Sunday 3 July 2011

Reagan Helped Caused Economic Crisis, So Why A Statue

A statue of Ronald Reagan is to be unveiled in London's Grosvenor Square (near the USA Embassy) this week, as part indeendence day and of a year of celebrations to mark his 100th birthday. But hang on a minute, wasn't Reagan in large part responsible for the economic path to the current disaster? Perhaps we should be turning this statue into a home for rotten tomato or paint, as I suspect will happen.

Reagan is famous for deregulating financial institutions.
“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.

His bill turned the modest-sized troubles of savings-and-loan institutions into a catastrophe. 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.

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.

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.

USA 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 was to turn 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.

Reagan-era legislative changes essentially ended previous restrictions on mortgage lending — restrictions that, in particular, limited the ability of families to buy homes without a significant deposit.

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. They 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.

Now the 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. (and other) economies so vulnerable. Overstretched borrowers were bound to start defaulting in large numbers once the housing bubble burst and unemployment began to rise.

What Reagan started, Thatcher made worse, Blair and Brown continued. The path to disaster is due to many people. But I dont buy this near saintood that some see in Reagan. He vastly increased USA military spending which may have boosted them into confidence after the disaster of Vietnam. Following presidents dared not cut this as the Republicans were quick to paint them as weak. So fortunes were spent, and wars fought, with with any great justification.

After the great depression lessons were learned, promises made, then forgotten. Reagan and those who agreed with him forgot the lessons of the last great financial crisis, and condemned the rest of us to repeat it. Such is his legacy.

9 comments:

howard thomas said...

"Reagan's biggest legacy"................As an alternative might the end of the cold war and the breaking up of the Soviet Union be a contender ?

Adrian Windisch said...

Do you really thimk thays Reagans legacy? I would say Gorbachov had a lot to do with it. There were many factors, thr breaking away of eastern block countries being also significant.

Reagan almost started a war when he said as a joke, "lets bomb russia" . Do you rember je even called Lady Di princess david but if you think he was a saint then thats your opinion Howard. hov had a lot to do with it. There were many factors, thr breaking away of eastern block countries being also significant.

Reagan almost started a war when he said as a joke, "lets bomb russia" . Do you rember je even called Lady Di princess david but if you think he was a saint then thats your opinion Howard.

howard thomas said...

Crikey Adrian.....do yourself a favour and proof read what you have written !!
Please point out where I said he was a saint or any wording that led you to that conclusion !
Much as you may not approve , Mrs Thatcher had a lot to do with that as well. She said of Gorbachov "this is a man we can do business with" , and history shows she was right !

Adrian Windisch said...

You sais "Reagan's biggest legacy"................As an alternative
might the end of the cold war and the breaking up of the Soviet Union be a contender ?"

No mentiom og Gorbachov or Thatcher im your comment, you give all tje credit to Reagan. The right wing in the USA speak like you do as if he had changed tje ussr on his own. I pointed out that there were many other factors, starting with Gorbachov, so now you agree with me? Perhaps you are tje one who needs to proof read.

Its debatable how much Thatchet and Resgan had to do with it, but its certain that Gorbachev and the Eastern block stated lead the way.

However you are still focusing on one word of the pist and ignoring the rest which is about the economics.

howard thomas said...

Adrian ....you stated that changes in America's financial rules "was Reagan's greatest legacy". I suggested that it may have been the ending of the cold war.
Note the use of my word 'may' and your word 'was' ! This is quite typical of your way of looking at things. ie. Adrian is right and anyone that puts forward an alternative is wrong. I didn't go into the history of the end of the cold war, because I would be still writing the reply!
Have you any idea what proof reading is ? What is a 'pist' ?
And "perhaps you are 'tje' one that needs to proof read" !
Come on Adrian....surely you can do better than that !

Adrian Windisch said...

Typical comment from you Howard, nasty personal attack but no substance. In future make an argument, give a link to prove it.

Attacking my ability to spell (while writing with a smart phone) doesnt contribute to anything though it may give you pleasure.

howard thomas said...

Thats a 'nasty' personal attack ??
I thought I was being quite restrained. I was just pointing out that you ought to check the comments you make before pressing the button. Am I wrong? Your skin is ever so thin Adrian

Adrian Windisch said...

Your attitude comes across when you type Howard. This time its the way you ignore what is said and instead dismiss it because of some typo.

You said 'This is quite typical of your way of looking at things. ie. Adrian is right and anyone that puts forward an alternative is wrong.' Plain wrong, anyone can comment here, just be reasonably polite, any alternative view is welcome.

However you make claims that you wont or cant give any evidence for. You ignore what I have written, including the links I give. I am now questioning what is the point of you commenting here.

howard thomas said...

Perhaps we should leave that for others to judge !
By the way have you thought of any press that isn't 'right wing' yet ?