When Richard Posner, icon of the Chicago School, and William Greider, a fixture of the left, both decide to tell Paul Krugman that's he's wrong, maybe we should pay attention. Notwithstanding Posner's recent reevaluation of the infallibility of markets, the two men tend to disagree far more than they agree.
Both say Krugman's Monday New York Times column, "Reagan Did It," gets history wrong.
Krugman's thesis is that "the prime villains behind the mess we're in were Reagan and his circle of advisers." The smoking gun, he says, was Reagan's 1982 signing of "the Garn-St. Germain Depository Institutions Act," which helped precipitate the savings and loan crisis, writes Krugman, by giving the banking industry "license to gamble with taxpayers' money."
Not quite, say Posner and Greider, both of whom point to the administration of Jimmy Carter as the starting point for financial industry legislation.
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(Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since).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.
Deregulation was bipartisan. It is entirely speculative to suppose that, had Carter been reelected, the deregulation of banking, including the relaxation of mortgage standards, would have ceased. When the Democrats regained the presidency in 1993, banking deregulation continued, culminating in the repeal of the Glass-Steagall Act, which had split commercial banks from investment banks, and in the rejection of regulation of the new derivatives, notably credit-default swaps. Robert Rubin and Lawrence Summers, Clinton's principal economic advisers, were steadfast supporters of banking deregulation. They are both Democrats.
The continuing influence of the banking industry on Congress, on which point we witness new revelations nearly every day, should be enough to underline how both parties succumb all too willingly to the financial blandishments lavished by Wall Street. I'm sure Krugman would acknowledge that. Despite Posner's dismissal of Krugman as a Democratic partisan, it is well worth noting that Krugman has been far harder on the Obama administration's economic policy moves than your typical Republican partisan was on George Bush until late in his second term.
But there's a different, perhaps more profound sense in which Reagan really did do it. Momentum for deregulation may have gotten started during the Carter administration, but the ideological case for it didn't crystallize until the election of Reagan in 1980. From that point on, the predisposition to loosen the reins on the financial industry became explicit. Both parties helped get us where we are today, but one party in particular identified itself with the all-knowing wisdom of the markets. And that party is paying the price.
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