Andrew Leonard is unhappy with my colleague David Brooks for suggesting that rising debt in America reflects moral decay. Surprisingly, however, Leonard doesn't make what I thought was the most compelling critique.
David points out, correctly, that something changed around 1980 -- that consumers started spending a larger share of national income and that debt began increasing. Although he doesn't point this out, this was also when the federal government first began running substantial deficits even in good years.
David would have you believe that what happened then was a decline in Calvinist virtue. But, um, didn't something else happen around 1980? Can't quite remember .. someone whose name begins with the letter "R"?
Yes, Reagan did it.
The turn to budget deficits was a direct result of the new, Irving-Kristol inspired political strategy of pushing tax cuts without worrying about the "accounting deficiencies of government."
Meanwhile, the surge in household debt can largely be attributed to financial deregulation.
So what happened? Did we lose our economic morality? No, we were the victims of politics.
For starters, of course, deregulation kicked off under Jimmy Carter, with the Depository Institutions and Monetary Control Act of 1980. More importantly, deregulation wasn't simply the brain child of some Chicago-crazed lunatics at Treasury. It was the brainchild of Fernand St. Germain, the Democratic representative from Rhode Island, which is not surprising, because of course, Democrats had control of the House of Representatives. And he wasn't being driven just by ideology, or even bank lobbying; he was being driven by the fact that the previous regulation regime had driven the Savings and Loans into a ditch. They were stuck with a bunch of fixed rate mortgages paying low interest rates at a time when Paul Volcker was driving short term interest rates up to 20%. Mortgage deregulation was supposed to be a solution to the problem of banks that borrowed short and lent long bleeding to death.
And why were they borrowing short and lending long so disastrously? Because Congress had prohibited banks from making anything other than long-term fixed rate loans, and until the deregulation of 1982, sellers could pass their low-interest loans on with the house when they sold it.
There are also other demographic changes that explain the change in American indebtedness, particularly the retirement, and subsequent death, of the generation that lived through the Great Depression. Their children were the first to have grown up with long term mortgages and credit cards--which were invented in the 1950s, not under Reagan. There's a lot of evidence that American attitudes toward debt have changed, but very little that this change was caused by changes in the government--rather, the explosion of deficits seems to have followed the mood of the citizenry.
More broadly, it doesn't make a whole lot of sense to deride those who have linked the crisis to the Community Reinvestment Act because 1977 was such a very long time ago . . . and then claim that it can all be linked back to one law passed a few years later.
Never mind the fact that Reagan did not invent deficit spending, the very notion that we run personal deficits because the government runs deficits is laughable.
Maybe not every liberal, but only a liberal could make such an absurd statement.
Who, exactly, is making this statement? Certainly not Krugman. He makes the perfectly reasonable (if not inarguable) suggestion that rising personal debt levels are "attributable" to financial deregulation (I think this is obviously the case, though I don't think it's the only reason). He then says non-counter cyclical federal deficits became de rigeur with the advent of Reaganomics. Again, a perfectly reasonable claim.
If Krugman said or believed half the things you people claim, he couldn't get a job teaching high school economics or writing for WorldNetDaily, much less Princeton and the New York Times.
If Krugman believed half the things he writes, he couldn't get a job teaching high school economics.
This makes no sense whatsoever. I'm sure there's supposed to be some sort of dry, snarky humor there, but the credentials and intellectual ability required to teach at an Ivy League institution and be awarded a Nobel prize quite obviously far exceed those required to teach high school economics.
If you don't like or agree with Krugman fair enough, but lazy, graceless insults are just lame.
Well, movertyperguy, given your obvious intellectual brilliance, why don't you win a Nobel in Economics and show the world your brilliance? Or, as a more realistic plan, why don't you graduate high school first?
Reading comprehension alert. It is perfectly obvious that MTG accused Krugman in being dishonest rather than stupid. And he's certainly not the first in making this accusation.
