Posted on 06/03/2009 11:15:12 AM PDT by seatrout
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 fifteen 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 thirty 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 US 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.
Paul Krugman is preaching to his choir in the NYT. Does anyone think people that read his column will question it?
Considering that the Nobel Prize committee gives awards to avowed terrorists and nothing in the Al Qaeda Times comes even close to resembling news, how could any other conclusion be reached?
Soros has a jelly finger in Krugman's butt!
This is helpful to Obama. Obama thought he could only blame his immediate predecessor. Now a Nobel Laureate has given him the green light to go back farther. I think we should also consider what role Ford played in all of this. Oh, wait, his campaign motto was Whip Inflation Now. Guess he’s off the hook then.
From the Nation magazine? Wow, eventually the light of truth shines everywhere!
Of course Reagan didn’t do it. He was a capitalist though, and that’s more than enough for the left to hate his ass.
This is more than anything else, a full frontal assault on capitalist free enterprise.
Robert Scheer is kinda sorta defending the Gipper in the pages of The Nation. Isn’t that actually one of the signs of the end times?
And defending Ronaldus Magnus, no less!
Scheer has been huffing glue again ...
“The agenda here is clear. If you can demonize the pro-growth, pro-capitalist movement from Reagan on, then you have to return to what preceded him; that would be Jimmy Carter. Socialism is on the ascendancy.”
Maybe fiscal conservatives should place the blame on FDR and LBJ for creating the two headed monster that is bankrupting this nation.
The great ponzi scheme that is Social Security and the wasteful medicare fiasco.
Yet still no mention of the community reinvestment act and the pressure put on banks by groups like Acorn?
Here is absolute proof that Clinton and Greenspan knew about the problem. Take some time to read a few pages of this 1994 report outlining exactly what has happened.
http://archive.gao.gov/t2pbat3/151647.pdf
GAO Report May 1994 Financial Derivitives: Actions Needed to Protect Our Finincial System
Nice article. I keep looking for explanations that can be understood by an economic ignoramus like me. This one is the best I’ve seen.
—How could Paul Krugman, winner of the Nobel Prize in economics and author of generally excellent columns in the New York Times—
Yup, that line is barf-worthy. I guess Scheer felt obliged to tip his hat to the Great Krugman before he dismantled Krugman’s ridiculous screed.
Good article. Names names (Rubin, Summers, Greenspan, Leach and Gramm) and emphasizes an unknown name to the public, a heroine martyr (Brooksley Born) who has been vindicated.
http://www.bloomberg.com/apps/news?pid=20601109&sid=aXcq.r6xLf4g&refer=home
But lack of regulation was only one aspect of the current crisis. Other aspects are well-known to Freepers that follow this blame-game such as Frank-Dodd-Schumer and so on. And then there is the late and untimely imposition of hedge fund regulation.
As an initial step in the regulation of hedge funds, they were forced in September 2008 to disclose their short positions as of a specific future date. They were also deleveraged in a catastrophic way. This caused massive volatility on the markets and a CDO market collapse due to the uncertainty, highlighted early on by the collapse of two Bear Stearns hedge funds.
For those that can’t follow what I am saying, think of pre-September 2008 Hedge Funds as ‘Secret Bank accounts’ like the Swiss Bank accounts of years past. One could hide money in these hedge funds and no one would know what instruments or portfolios the money was tied to. Once the light of day was announced to be coming to these hedge funds, the fund’s masked investors fled before the disclosure deadline. This caused redemptions, margin calls and combined with deleveraging, it wiped out half of the wealth of Americans.
And we still have not had an investigation into the financial collapse.
Think about that. No investigation yet and none likely.
Who says certain banks don’t control the USA?
It will be repeated over and over and eventually become a segue line on MSNBC.
Yep, and as long as the girly men Republicans refrain from refuting the lies, the Democrats can blame anyone they want and the American people will soon start repeating it themselves.
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