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Paul Krugman Blames Free-Market Ideology for Economic Crises Print E-mail
Written by TheDailyBell
Thursday, 17 December 2009 06:50
Let's recall how we got into our current mess. America emerged from the Great Depression with a tightly regulated banking system. The regulations worked: the nation was spared major financial crises for almost four decades after World War II. But as the memory of the Depression faded, bankers began to chafe at the restrictions they faced. And politicians, increasingly under the influence of free-market ideology, showed a growing willingness to give bankers what they wanted. The first big wave of deregulation took place under Ronald Reagan - and quickly led to disaster, in the form of the savings-and-loan crisis of the 1980s.
Taxpayers ended up paying more than 2 percent of G.D.P., the equivalent of around $300 billion today, to clean up the mess. 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. In a memorable 2003 incident, top bank regulators staged a photo-op in which they used garden shears and a chainsaw to cut up stacks of paper representing regulations. And the bankers - liberated both by the 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. Ironically, the effort to contain the crisis required government intervention on a much larger scale than would have been needed to prevent the crisis in the first place: government rescues of troubled institutions, large-scale lending by the Federal Reserve to the private sector, and so on. Given this history, you might have expected the emergence of a national consensus in favor of restoring more-effective financial regulation, so as to avoid a repeat performance. But you would have been wrong. - New York Times
Dominant Social Theme: Krugman makes the case for necessary regulation.
Free-Market Analysis: We checked on the author of this article just to make sure - because each time we read Krugman we wonder all over again about the guy's background. But yes, "in 2008, Krugman won the Nobel Memorial Prize in Economics for his contributions to New Trade Theory and New Economic Geography" (Wikipedia).
Why do we keep checking? Because Krugman keeps writing things like this column, excerpted above. Krugman keeps writing things that we can't believe he's putting down on paper. In this article, he states that it was deregulation that destabilized American economics and that deregulation started under Ronald Reagan. Say, what!
Anyway .... back to the calculator. We busily check and recheck our math to make sure (math mavens we're not). In fact, it always comes out the same: 1985. See, the big war ended in 1945, but Krugman states that "the nation was spared major financial crises for almost four decades after World War II." That means that America didn't hit a major economic problem until around 1985. And we assume Krugman is talking about the stock market crash of 1987, when he refers to the fruits of deregulation.
Well, amongst our editors are those who have written books on the stock market crash. While it takes time to sort through all the potential causes, the one that continually stands out is the deal made by the Reagan administration to devalue the dollar so as to make it easy for Japanese imports to penetrate the United States. As we remember that not two weeks after the hush-hush monetary arrangement was agreed upon, the market crashed. As well it should have given the debasement of the US currency. What that has to do with "deregulation" we're not quite sure of. But Krugman has won a Nobel prize, so maybe he knows better.
Anyway, that's not what caught our attention. What we REALLY can't believe about this article is that Krugman entirely glosses over the 1970s. His argument is that America's economic problems didn't arise until the 1980s. Does he not remember the wave of bankruptcies that swept America in the 1970s? Does he not recall 20 percent interest rates, the fear that the entire banking system would collapse, the mortgage defaults, the unemployment, the generalized chaos that marked that decade.
Conclusion: In the 1970s, gold got up to US$800 an ounce and adjusted for inflation it still hasn't reached that level again. But we believe the 2000s are a carbon copy of the 1970s except far worse and we fully expect, along with many others, that gold and silver will continue to move up in price until the excesses are wrung out of the system. In the meantime we read articles like this with incredulity. A man with a Nobel prize has just written that America's economic problems didn't start until the 1980s. What planet is he living on? How on earth did they award him this great honor? A grade school child with knowledge of economic history could do better than this. What, we wonder, does the Nobel really stand for.
© Copyright 2008 - 2009 Appenzeller Business Press AG. All Rights Reserved. The Daily Bell is an informative compendium of independent economic views and analysis, which is published by Appenzeller Business Press AG. The information contained in the Daily Bell is for informational purposes only, is impersonal and not tailored to the investment needs of any particular person and should not be construed as financial or investment advice. Appenzeller Business Press AG does not accept any liability or responsibility for, nor does it verify the accurateness of the information being provided in the Daily Bell. Readers of the Daily Bell or any affiliated or linked sources or sites must accept the responsibility for performing their own due diligence before acting on any of the information provided within the report regardless of the source.
Last Updated on Thursday, 17 December 2009 06:54
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