Loan Modification

Blame it on Reagan

By Morgan

Economist Paul Krugman is any way in a New York Times Op-Ed. Krugman blames Reagan and his advisors for planting the seeds that would has become the worst economic crisis since the Great Depression.

Krugman points to the 1982 signing of the Garn-St. Germain Depository Institutions Act that deregulated mortgage financing, encouraged absurd levels of personal debt and ushered in a period of government deficit spending that while curtailed by Clinton was exacerbated by Bush to a point where we were caught with our pants down for the payoff of 25 years of deregulation and debt-binging.

Definitely worth the read:

The immediate effect of Garn-St. Germain, as I said, was to turn the thrifts from a problem into a catastrophe. The S.& L. crisis has been written out of the Reagan hagiography, but the fact is that deregulation in effect gave the industry ? whose deposits were federally insured ? a license to gamble with taxpayers? money, at best, or simply to loot it, at worst. By the time the government closed the books on the affair, taxpayers had lost $130 billion, back when that was a lot of money.

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.

Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.

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. Household debt was only 60 percent of income when Reagan took office, about the same as it was during the Kennedy administration. By 2007 it was up to 119 percent.

All this, we were assured, was a good thing: sure, Americans were piling up debt, and they weren?t putting aside any of their income, but their finances looked fine once you took into account the rising values of their houses and their stock portfolios. Oops.

Full post as published by Blown Mortgage on June 01, 2009 (boomark / email).