How We Got into this Mess: A Brief History of Republican Economics

John McCain, the reborn populist, wants to divert your attention from the architects of our economic crisis: the Republican Party and its free market ideologues. It is an unconvincing posture, based on a distorted reading of American history.

Today's financial crisis is the predictable historical outcome of the policies enacted by the Republican Party since Ronald Reagan's presidency. The market fundamentalism dictating Republican policy has become so pervasive that most Americans are unaware of how we got here and how it could have been avoided.

To fully appreciate the role of the Republicans enablers in our current crisis, we have to go back in time to the event this most resembles, the panics that set in motion the Great Depression, and what was done then to end the crisis.

When Democrat Franklin D. Roosevelt took office, the nation was in the midst of a banking meltdown. FDR and his advisors zeroed in on financial speculation. Many of the hallmarks of the New Deal were designed specifically to curb speculation, regulate the financial sector, and protect ordinary Americans from becoming collateral damage of Wall Street's predators. The Glass-Steagall Act (1933) separated commercial from investment banking and created the FDIC to insure small savings. The idea was to create a firewall between the small savings of individuals and the creative minds on Wall Street, and instill confidence in the banks holding the nation's savings. The Truth in Securities Act (1933) and the creation of the Securities and Exchange Commission (1934) aimed to prevent the scandals, lies, and pyramid schemes that had brought the stock market crashing down in 1929. These acts, of course, were part of a broader package that included substantial relief for suffering Americans and vast public investment.

Schooled by depression, fascism, global war, and genocide, economists, policy-makers, and the citizenry of Western industrial democracies concluded that capitalism left to its own devices spelled chaos and disaster. After World War II, the international financial system designed and led by the U.S. limited international financial speculation as well. In a word, regulation, enforced by independent, knowledgeable, and conscientious employees of the federal employment was the cure for "greed." In this tough regulatory environment, the long postwar era was comparatively free of the speculative bubbles that have landed us in our current mess.

What changed? In the 1970s, as the U.S. and advanced industrial economies stagnated, advocates of the free market made a comeback. They insisted that excessive business regulation and high taxes were the problem. The market would work its magic, they promised, if it was allowed to operate freely. According to their theory, deregulation would draw private investment into the market and simulate economic growth. The benefits would trickle down to the working majority.

Reagan's election in 1980 gave the deregulators their political opening. Reagan, an adherent of "supply-side economics," waged war on the New Deal and attempted to remake the federal government according to the principles of free market fundamentalism. He slashed taxes on the wealthy, cutting social spending to partially make up for the budget shortfall. (McCain's own Phil Gramm, then a Democrat, was a co-sponsor of Reagan's budget-cutting legislation.) In command of a vast federal government he scorned, Reagan appointed zealots of deregulation to manage the federal agencies charged with enforcing the nation's laws. Their mission was to destroy from within. Just as we learn that the SEC concedes oversight flaws fueled collapse in today's crisis, so too did lax regulation by Reagan's SEC create conditions for the 1987 market plunge, the first major stock market panic since the 1929 crash. Reagan gloried in the deregulation of the Savings and Loan industry in 1982. Over the next several years, more than 1,000 savings and loan institutions collapsed under the weight of their bad investments, investments they had been prohibited from making before deregulation. The American taxpayer bailed them out in 1989.

Free the market through deregulation and tax-cuts was Reagan's mantra. Reaganomics has been the program of the Republican party since the 1980s, with each generation of Republicans carrying it to a further extreme. John McCain reiterated at the first debate that he is a proud and true Reagan conservative. We would be advised to take him at his word.

Barack Obama is correct that the best opportunity for making the economy work for all Americas is to fire those who made up the current rules of the game. What he should be saying more forcefully is that Democrats need to return to our roots. Government is the solution, not the problem.

