Krugman: Reagan Deregulation Caused 2008 Crisis

Thursday, 17 Dec 2009 08:36 AM

By Gene J. Koprowski

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The deregulation that took place under President Ronald Reagan created two massive financial disasters during the last quarter of a century, the savings-and-loan crisis of the 1980s, and the financial market meltdown of 2008, writes Nobel Prize winning economist Paul Krugman.

In a recent column in The New York Times, Krugman says that, starting in the late 1980s, taxpayers ended up paying more than 2 percent of GDP, the equivalent of around $300 billion today, to fix up the S&L catastrophe.

“But the proponents of deregulation were undaunted, and in the decade leading up to the current crisis politicians in both parties bought into the notion that New Deal-era restrictions on bankers were nothing but pointless red tape,” writes Krugman.

“The bankers — liberated both by legislation that removed traditional restrictions and by the hands-off attitude of regulators who didn’t believe in regulation — responded by dramatically loosening lending standards. The result was a credit boom and a monstrous real estate bubble, followed by the worst economic slump since the Great Depression.”

Krugman calls the conservative take on the financial problems “an alternative, bizarro” reality in which government bureaucrats, not greedy bankers, created the crisis that led to the meltdown.

“It’s a universe in which government-sponsored lending agencies triggered the crisis. It’s a universe in which regulators coerced bankers into making loans to unqualified borrowers,” he writes.

Though there are objections in the Senate, along the lines summarized by Krugman, the U.S. House of Representatives has passed legislation which would reform regulation of financial institutions to head off another crisis in the financial markets, reports the Voice of America, the radio network.

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