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Robert Scheer: In Blaming Reagan, Krugman Ignores the Real Culprits
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” — that stated that “the prime villains behind the mess we’re in were (Ronald) 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 Bill Clinton years.
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. From 1998 to 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 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. Jim 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 importantly, 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 such as Citigroup to become too big to fail, is now a member of the board of directors of ProPublica, which bills itself as “a nonprofit newsroom producing journalism in the public interest.” Leach serves as the chairman of a prize jury that ProPublica has created to honor “outstanding investigative work by governmental groups,” and perhaps he will grant one retrospectively to Born and the federal commission she ran so brilliantly before Leach and his buddies destroyed her.
— TruthDig.com editor in chief Robert Scheer‘s new book is The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America. Click here for more information. He can be reached at .(JavaScript must be enabled to view this email address).
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» on 06.06.09 @ 06:43 AM
Excellent and wise observations . Too many play the blame game when things fall apart, even searching twenty years ago for a villain. Ronald Reagan is actually what we need more of not less. He wasn’t treated fairly in his time and still is not on his post mortem 100th birthday.
We could learn a lot from Reagan during these times, and a lot about the reasons we are in them, because we have ignored his wisdom for so long.
For some of his great quotes that the media ignored during his era:
http://thinkexist.com/quotes/ronald_reagan/2.html
Visit heritage.org for the foundation he built. In defense of his budget is the following:
http://www.heritage.org/Press/Commentary/ed061604b.cfm
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» on 06.06.09 @ 06:49 AM
“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? “
Well, of course, he didn’t get it wrong; Scheer’s ridiculous rant is addressed at a strawman: Krugman has written plenty about the culpability of Gramm et. al.
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» on 06.06.09 @ 10:12 PM
Krugman is ‘correct’ ONLY is this sense: The mind-set initiated by Reagan “did it”. The actual pulling of levers behind the Wizard’s curtain WAS DONE as Robert correctly observes. The appealing rhetoric - belying the costs we now content with - uttered by “The Great Communicator” were [para] “You can be anything you want to be”! The US Army even ‘bought it’ in their privately produced recruitment ads—until recruits discovered that “their way” was NOT NECESSARILY “the Army way of doing business”. Implicit within the quaint Reagan-esque rhetoric: You now have permission to step on anyone you wish to achieve your goals, since you will be rewarded in the end ‘for any means you choose’ or any path you elect to take to that goal. Ergo: Implicitly, no ethical consequences [Q = ‘what are those, no one in school taught us that!’] would be paid nor suffered. Fast forward to the water-boarding means which were used to somehow justify noble ends—an argument which now falls on increasing numbers of deaf ears. Not to forget the moral consequences writ into Laws of War, Codes of Conduct during wartime, etc. It is a nexus. Thus: As cartoonist Walt Kelley so aptly had one of his clever characters state: “We is met the enemy, and he is us”!
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» on 06.07.09 @ 12:25 PM
By a coincidence, former Rep Jim Leach was joined named to a prestigious, well-paid
position in the new Obama administration, NEH director.
Now he can continue to interact with his old pal, Larry Summers, on our dimes, in the
imperial city.
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