"Krugman Gets His History Wrong
Posted on June 1, 2009
Paul Krugman, like many other Democratic partisans, wants to blame Republicans and right-wingers for causing the financial disaster by deregulating the system. This may be comforting to Dems but, alas, it requires them to falsify the history, as Krugman does in this morning's column. Krugman flogs the notorious Garn-St. Germain Depository Institutions Act of 1982 and quotes Ronald Reagan's extravagant praise for the measure. [http://www.nytimes.com/2009/06/01/opinion/01krugman.html?_r=1&hpw]
What Krugman leaves out is that financial deregulation actually started two years earlier -- before the Gipper got to Washington. 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(Jimmy Carter) enacted the Monetary Control Act of 1980 which removed all remaining controls on interest rates and repealed the federal law prohibiting usury (note that sky-high interest rates and ruinous predatory lending have been with us ever since).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.
Economist Albert Wojnilower warned at the time: "Freeing the thrift and mortgage markets from government subsidy and guarantee is like freeing the family pets by abandoning them in the jungle."
His sardonic prediction was swiftly realized. The 1982 legislation that upsets Krugman was actually Congress's clumsy attempt to make amends by expanding the lending powers of the failing S&Ls. That only made things worse and the crisis followed a few years later -- a bipartisan fiasco that politicians tried to conceal from voters. But why blame Garn-St. Germain on Reagan? Ferdie St. Germain was a Democrat and chairman of House banking, notorious himself for his slavish attention to the financial interests.
Getting the history right still matters. It helps explain why contemporary Democrats are so reluctant to enact more serious reforms, like capping interests or restoring the usury law. That would require them to clean up the mess they made 30 years ago and finally acknowledge their costly errors. The Times should run a correction on Krugman's column, maybe with an apology to the Gipper."