It’s Ronnie’s fault?

Paul Krugman, who’s one of the smartest people playing the punditry game, presents us with another gem in his Monday column for the New York Times.  Krugman, the Nobel prize winning economist, lays out a plausible case that the causes of the current collapse of the financial industry and the economy can really be traced back to Ronald Reagan’s signing of the Garn-St. Germain Depository Institutions Act in 1982.  That bill deregulated the savings & loan industry, which went hog-wild making bad investments and essentially went belly-up in less than a decade.

After Reagan deregulated the S&Ls, Bill Clinton and the Republican-controlled Congress went an unfortunate step further in the late 90s and repealed the Glass-Steagall Act, deregulating the rest of the financial industry.  From that brilliant decision flowed the investment of billions of dollars into securitized subprime mortgage loans and other fantastic Wall Street deals.  We owe so much to these wise politicians who swallowed the bogus idea that deregulation is always the right thing to do.

Krugman observes:

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.