Reagan Didn't Do It

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
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 Clinton

Ronald 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

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 important, 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 non-profit 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.

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