Reagan Didn't Do It

How could Paul Krugman, winner of the Nobel Prize in economics and author of generally excellent columns in The New York Times, get it so wrong? His column last Sunday -- "Reagan Did It" -- which stated that "the prime villains behind the mess we're in were Reagan and his circle of advisers," is perverse in shifting blame from the obvious villains closer at hand.

It is disingenuous to ignore the fact that the derivatives scams at the heart of the economic meltdown didn't exist in President Reagan's time. The huge expansion in collateralized mortgage and other debt, the bubble that burst, was the direct result of enabling deregulatory legislation pushed through during the Clinton years.

Ronald Reagan's signing off on legislation easing mortgage requirements back in 1982 pales in comparison to the damage wrought 15 years later by a cabal of powerful Democrats and Republicans who enabled the wave of newfangled financial gimmicks that resulted in the economic collapse.

Reagan didn't do it, but Clinton-era Treasury Secretaries Robert Rubin and Lawrence Summers, now a top economic adviser in the Obama White House, did. They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders James Leach and Phil Gramm, blocked any effective regulation of the over-the-counter derivatives that turned into the toxic assets now being paid for with tax dollars.

Reagan signed legislation making it easier for people to obtain mortgages with lower down payments, but as long as the banks that made those loans expected to have to carry them for 30 years they did the due diligence needed to qualify creditworthy applicants. The problem occurred only when that mortgage debt could be aggregated and sold as securities to others in an unregulated market.

The growth in that unregulated OTC market alarmed Brooksley Born, the Clinton-appointed head of the Commodity Futures Trading Commission, and she dared propose that her agency regulate that market. The destruction of the government career of the heroic and prescient Born was accomplished when the wrath of the old boys club descended upon her. All five of the above mentioned men sprang into action, condemning Born's proposals as threatening the "legal certainty" of the OTC market and the world's financial stability.

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. ... "

Legal certainty for swaps -- meaning the insurance policies of the sort that AIG sold for collateralized debt obligations without looking too carefully into what was being insured and, more important, without putting aside reserves to back up the policies in the case of defaults -- is what caused the once respectable company to eventually be taken over by the U.S. government at a cost of $185 billion to taxpayers.

Leach, an author of the Gramm-Leach-Bliley Act, which allowed banks like Citigroup to become too big to fail, is now a member of the board of directors of ProPublica, which bills itself as "a non-profit newsroom producing journalism in the public interest." Leach serves as the chair of a prize jury that ProPublica has created to honor "outstanding investigative work by governmental groups," and perhaps he will grant one retrospectively to Brooksley Born and the federal commission she ran so brilliantly before Leach and his buddies destroyed her.

Comments

[AZM]

National debt tripled during Reagan's eight years in office: from one trillion dollars to three trillion dollars. Republicans were fond of saying that deficits don't matter any more!

[LeftRight]

It actually almost QUADrupled, he started with $984 billion, and ended close to $4 trillion.

[TheBaffler]

We are facing the inevitable consequences of three decades of unabated reaganomics. The Gipper started this, everyone of his successors just carried it on. Nothing short of a massive to the left will get us out of this mess.

[NitramNos]

Reagan started the notion that all government regulation of business was bad for the country, and conservativeand their lobbyists hammered at regulations nonstop ever since Reagan until the orgy of greed that led to the recent crash.

[Indedave]

Pass the buck. Ignore the zeitgeist. Blame the Democrats. To hell with facts. This type of thinking is what has made your party irrelevant, Mr. Scheer: mission accomplished, congratulations.

[research]

Raygun Did IT!

Raygun started the whole "governmnet is bad, regulation is bad" train wreck that scared the Democrats into created the Centrist DLC, from which Clinton and Obama come.

RayGun = Government Bad=Regulation bad = conservati­ve=plutocr­acy=econom­ic crashes every time.

Raygun DID IT!

[glockman]

Not that I'm a Reagan supporter, but you keep using the word Raygun, which probably tells me you are unaware that Reagan actually reduced the number of nukes in both our and the USSR's arsenals.

[research]

So? We both kept our best, most accurate weapons. It was just welfare for the military industrial complex.

RayGun was for Edward Tellers' laser shield against nuke missiles.

