Democrats and Republcans Share Equal Blame for the Economic Crisis
I've posted this chart because provides a useful point of reference to an interesting debate between two progressive economists, Paul Krugman and William Greider.
The issue is whether the economic crisis we are facing right now should be laid at the doorstep of Ronald Regan who signed into law the deregulation of the Thrifts (ie the Savings & Loanl banks) as Krugman says, or whether in fact deregulation has been a bi-partisan policy beginning when Jimmy Carter was president and continuing under Bill Clinton.
It is not a moot point of merely historical interest. We can lay Barack Obama's failure so far, to take on the banks and major financial institutions effectively is traceable to his reliance on the same team of advisors whom Bill Clinton relied upon, a team put into place by Rubin.
Here are some excerpts from Krugman's May 31st New York Times Op Ed, Reagan Did it:.
[Reagan] 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.
... snip ...
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.
While Reagan's signing of the Garn-St. Germain Depository Institutions Act. in 1982, Greider points out that deregulation and all of the consequences that followed was a bipartisan policy that began with Jimmy Carter.
He writes in the Nation, Krugman Gets His History Wrong.:
What Krugman leaves out is that financial deregulation actually started two years earlier -- before the Gipper got to Washington. A Democratic Congress and Democratic president (Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since). It was the 1980 legislation that took the lid off banking and doomed the savings and loan industry, the mainstay that used to provide housing loans and home mortgages. The thrifts were able to raise capital because they were allowed to pay a half percent more in interest to depositors. Bankers wanted them out of the way. The Democratic party obliged.
Economist Albert Wojnilower warned at the time: "Freeing the thrift and mortgage markets from government subsidy and guarantee is like freeing the family pets by abandoning them in the jungle."
,,, snip ... [emphasis mine]
Getting the history right still matters. It helps explain why contemporary Democrats are so reluctant to enact more serious reforms, like capping interests or restoring the usury law. That would require them to clean up the mess they made 30 years ago and finally acknowledge their costly errors. The Times should run a correction on Krugman's column, maybe with an apology to the Gipper.