Paul Krugman often will wind a very big lie around a kernel of truth, and in his column today, he does not disappoint. Now, here is someone who openly extols the “virtues” of inflation and complains that the real problem today is that the government is not inflating enough.
Today, he turns his guns back on his favorite bug-a-boo, Ronald Reagan, promoting the Krugman myth that all was well in the banking system until Reagan and his “magic of the marketplace” ideologues turned finance into a free-for-all. And, like always, Krugman denies the real history of financial deregulation and creates his own morality tale.
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.
It all began, Krugman claims, with the 1982 passage of the Garn-St. Germaine Act. Well, not exactly. Much of the major deregulation of the financial system began before then, and it came because inflation was driving people out of the regulated savings accounts and into money market accounts. (I am sure Krugman believes anything outside of the government financial cartel should have been outlawed, but that is another post.)
Furthermore, most of the players in financial deregulation were not conservative ideologues, no matter how many times Krugman tries to convince us that they were. Ted Kennedy, not exactly a well-known conservative free-marketeer, was the main force behind airline, trucking, and railroad deregulation, and a lot of the heavy lifting came in 1980, a year before Reagan took office, and at a time when Democrats controlled all of the government.
Krugman gives us another howler here:
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.
Now, this is coming from someone who claims that there really is a “paradox of thrift” and that government should inflate to force people to stop saving and start spending. Krugman is someone with no sense of shame whatsoever, but I must admit that he always gets away with his howlers because the political classes, the “elite” academics, and the mainstream media have anointed him with the title of “seer.”