done things quite differently if he did not have to fight a leftwing democrat congress on every issue. They used to mock him that his budgets would be DOA when delivered to congress. Democrats and their media allies savaged Reagan for not spending lavishly enough on social programs. In that pre-Gingrich era, he had little support from congressional republicans. Reagan did spend heavily on the military. He had to to make up for the Carter years. All in all, I'd call it money well spent, since he won the Cold War and destroyed the Soviet Union in the process.
  7. if you understand the dynamics of the world,... its not about deficits or money.. its about guns and spheres of influence.

    what good is money when a foreign power can blow your brains away... its one elite circle competing against another...the dynamics are the same.

    the deficit... went mostly towards military infrastructure...
  8. NOW we are getting somewhere...........

    nice post.
  9. .

    June 3, 2009

    SouthAmerica: Regarding who planted the seeds of the mess that we have today there’s plenty of blame to go around including the Carter administration.


    FDIC insurance and the US economy

    September 30, 2008

    SouthAmerica: Reply to Jprad

    Sorry I made a mistake on my posting.

    The people who passed the increase in deposit insurance in the middle of night was the Carter administration in March of 1980 when they increased the deposit insurance from $ 40,000 to $ 100,000 limit.

    This increase in deposit limit was at the root of the problem that later on created the foundations that resulted in the late 1980’s Savings and Loan Scandal.

    This thread is about the impact that an increase in deposit insurance has in the US economy - the unintended consequences as well.

    The point is: if the deposit insurance had not been increased in March 1980 we may have avoided the savings and loans debacle of the late 1980's.


    March, 1980--Depository Institutions Deregulation and Monetary Control Act (DIDMCA) enacted. The law is a Carter Administration initiative aimed at eliminating many of the distinctions among different types of depository institutions and ultimately removing interest rate ceiling on deposit accounts. Authority for federal S&Ls to make ADC (acquisition, development, construction) loans is expanded.

    Deposit insurance limit raised to $100,000 from $40,000. This last provision is added without debate.


  10. dhpar


    krugman is a jerk.

    there was only one worse nobel prize awarded - and that was yasser arafat peace prize. you could say krugman is in a good company....

    reagan is my hero - if only because he did not bow to CCCP.
    #10     Jun 3, 2009