[LeftRight]

And he spent HUNDREDS OF BILLIONS making star wars and a 600 ship navy, and all sorts of other things that weren't needed!!

[Leatherhelmet]

Make sure to write down Krugman's prediction that we will not have inflation due to the debt Obama is running up.

[UnknownSoldier]

Robert, Robert, Robert

Clinton's biggest historic blunder will be Triangulation.

Deregulation and hostility toward government regulations started with WHO?????

Let me give you a hint: Famous words: "I'm from the Government I'm here to help"

Who said that???? Was it Bil Clinton, Robert Rubin, Larry Summers.........no it was Ronald Reagan

Ronnie and Greenspan have more to do with this mess than anyone else. Was it part of the Good Ole boys Network....... Yes..... but what isn't part of the Good Ole Boys network in America

[Curdleberg]

I like some of the comments posted - when are we going to realize that both parties are one and the same? Democans and Republicrats...all greedy and corrupt.

[TheFriendlyAtheist]

Great post Robert. Your right, both parties got us into this mess and neither one, nor the president, is doing anything to break up the to bit to fail banks that have brought the economy of the whole world to its' knees. Instead they're being allowed to take our bailout money and buy up smaller banks so they can become even bigger. Why do we stand for this nonsense? We should all be in the streets demand real reform from the corporate stooges that we put in office.

[masher]

They both did it. The GOP and the Dems. They both want money for nothing. Neither party wants to value work, hard work. That want to keep buying the notion that we can have it all.

[jhNY]

I wasn't reading the piece so as to refute arguments later, but as I recall, Krugman's column made the point that by deregulating the S&L business ,and by not punishing most of the malfeasants who ruined it subsequently, the stage was set for further financial shenanigans like the present one, where actors were emboldened by the no-punishment precedent.

Not for nothing, but I'm going with the Nobel guy anytime there's a controversy regarding economic policy

[HST]

After the S&L collapse Krugman also heavily criticized Enron's entry into energy derivatives in the late 90's-early 2000 along with the shady accounting practices that lead to Enron's bankruptcy. Krugman's been right about every deregulation scheme conservatives have put forth. The problem is they keep coming up with new ones.

[glockman]

What is this? Someone sounding like a rational thinker? Say it isn't so.

Until we realize that the two party system is a dead thing responsible for nearly every problem we have, we will never see any difference in politics.

But I'm sure there will be apologists from both parties responding to this article with incredulity and vile words for each other.

[usna73]

WE collectively "did it." ( I am not one of them.) . Pres. "Raygun" fed the "something for nothing" fantasy of the population. Even G.H.W. Bush reminded us all it is "voodoo economics."

Time to look in the mirror folks. I'm old enough not to think that "denial" is a river.

[LeeX]

While certainly Clinton, Bush Sr, and Bush Jr are culpable, I believe that Reagan was the worst of the bunch. The recent Wall Street bubble began on his watch. The era of deregulation began with him, too. I think that Reagan was the worst president, ever. Bush did more damage to the country because he had so much help from his wrecking crew (e.g. Cheney & Co, Fox Noise).

I could not stand Reagan. He was so phony, I just got such a visceral reaction to him. He was a m.o.r.o.n! The country was in terrible shape during his administration, much unemployment and homelessness. It was a fiesta for big business, tho.

[PaiaGirl]

Reagan & Goldwater began this whole "Government is not the solution, it is the problem" mindset of the Republicans. Deregulation followed. Disaster happened when it all caught up.

[Hoelder]

Alone the fact that we have this discussion, means the there is still a controversy about Ronald Reagan. The problem is that the canonization of Reagan does not hold up to sanctity any more. When I listened to Reagan I found him a dangerous zealot stepping on so many toes that you had to wear steel tipped boots. From covert operations to bring down elected foreign governments to a ruthless you are either for me or you get fired. The dismantling of government and the society in the US is deeply routed in the believe that people that make a lot of money are better in leading and stream ling business. They are trickling down wealth because they have a small business supplying employments etc. etc. The problem is that self regulation or consumer driven supply and demand just does not work. It will certainly take a generation to look onto the facts of the presidency of Reagan without the spite and ideological lines in the sand. It is really easy to blame other Presidents in the current crises of finance in this country. But it was never the issue. The question was who started it. Guess what, who did.