Ronald Reagan: the modern saint of neoliberalism cult

September 30, 2008 | Bigpicture

BILL MOYERS: You describe Ronald Reagan as the "modern prophet of profligacy. The politician who gave moral sanction to the empire of consumption."

ANDREW BACEVICH: Well, to understand the truth about President Reagan, is to understand why so much of what we imagined to be our politics is misleading and false. He was the guy who came in and said we need to shrink the size of government. Government didn't shrink during the Reagan era, it grew.

He came in and he said we need to reduce the level of federal spending. He didn't reduce it, it went through the roof, and the budget deficits for his time were the greatest they had been since World War Two.

BILL MOYERS: And do you remember that it was his successor, his Vice President, the first President Bush who said in 1992, the American way of life is not negotiable.

ANDREW BACEVICH: And all presidents, again, this is not a Republican thing, or a Democratic thing, all presidents, all administrations are committed to that proposition. Now, I would say, that probably, 90 percent of the American people today would concur. The American way of life is not up for negotiation.

What I would invite them to consider is that, if you want to preserve that which you value most in the American way of life, and of course you need to ask yourself, what is it you value most. That if you want to preserve that which you value most in the American way of life, then we need to change the American way of life. We need to modify that which may be peripheral, in order to preserve that which is at the center of what we value.

[Jun 3, 2009] Reagan Didn't Do It By Robert Scheer

That's an amazingly naive view. Actually Reagan created the ideology that flourished under Clinton and Bush II.

Robert Scheer is the editor of Truthdig, where this article originally appeared. His latest book is The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America(Twelve).

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.

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• "Reagan Didn't Do It"? It seems that chopping up history is the order of the day. Paul Krugman, Robert Sheer and now I all delight in doing so. I'm tempted to go back to Haymarket and the wonderful way economics was taught in Illinois and the eight-hour day was dispatched.

  Mercy! Let's start in '80. Nineteen eighty, that is. Virulent inflation was being fought valiantly by Fed chairman Paul Volker, by raising interest rates. This is usury, which is frowned on by all three of the great religions.

  Enter the United States Congress, which passed a bill that effectively overrode state laws against usury. This was the signal that many had been awaiting, "Greed is good." To this day it can be seen emblazoned on the Wall Street Journal.

  The rest, as they say, is history.

   

  Louis Ricker
   

  Italy, TX

  06/03/2009 @ 4:18pm

   

  
   
• Ever hear of the Savings and Loan scandals or Iran/Contra? No, Reagan didn't start it, just kept it alive. "Business-as-usual" has been around since after WWII. People, we can set up a "truth and reconciliation" concept later; what do we do with the information now? Think democracy, get involved--from the "grassroots up," make it better; if not for us, then for following generations. Learn, communicate, set standards, re-invest in what can become a very "unique" America.

  ira reschman

  Tampa, FL

  06/03/2009 @ 3:50pm

  My reading of the Krugman article suggests an analogy to New Orleans and the Katrina tragedy. Why did New Orleans flood? Blaming the hurricane is too easy. You have to go back and understand why the levees failed. This means you have to track back through the years of government decisions on maintaining the levees to the first time that someone decided that secure levees were not as important as some other spending need (or perhaps, some tax cut).

  The approach to regulation defined during the Depression held up until the Reagan years. At that point, it started to unwind. Small steps at first, then gradually bigger steps until most of the finance world was unregulated (no levees at all). When the storm hit, it blew everything away.

  To blame mortgages for the relatively poor for this catastrophe is wrong. Between 200 and 2008 homeownership increased from around 66 to around 70 percent. In the same period, total outstanding mortgages rose from under $8 trillion to over $14 trillion. The relatively few, relatively small mortgages held by lower-income people are a minute fraction of this total. The system could easily have withstood all of these mortgages defaulting.

  Easy mortgages caught middle-class people who borrowed ever more against their homes.

  Finally, mortgages are not the problem either. At least, not all of the problem. Credit Default Swaps were sold with total value of $350 trillion. Multiple bets against all types of structured products. This leverage or risk brought the system down.

  And, in Krugman's view and mine, it all started with the changes made during Reagan's tenure.

