This week . . . a rant.
First of all, let me say that I almost never read Paul Krugman's New York Times column, as I noticed several years ago that he has an uncanny ability to understand a problem but totally misdiagnose the cause.
During the "W." years, Krugman would frequently outline an economic problem, then go out of his way to blame the president. A lot of poor decisions did flow from George W. Bush, as he was basically in over his head. But this Nobel Prize-winning economist was a Johnny-one-note when it came to W.
But I did read Krugman's May 31 column because of its headline: "Reagan did it" (registration required). I thought, wow, I need to see what this is all about. Here goes:
The devil in deregulation
Krugman wants us to believe that all of our financial ills can be traced directly back to the presidency of Ronald Reagan and deregulation. As usual, he finds the source of trouble -- almost. He identifies a specific piece of legislation that he claims started us on the path to so much financial trouble: the deregulatory Garn-St. Germain Depository Institutions Act of 1982.Close but no cigar. The actual offending cancerous legislation that kicked off the move toward extra reckless lending did involve then-Rep. Fernand St. Germain, a Rhode Island Democrat. But the problem legislation was the Depository Institutions Deregulation and Monetary Control Act of March 31, 1980.
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It's important to note that the law was enacted two years before the act Krugman cites -- and nearly a year before Reagan took office. The earlier legislation contained a provision that increased the limit for deposit insurance from $40,000 to $100,000 at a time when $100,000 was a lot more money than it is today.
Tracing the roots of reckless lending
Believe it or not, I felt in 1980 that it was a bad law that would lead to recklessness. That's because the excessive increase became an incentive for depositors to be less disciplined regarding the health of their depository institutions.I made this very point at the height of the tech mania in a speech titled "Spinning Financial Illusions: The Story of Bubblenomics," which I gave at the Contrary Opinion Forum on Oct. 1, 1999:
The seeds of this bubble were sown way back in 1980 when Congress passed the Depository Institutions Deregulation and Monetary Control Act, calling for the phasing out of Regulation Q, which allowed financial institutions to compete with money market funds. A piece of that legislation was financial cancer: raising the insured deposit maximum to $100,000.
That seemingly innocuous change (thank you, Fernand St. Germain) spawned "brokered deposits," the primary driver of the reckless lending practices of the 1980s. Money sought out the highest bidder with no regard as to how it might be used.
As a result, we witnessed the funding of overleveraged LBOs and the overbuilding of real estate long after the 1986 Tax Act made it uneconomical to speculate in property. It is hard to overstate the significance of this legislation in creating the excesses of the 1980s, which set the stage for the even greater excesses of the 1990s.
(The entire speech can be found in my column of Oct. 14, 2002.)
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Back to Krugman's column: He wraps up his indictment with a statement that demonstrates his utter lack of understanding about what has transpired over the past quarter-century: "There's plenty of blame to go around these days. But the prime (my emphasis) villains behind the mess we're in were Reagan and his circle of advisers -- men who forgot the lessons of America's last great financial crisis, and condemned the rest of us to repeat it."
That is just nonsense. The person to blame for the increase in deposit insurance was none other than St. Germain, who saw to it that the deposit insurance increase was put into place.
Continued: Who's to blame? Greenspan
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