My old bud Larry P sent me an email with this article by Paul Krugman.
I read it with low expectations. Over the years Krugman has proven to me that he is not a disinterested observer, and Left Wing economists turned columnists have a habit of seeing the result, but never the cause. He did not disappoint.
Contrary to popular belief, the stock market crash of 1929 wasn’t the defining moment of the Great Depression. What turned an ordinary recession into a civilization-threatening slump was the wave of bank runs that swept across America in 1930 and 1931.
Ordinary recessions do not have stock market crashes like Black Friday. And the cause was the purchase of stock on margin, as low as 10%. Once the fall started buyers couldn’t cover the margin without selling which further dropped the price which increased the margin call which increased the selling…. I’m sure you get the point.
The bank runs were the result of panic and rumors that the banks, like the stock market, were over leveraged. That many were didn’t help the situation.
Krugman also suffers from selective memory, failing to remember the Carter years and the Savings and Loan crisis, which Congress did nothing to fix, all its new laws came too late. The crisis, simply put, was caused by the S & L’s having too many low interest rate loans outstanding. When the rate of return became too low to pay the interest rates demanded by the Carter years inflation, people moved their money elsewhere and quit saving. The S & L industry collapsed. With little money to loan interest rates went out of sight, the housing industry collapsed and we had both inflation and recession.
I well remember taking a transfer based on “take it or be laid off,” having a house for sale that I left about $40,000 in and trying to purchase another when interest rates were in the 16-18% range for a 30 year fixed rate loan.
The solution then, and my salvation, was a negative Adjustable Rate Mortgage . It allowed me, and millions of others, to buy a house. With the Fed squeezing inflation out of the economy and the Stock Market recovering due to Reagan’s tax cuts I was able to re-finance and move forward.
Now, what’s happened? Krugman opines:
For example, in the old system, savers had federally insured deposits in tightly regulated savings banks, and banks used that money to make home loans. Over time, however, this was partly replaced by a system in which savers put their money in funds that bought asset-backed commercial paper from special investment vehicles that bought collateralized debt obligations created from securitized mortgages — with nary a regulator in sight.
As the years went by, the shadow banking system took over more and more of the banking business, because the unregulated players in this system seemed to offer better deals than conventional banks. Meanwhile, those who worried about the fact that this brave new world of finance lacked a safety net were dismissed as hopelessly old-fashioned.
Again Krugman confuses cause and effect.
The system described exists because it became socially acceptable. In fact, many on the Left ranted over “red lining” and other bank practices used to keep the bank from making bad loans. People who had demonstrated they couldn’t manage money and who couldn’t afford to pay back a conventional loan were serviced by the so-called sub-prime market. If the government turned a blind eye to the situation, and it did, the reasons were that lots of money was being made and it was the politically correct thing to do.
And while it was the Demo Left calling the tunes, the Repubs get no kudos for trying to prevent it.
The acceptance of people into the system who should have been left out has yielded the result.
That the players on the finance side took every opportunity to become rich I have no doubt. I also have no doubt that I would be happy to see some of them put in jail. But after observing the do-nothing Demos and their “oversight,” I get nervous whenever they start to micro manage.
The Feds have stated they “have our back.” Under the Bush administration they have done more to try and fix the situation than any time in history.
And what has the Demos done? Call for more tax cuts as Reagan did? As Bush did?
No. The Demos call for tax increases. That is a sure way to make the problem worse.
But Krugman failed to mention that. But then I believe he is a Demo.
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