   

  Brent Beach
   

  Victoria, BC

  06/03/2009 @ 2:49pm

   

• I'm sure Mr. Krugman knows full well that others after Reagan had just as much, if not more, to do with this stuff than Ronnie did. But he would rather blame someone from the other side of the aisle.

  One slight correction to Mr. Scheer: Krugman does not have a "Nobel Prize in Economics," because such an award doesn't exist. The award he won was established in the early 1970s and had nothing to do with Alfred Nobel. The Nobel Foundation does administer it, but on their website they explicitly state that this award is not a "Nobel Prize."

   

  Craig Seufert
   

  Meredith, NH

  06/03/2009 @ 2:46pm

  I had the same response to Krugman's NY Times column, and in a comment I posted there pointed out that Fernan St. Germain, co-sponsor with Jake Garn (R-UT) of the Congressional Act Krugman referenced, was a Democrat and that the act passed with broad bipartisan support. In the House of Representatives, it was co-sponsored by Chuck Schumer and Steny Hoyer and it passed the Democratic-controlled body by a vote of a whopping 272 to 91.

  And what was the stepping stone to this "New Deal" betrayal? Jimmy Carter's signing of the "Depository Institutions Deregulation and Monetary Control Bill," which, according to John Birger (money.cnn.com), "abolished state usury caps that had limited the interest rates banks could charge on primary mortgages--and, in the process, gave banks more incentive to make home loans to folks with less-than-perfect credit.... DIDMCB...open[ed] the door to some predatory lending in low-income communities...deregulated the mortgage market and made home loans more available."

  I have never voted for a Republican in my life, and Jimmy Carter's was the first presidential election I took part in. My point is not to defend Reagan and the GOP but to insist that none of it could have been accomplished without the help of Congressional Democratic majorities who very much participated in the destruction of the New Deal--the very foundation of the modern Democratic Party.

  Nothing will change if we fail to acknowledge that our current economic downfall was a not just a GOP-engineered event. It has resulted from the failure of our democracy and won't be fixed until we have a Democratic Party dedicated to Main Street--and the humane principles behind FDR's New Deal--not Wall Street.

   

  Chris Trakas
   

  Manhattan, NY

  06/03/2009 @ 2:08pm

  Reagan, Schmeagan. A genial front man for the banks, but really a B-movie actor.

  Actually, Wall Street did us in. The financial whiz kids found a way to make an easy buck--selling junk as gold--and now they're hooked on their criminal ways. They don't want to work hard--as in making things. So they continue to flip papers and click on the mouse.

  Goodbye GM, goodbye Empire.

  So down the tubes of history we go--of course, the Pentagon helped--a trillion for war every year and the constant invasions, occupations, dronings.

  Not to mention that we have a rich caste that refuses to pay taxes or even serve in the military, plus we have really awful leadership (see Rome).

  "Oh mama, can this really be the end...?"

   

  Howard Kaplan
   

  Belmont, MA

  06/03/2009 @ 1:12pm

  What planet were you on during the Reagan years? He was a B grade actor at best and an Alzhiemer president.

   

  Sally Spelbring
   

  Lawrenceville, GA

  06/03/2009 @ 12:22pm

  Like Scheer, I was fairly appalled when Paul Krugman attempted to blame the deregulation-derived mess of today on Ronald Reagan. It is widely understood at this point that Clinton and Clinton-era figures, in addition to Bush II-era figures, had major and direct contribution to the mess of today. In particular, the repeal of part of Glass-Steagall and the ascension of Summers & Rubin, Inc. during the Clinton years were not just contributions to the mess at hand but also part of the Democratic Party losing itself.

  I suspect Krugman doesn't want soil the area where he eats, so he simply forgot to mention this entire chunk of the history of our finance mess today. It's good that Scheer holds him to the fire for this lapse of memory.

   

  Seymour Friendly
   

  Seattle, WA

  06/03/2009 @ 11:50am

  As I read Krugman's article, his point was, Reagan started it. He has, elsewhere, given the Clinton administration its full measure of blame. And Ayn Rand's obscurantist disciple Alan Greenspan, and Gramm and his sister.

  The process of desanctifying Reagan is essential, and Krugman's analysis is an effective tool. If Reagan could have done worse, he would have, and it was a Democratic Congress which (timidly) stood in his way.

