It’s Friday, and Paul Krugman has returned to form, giving us another howler. Today, he tells us a tale of a wonderful regulated banking and finance system that never quite existed:
The market mystique didn’t always rule financial policy. America emerged from the Great Depression with a tightly regulated banking system, which made finance a staid, even boring business. Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.
And the financial system wasn’t just boring. It was also, by today’s standards, small. Even during the “go-go years,” the bull market of the 1960s, finance and insurance together accounted for less than 4 percent of G.D.P. The relative unimportance of finance was reflected in the list of stocks making up the Dow Jones Industrial Average, which until 1982 contained not a single financial company.
It all sounds primitive by today’s standards. Yet that boring, primitive financial system serviced an economy that doubled living standards over the course of a generation.
However, that evil Ronald Reagan stepped in and ruined the wonderful system:
After 1980, of course, a very different financial system emerged. In the deregulation-minded Reagan era, old-fashioned banking was increasingly replaced by wheeling and dealing on a grand scale. The new system was much bigger than the old regime: On the eve of the current crisis, finance and insurance accounted for 8 percent of G.D.P., more than twice their share in the 1960s. By early last year, the Dow contained five financial companies — giants like A.I.G., Citigroup and Bank of America.
And finance became anything but boring. It attracted many of our sharpest minds and made a select few immensely rich.
However, history tells us a different story. First, the 1960s was a decade in which U.S. capitalization did not keep up with the rest of the world. Second, the government vastly increased spending and by 1971, the dollar was kaput (something left out in Krugman’s revised economic history).
By 1980, not only was inflation leading to real-live decapitalization from banks as people were fleeing those wonderful Regulation Q rates, but it also was painfully clear that the system that Krugman so praises was inadequate to fund the new technologies and the new direction of the economy. Whole fields of computers and telecommunications were financed outside that system because the system with its rules and regulations was not prepared to go in that direction.
Furthermore, much of the banking deregulation came during the administration of Jimmy Carter, not Reagan. (Carter was president in 1980, something that apparently has slipped the mind of Krugman the Distorian.)
So, once again, we have blatant dishonesty posing as economic commentary. F.A. Hayek was a Nobel winner just as Krugman is, but the difference between them, to quote the Great Irwin Schiff (Peter’s father) is like the difference between cheese and chalk.
Home
RSS Feed
E-Mail
Del.icio.us
Digg
Technorati
Magnolia
Newsvine
Reddit
12 Responses
“Banks attracted depositors by providing convenient branch locations and maybe a free toaster or two; they used the money thus attracted to make loans, and that was that.”
Krugman looks as if he’s at least as old as I am; doesn’t he remember the inflation that made the puny interest paid by a savings account a financial loser that couldn’t be made up by the “gift” of a cheap toaster? The government could have “deregulated” all it wanted; if the old way were still viable most people would have stuck with it.
Silly William, the Carter era is unperson in mainstream economics…
“doesn’t he remember the inflation that made the puny interest paid by a savings account a financial loser”
sure he remembers.. that’s what he wants… to punish savers (damned capital accumulators!)
It could become a standard homework task for school children: “Until tomorrow, refute the writings of Paul Krugman, and mind your spelling, that’s the hard part!”
Btw, there exists no such thing as a “Nobel Prize in Economics”. The chemist Alfred Nobel in 1895 testamented his fortune, made from inventing dynamite, to the Swedish Academy for giving prizes in Physics, Chemistry, Medicine, Literature and Peace. Over 70 years later, in 1968, the Swedish CENTRAL BANK (Riksbanken) donated money (which it had counterfeited of course) for a completey different and separate prize: “The Central Bank’s Prize of Economics to the Memory of Alfred Nobel”.
For some reason, the Swedish king (who depens on cash payments from the government for his living) has accepted to give this new prize in the same cermony as he gives the Nobel Prizes.
When Hayek got this “The Central Bank’s Prize of Economics to the Memory of Alfred Nobel”, he shared it with Gunnar Myrdal, and you can google what this compulsory-sterilization-advocate and social-democratic-minister stood for! He’s “honored” by having reached parts of Keyne’s conclusions before Keynes himself…
The massive inflation of the 70′s was a result of easy money from the 60′s. The Reagan/Volcker tandem helped keep the fiat money system intact, until now.
Nixon, end of Bretton Woods- Reserve requirements of %15 to %10…anyone?
First lets get the facts straight. Government spending did not acclerate during the ’60′s. Govt spending relative to GDP accelerated during the ’80′s. Next, it is pretty clear that we did not have inflation in this country until we started listening to Milton Friedman tell us it was coming and to cure it with higher interest rates. Funny, but increasing wage costs increases inflation; increasing energy costs increases inflation; but increasing interest costs DECREASES inflation?? Some of you Austrians need to get a job other than teaching school or “serving” as govt. bureaucrats. Keynes is the only economist of any repute who actually took on the role as a capitalist. Not one Austrian that I know of ever did anything but suck the dole.
bye
BB
@ Bill:
Laughable post.
“Funny, but increasing wage costs increases inflation; increasing energy costs increases inflation; but increasing interest costs DECREASES inflation??”
Um, none of those things increase inflation there Bill. Try consulting a dictionary. Inflation is an increase in the money supply relative to the amount of goods and services available. Second, I know of no “reputable” economist of any political stripe, that doesn’t agree that higher FED target interest rates put a damper on inflation. None. Third, uncle milty isn’t exactly popular around here and you won’t find many here defending his views.
I think the only thing you got right is that Govt spending did indeed accelerate during the 80′s. But that hardly shows that it didn’t also in the 60′s now does it?
I’d stick to posting your comments where people don’t know any better to call you on your bull.
Cheers!
As mentioned in a previous post, there was no expansion of government spending during the 1960′s. In fact, one could argue that since government spending was relatively constant, with military spending expanding, that Keynes style social expenditures were actually falling in the 1960′s. I can only assume from your highly technical statement that “by 1971, the dollar was kaput” you are referring to the Triffin Paradox and the abandonment of Bretton-Woods, an event related to US expansionary monetary policy (not spending).
So in essence, the Regan era was upside deregulation with the continued shielding of banks from market checks and balances?
I can see the argument that the banking system was not prepared / allowed to take risks (60′s and 70′s) and that lack of available risk resulted in the retarding economic growth in new areas and as a whole. So we “deregulated”, which in this context means allowing them to take “risks” that were previously illegal.
So correct me if I’m wrong, the Austrian view is that this type of “deregulation” obviously isn’t getting us anywhere (because it can’t) and we need to stop shielding banks from market forces and to uncouple the banking system from the “single source” paper money manufacturer and return to competing monies.
RE: Bill
I think Bill might be confused because of how the inflation number is calculated; since if wage and energy costs increase, the reported inflation number increases. While this is true, the inflation number is only an arbitrarily weighted measurement and it does not explain where those wage rate and energy cost increases come from; i.e. companies can’t just keep paying more to employees unless it is available. In this sense, inflation as an increase of the money supply would lead to higher wage rates and energy costs. I think he has this mixed up.
jb1122,
Actually, the Monetary Control Act of 1980 was the master stroke in Financial deregulation; and this was signed by President Carter……