Do they teach econ in high school? Honestly, not being snarky here. I went to a private school so maybe we got screwed on that one. Y'know, depending if you think taking econ is a good thing or not.
Coreilly, my(public) highschool had one econ class. It was simplistic, but it existed.
Isn't this the same Krugman who thinks Obama's much larger deficits are too small? Didn't Reagan also take over a bad economy?
Speaking as someone who grew up in that generation--and whose first Presidential vote was proudly cast for Reagan in 1980--there is also the issue of when credit cards--and thus broad-based consumer credit--really penetrated the economy.
I remember when I was a child that my mother had a walletful of what were called "charge plates": plastic cards about the size of credit cards (often somewhat narrower) embossed with her name, address and account number *at some specific store*. So for example she had one for Macy's, one for Saks, one for Lord & Taylor, one for Gimbels...you get the point.
And these weren't credit cards, either: they were revolving charge cards on the AMEX model, where you had to pay off the full balance at the end of each month.
It really wasn't until sometime in the 1970s that MasterCharge and BankAmericard (as MasterCard and VISA were then known) became widely accepted in stores: for AMEX, it was even longer.
I also remember that it was extremely difficult for me as a new entrant to the workforce to get a credit card, because...I had no credit history. Indeed, one fo the local banks had a program whereby you could get a credit card with a very low limit--something like $250 IIRC--that was secured by an account at their bank.
You couldn't run the balance down below what you had as a limit, either: effectively, your account balance provided a 100 percent backstop to your credit card. Presently they let you know that you'd established a good enough credit history that you could close out the account securing the credit card, but it took more than a year.
I also remember that in 1983, I was solicited by a real estate developer to buy an apartment in a high-rise for five percent down, which seemed extraordinary to me. It worked out fine, but I can't help but wonder if that wasn't really the transition point--somewhere between 1981 and 1983.
The Japanese dollar surplus.
Your American credit card was made possible by the the influx of Japanese holding excess US dollars to buy Real Estate and other assets in the United States.
Credit ceased to be a personal promise between borrower and lender with a chain of, what in effect were currency trading posts vouching for the trust of the name on your card, and instead became product by which there was so much credit created that it had to find new people to borrow it. Hence, your credit card with relaxed standards, higher limits, and wider acceptance.
There were never enough US dollars to support the purchase of Japanese exports to the United States for an extended period of time. You likely purchased a whole bunch of Japanese goods in the 80s with your card. A Walkman perhaps. Maybe a Nintendo.
"You likely purchased a whole bunch of Japanese goods in the 80s with your card. A Walkman perhaps. Maybe a Nintendo."
Others, perhaps, but not I. As a child of the 1960s, I grew up in an era when "Made in Japan" meant the opposite of what it has come to mean now: when I was growing up, it was synonymous with cheap junk.
But in any event, the Japanese were heavy exporters to the US market before, during, and after the transition to readily-available consumer credit: effectively, they were the equivalent in the 1950s and 1960s of what China is today.
In the 11 of 12 years prior to Reagan, the Fed government ran deficits. Reagan hardly invented them.
for all the talk of deficits caused by the Reagan tax cuts, the Fed government didn't exactly have a revenue problem. Even with his tax cuts, Fed revenue increased year on year during every single year of the Reagan presidency. In 1979, the Fed government received $463 B. In 1988, Fed rev was $909B -- a cagr of nearly 8% over that period.
I'd have to look this up to give specific numbers, but I'm reasonably sure that "in the 12 years prior to Reagan" federal deficits were much smaller as a percentage of GDP. Small enough, IIRC, for the public debt as a percentage of GDP to continue to decline throughout the 1970s. Regan's deficits were whoppers (though happily for him, the associated Keynesian stimulus helped ensure a sharpish recovery in '83-'84 that helped insure his reelection).
To put it another way, prior to Regan, federal borrowing (to oversimplify a bit) was supposed to be avoided in non-recession years. But Reagan's people made it quite clear they welcomed deficits as a means of shrinking government. They used deficits, in other words, for ideological ends -- not as a legitimate tool to smooth out drops in demand during recessions.