Comments

[Pheisty]

The funny thing between conservatives and socialists is that conservatives admit that Capitalism isn't perfect, yet socialists believe that government is the messiah. We conservatives recognize that so long as there are dishonest and greedy people in this world, no economic model will ever be perfect. Since government has the same imperfections (it is, after all, made up of fallible humans), there are an equal (if not higher) number of dishonest and greedy people in government. The difference is that government has the weapons, the military, the keys to prisons, and the ability to legislate themselves more funds from the public coffers. In other words, they hold complete power.

The biggest problem comes when business gets in bed with government, which is precisely what happens with over-regulation. The underestimation of the mind of the American capitalist is the folly of government (or perhaps the hope, depending on which way you look at it). Over-regulation spawns backroom deals between industry and legislators since industry knows full-well the power of those legislators to make or break them. This creates a river of money and sweetheart deals flowing into the pockets or campaigns of legislators (Christopher Dodd, case-in-point).

[jhNY]

But if Democrats return to their roots, they will have to eschew donations from the financial predators who have lately provided a goodly portion of the bankroll for their election campaigns. If Democrats hadn't sat by glumly while the union movement in the country was eviscerated and starved of membership, perhaps we could count on the membership, or the leadership anyway, to drum up cash.
Which is to say, the roots have been severed from the tree, and the party has propped itself up with money we can't afford them to request from predators we cannot afford to appease. See current economic debacle for outcome.

No health care plan, no job creation, no education reform. All swallowed up in the bonfire. The Democratic Party is crap. The Republican Party is crappier. And the people of the US are ill-served by both.

[joanndarc]

Nancy, you are correct that Reagan's economics don't work.

[oncethere]

Republicans are blaming the current financial crisis on big government and, specifically, on the Community Reinvestment Act. They imply that, absent govt intervention, the free-market works fine. What I want to know is then, how is it that the stock market crashed in 1929 and the Great Depression began---at a time when there wasn't big government?

[mommadona]

Let's include the DEMOCRATIC LEADERSHIP COUNCIL (DLC = Republican Light) and President BILL CLINTON among the culprits.

CLINTON eliminated the The Glass-Steagall Act.

And THAT is why Hillary Clinton is NOT the Democratic Presidential candidate today.

[chrisro]

My understanding of history is quite different. It is easy credit that creates the booms and busts of the business cycle. The 1920's saw a huge increase in the supply of credit money. The bust, as in all previous cases, was inevitable.

The difference with Hoover and FDR vs. previous administrations was that they were not going to allow the needed liquidations to occur....a­nd they didn't. They both did everything possible to keep prices up...thus creating the longest depression on record (16 years). Prior to this, depressions were sharp, but short...be­cause the government did not intervene.

We have the same situation today, easy credit created a stock market bubble in the late 90's followed by the astonomical housing bubble. And once again, the liquidations are being forbidden.

Trying to blame free markets and deregulation makes no sense, since few people really believe we have a free market....­especially in the *highly regulated* banking and investment industries.

What little is left of the free market can bring about a sharp, but quick cure, if it were allowed. But trying to fasten New Deal II can only bring many years (or generations) of economic depression.

[BillZBubb]

I just wonder if enough voters are informed enough to put two and two together on Republican economic failure. So far, they've done a good job limiting it to Bush or muddying the waters by proclaiming "everyone is just as much to blame". When you look at the historical record though, it is very, very evident that the conservative eras always end in disasters economically.

It is amazing how quickly Americans forgot about the Republican created Great Depression and started buying the same failed right wing snake oil again.

[radiclib]

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Uh, government CAN BE the solution.
It's up to good people to make it work well.
After three decades of Reganism, it will be quite a jolt to return to a spirit of responsibility in government.
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But we can hope!
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[FogBelter]

Ms Cohen, Keynesian Economics worked for the United States before and can again. We need a hybrid economy where both the Public and Private sectors have their place and responsibility. We need to abandon the notion that "The Market" can overcome ethical and moral deficiencies that are resident in Human Nature.