  Let us not exculpate Mao to better condemn the Gang of Four (or five). So to speak.

   

  Barry Blitstein
   

  New York, NY

  06/03/2009 @ 08:39am

  Basically quite accurate, but I would add one major detail: Barney Frank and a few others continually pushed for Fannie Mae and Freddie Mac to to raise their percentage of loans targeted to lower income and less creditworthy people. That is a very large part of the disaster.

   

  John D. Froelich
   

   

How Much is Reagan Responsible for Bailout Nation ? By Barry Ritholtz

June 1, 2009

Paul Krugman has a fascinating OpEd today, essentially tracing the current economic crisis all the way back to Ronald Reagan.

In Bailout Nation, I place a small measure of blame on Reagan for a) appointing Greenspan; and 2) being the intellectual father of the radical deregulation movement.

Krugman goes much further than I. Beyond the financial deregulation issue, he mentions something I was unaware of:  Eliminating the down payment requirements of home buying:

“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.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.”

Astonishing.

Allow me to put Professor Krugman’s criticism into a little context, via Chapter 3 of Bailout Nation:

“The market for financing homes was quite different in the 1920s and 1930s than it is today.  There were no such things as 30-year, fixed-rate mortgages. Instead, the typical mortgage was an interest-only loan for a period ranging from three to five years. These non-amortizing mortgages called for a balloon payment upon maturity. Most were renewed without much fuss—assuming the borrowers had maintained their jobs and payment histories.

As the 1930s economy went from bad to worse, this cozy home financing arrangement ran into trouble. Home prices entered into a steep decline. A cash-strapped populace, suffering from massive job losses, was frequently unable to meet its mortgage payments.

In History and Policies of the Home Owner’s Loan Corporation, C. L. Harriss writes, “What had generally been regarded as a reasonably sound arrangement by all parties concerned proved to be very weak when a set of interrelated forces combined to bring on a severe depression after 1929 and to disrupt seriously the structure of home-ownership finance.”

I am curious about one thing:   Does anyone know specifically what legislation Krugman was referencing that eliminated the down payment requirement ?

Op-Ed Columnist - Reagan Did It - NYTimes.com

By PAUL KRUGMAN

Published: May 31, 2009

“This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. ... All in all, I think we hit the jackpot.” So declared Ronald Reagan in 1982, as he signed the Garn-St. Germain Depository Institutions Act.

He 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.

For the more one looks into the origins of the current disaster, the clearer it becomes that the key wrong turn — the turn that made crisis inevitable — took place in the early 1980s, during the Reagan years.

Attacks on Reaganomics usually focus on rising inequality and fiscal irresponsibility. Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains. He also broke with longstanding rules of fiscal prudence.

On the latter point: traditionally, the U.S. government ran significant budget deficits only in times of war or economic emergency. Federal debt as a percentage of G.D.P. fell steadily from the end of World War II until 1980. But indebtedness began rising under Reagan; it fell again in the Clinton years, but resumed its rise under the Bush administration, leaving us ill prepared for the emergency now upon us.

The increase in public debt was, however, dwarfed by the rise in private debt, made possible by financial deregulation. The change in America’s financial rules was Reagan’s biggest legacy. And it’s the gift that keeps on taking.

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.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

We weren’t always a nation of big debts and low savings: in the 1970s Americans saved almost 10 percent of their income, slightly more than in the 1960s. It was only after the Reagan deregulation that thrift gradually disappeared from the American way of life, culminating in the near-zero savings rate that prevailed on the eve of the great crisis. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent.

All this, we were assured, was a good thing: sure, Americans were piling up debt, and they weren’t putting aside any of their income, but their finances looked fine once you took into account the rising values of their houses and their stock portfolios. Oops.

Now, the proximate causes of today’s economic crisis lie in events that took place long after Reagan left office — in the global savings glut created by surpluses in China and elsewhere, and in the giant housing bubble that savings glut helped inflate.

But it was the explosion of debt over the previous quarter-century that made the U.S. economy so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise.

These defaults in turn wreaked havoc with a financial system that — also mainly thanks to Reagan-era deregulation — took on too much risk with too little capital.

There’s plenty of blame to go around these days. But the prime 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.

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