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Robert Scheer
Robert Scheer
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In Blaming Reagan, Krugman Ignores the Real Culprits


How could Paul Krugman, winner of the Nobel Prize in economics and author of generally excellent columns in The New York Times, get it so wrong? His column last Sunday — "Reagan Did It" — which stated that "the prime villains behind the mess we're in were (Ronald) Reagan and his circle of advisers," is perverse in shifting blame from the obvious villains closer at hand.

It is disingenuous to ignore the fact that the derivatives scams at the heart of the economic meltdown didn't exist in President Reagan's time. The huge expansion in collateralized mortgage and other debt, the bubble that burst, was the direct result of enabling deregulatory legislation pushed through during the Bill Clinton years.

Reagan's signing off on legislation easing mortgage requirements back in 1982 pales in comparison to the damage wrought 15 years later by a cabal of powerful Democrats and Republicans who enabled the wave of newfangled financial gimmicks that resulted in the economic collapse.

Reagan didn't do it, but Clinton-era treasury secretaries Robert Rubin and Lawrence Summers, now a top economic adviser in the Obama White House, did. They, along with then-Fed Chairman Alan Greenspan and Republican congressional leaders James Leach and Phil Gramm, blocked any effective regulation of the over-the-counter derivatives that turned into the toxic assets now being paid for with tax dollars.

Reagan signed legislation making it easier for people to obtain mortgages with lower down payments, but as long as the banks that made those loans expected to have to carry them for 30 years, they did the due diligence needed to qualify creditworthy applicants. The problem occurred only when that mortgage debt could be aggregated and sold as securities to others in an unregulated market.

The growth in that unregulated OTC market alarmed Brooksley Born, the Clinton-appointed head of the Commodity Futures Trading Commission, and she dared propose that her agency regulate that market. The destruction of the government career of the heroic and prescient Born was accomplished when the wrath of the old boys club descended upon her. All five of the above-mentioned men sprang into action, condemning Born's proposals as threatening the "legal certainty" of the OTC market and the world's financial stability.

They won the day with the passage of the Commodity Futures Modernization Act, which put the OTC derivatives beyond the reach of any government agency or existing law.

It was a license to steal, and that is just what occurred. Between 1998 and 2008, the notational value of the OTC derivatives market grew from $72 trillion to a whopping $684 trillion. That is the iceberg that our ship of state has encountered, and it began to form on Bill Clinton's watch, not Reagan's.

How can Krugman ignore the wreckage wrought during the Clinton years by the gang of five? Rubin, who convinced President Clinton to end the New Deal restrictions on the merger of financial entities, went on to help run the too-big-to-fail Citigroup into the ground.

Gramm became a top officer at the nefarious UBS bank. Greenspan's epitaph should be his statement to Congress in July 1998 that "regulation of derivatives transactions that are privately negotiated by professionals is unnecessary." That same week, Summers assured banking lobbyists that the Clinton administration was committed to preventing government regulation of swaps and other derivatives trading.

Then-Rep. Leach, as chairman of the powerful House Banking Committee, codified that concern in legislation to prevent the Commodity Futures Trading Commission or anyone else from regulating the OTC derivatives, and American Banker magazine reported that the legislation "sponsored by Chairman Jim Leach is most popular with the financial services industry because it would provide so-called legal certainty for swaps transactions."

Legal certainty for swaps — meaning the insurance policies of the sort that AIG sold for collateralized debt obligations without looking too carefully into what was being insured and, more importantly, without putting aside reserves to back up the policies in the case of defaults — is what caused the once respectable company to eventually be taken over by the U.S. government at a cost of $185 billion to taxpayers.

Leach, an author of the Gramm-Leach-Bliley Act, which allowed banks like Citigroup to become too big to fail, is now a member of the board of directors of ProPublica, which bills itself as "a nonprofit newsroom producing journalism in the public interest." Leach serves as the chair of a prize jury that ProPublica has created to honor "outstanding investigative work by governmental groups," and perhaps he will grant one retrospectively to Brooksley Born and the federal commission she ran so brilliantly before Leach and his buddies destroyed her.

Robert Scheer's new book is "The Pornography of Power: How Defense Hawks Hijacked 9/11 and Weakened America." E-mail Robert Scheer at To find out more about Robert Scheer, and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate Webpage at



4 Comments | Post Comment
So now we should turn to all the other areas where unbridled greed and vision failing to make it past the tip of the nose have plundered the regulatory infrastructure while assuring us that everything is A.O.K. How will bad air, bad water, global warming, the depleted world fishery, toxics, unlimited numbers of human beings being added to the planet without any concern for overpopulation, and the environment in general come crashing down on us? Everything will be just fine, until it's not. Sure hope God will be able to cough up an emergency planet to lend us when the ecological market collapses.
Comment: #1
Posted by: Masako
Sat Jun 6, 2009 10:34 AM
In the wake of Wall Street's greed blowing up into all of our faces, has there been even one change forced on them by "our" government for the trillions of $$ we've handed over? No. All that's been done is to make those too big to fail even bigger, and with it their control over our country. A very simple change would be to require anyone who issues a mortgage to hold it for a significant period of time, and the riskier the loan, the longer it must be held. Beyond that, the total lack of financial transparency this crisis has revealed should lead our government to regulate the hell out of these guys and should keep the average Joe from every investing in Wall street until real change is made. Finally, the feckless response of Democratic controlled D.C. proves that Ralph Nader was right, and that a corporate Democrat is scarcely different than your typical Republican. Pleae, Americans, get politcally active, or more of the same will be on the way.
Comment: #2
Posted by: michael nola
Sat Jun 6, 2009 6:53 PM
ROBERT - Generally concur, with a modest 'tweak' of the Krugman piece a week ago. Have posted my comments - subject to moderator review and availability [as of 3:15 a.m. MDT - Sunday Jun 7, 09] on blog in Santa Barbara. s.v.p. Otherwise - WELL DONE = 'BRAVO ZULUS' ON YOUR PIECE.
Comment: #3
Sun Jun 7, 2009 2:18 AM
Come to think of it, you're both right, Mr. Scheer. The seeds were definitely sown in the Reagan era. It not only brought the new Republican paradigm to domination of national politics, but also changed the game so much that Democrats like Clinton had to sound Republican in order to get elected. Not so surprising then that they started to think Republican as well. The old "don't worry be happy" theme still plays on and on, and it doesn't really appear that the lesson has yet been learned.
Comment: #4
Posted by: Masako
Wed Jun 10, 2009 8:00 AM
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