Paul Krugman writes today that “the prime villains behind the mess we’re in were Reagan and his circle of advisers.” His argument hangs on an obscure piece of legislation called the Garn-St. Germain Depository Institutions Act. In Krugman’s imagination, this bill is the key to understanding “the mess we’re in.”
As he usually does when he is shading the truth, Krugman argues via assertion and the repetition of assertion (“the bill turned the modest-sized troubles of savings-and-loan institutions into an utter catastrophe” . . . “The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe,” etc.). He throws out lines that beg for substantiation and follows them with non-sequiturs. Garn-St. Germain led directly to “the worst economic crisis since the Great Depression,” we’re told. How? Six paragraphs later, Krugman finally provides an answer:
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.
That’s it — that’s the substance of Krugman’s argument. The rest is noise. So here’s Krugman’s formula. Start with a bold assertion (Reagan is to blame for the finanical crisis) and use big chunks of liberal boilerplate (“Indeed, Reagan ushered in an era in which a small minority grew vastly rich, while working families saw only meager gains”) to distract readers from the fact that you have “essentially” nothing “significant” to back up your assertion. The long decline of lending standards started before Reagan (the CRA was a “Carter-era legislative change”), and both parties contributed mightily to it in the name of promoting home ownership. To wit:
In 1995, President Bill Clinton’s HUD agreed to let Fannie and Freddie get affordable-housing credit for buying subprime securities that included loans to low-income borrowers. The idea was that subprime lending benefited many borrowers who did not qualify for conventional loans. HUD expected that Freddie and Fannie would impose their high lending standards on subprime lenders.
Needless to say, they didn’t. For further reading, here are two correctives to Krugman’s propagandistic distortion of economic history, one from Peter Wallison (a legitimate expert on banking regulation) and one from John Steele Gordon (a legitimate economic historian).