You are completely right-which is why Karmas's post is such nonsense. Krugman is right on the money-David Stockman said exactly that in this book "The Triumph of Politics" , in which he stated that the laughable Laffer Curve as a fig leaf the "starve the beast" strategy.
Hey, Karma, did you know that Bill Clinton balanced the budget and handed GWB a balanced budget-at which point the Republicans went back to starving the beast again, giving us big budgets in the middle of a economic recovery? Read Krugman and learn something.
Reagan increased the deficit from 80 billion to 200 billion - and no Republican president since has ever reduced it or even tried.
Balanced without raiding the Social Security Trust Fund?
The Clinton Administration couldn't keep the charade going to bail out the dot com bubble without it.
Every administration cheats. Hopefully the people use the same calculators to call them on it when they do.
Facts is facts, and those are the facts. Say what you want about Reagan as COMINCH, but he definitely had a taste for deficit spending that went far beyond what Nixon/Ford/Carter handed him.
It cost Bush I an election, when he realized that he had to renege on his promise to not raise taxes. The deficit was simply larger than common sense allowed for. You don't need a Ph.D. to realize that you're spending too much.
Clinton did a decent job in containing spending, but let's not forget that he rode a bubble.
Bush II is a much better example of fiscal folly. Like Clinton he caught a bubble in 5 years of his 8. Unlike Clinton, he didn't contain spending.
Of course NONE of these people can hold a candle to the current Spender in Chief. This is like nothing we've every seen before.
The Reagan deficits were larger as a % of GDP than predecessors-- For example, Carter averaged a deficit around 3% of GDP. Regan's first term averaged a deficit around 3.8%. It was his second term that saw a couple years of deficits around 5.5%. Interestingly, by the last two years of his tenure, deficits were back around 3%.
Mock Laffer all you want -- but even with substantial tax rate cuts, tax revenue from personal income taxes doubled during the Reagan era (and more importantly, increased significantly in real dollar terms).
Again, revenue wasn't the issue -- it was spending. And it wasnt all defense spending either. What partisans happily gloss over was that Reagan was dealing with a Dem majorities of +80 on average in the House, and for his second term, a Dem majority in the Senate.
The Dems were just as complicit in the Reagan era deficits as Reagan was.
Finally -- Clinton was the beneficiary of the dot-com bubble and a Republican majority in the House that put the clamps on spending. The surplus "he created" was driven entirely by capital gains taxes from a frothy stock market. When the bubble popped, those revenues disappeared.
Small enough, IIRC, for the public debt as a percentage of GDP to continue to decline throughout the 1970s.
You can thank inflation for the debt reduction not sound government spending.
I thank both: I would have thought it obvious that it is possible to increase the public debt as a percentage of GDP even when the economy is experiencing inflation. Google "George W. Bush, presidency of."
Jasper, since when was the GWB presidency a period of above-average inflation?
Come now. If Reagan ran up a deficit (a bit over six percent of GDP at its 1986 peak), it was to correct the decade of neglect of our defense establishment. Reagan made an arms buildup that put the USSR in the poorhouse and ended the Cold War. If you look at the figures, Reagan's deficits peaked in 1986 and were on a steep downward slope (i.e. back toward balance) in the last three years of his administration.
Clinton managed to balance the budget on the back of the defense department, by cutting defense spending and then being prevented by a Republican congress from spending the so-called "peace dividend".
As to the notion that fiscal prudence reigned prior to Reagan, again, look at the data: the last year the government ran a surplus was 1969, and before that you have to go back to the late 1940s, and then to 1930.
In any event, I find it highly amusing that Mr. Krugman and his defenders are in such high dudgeon over Reagan and GWB deficits, considering that this year alone, our beloved President proposes deficits that dwarf those of any of his predecessors.
You make an important point that Clinton fanboys never admit.
There was no surplus. It never happened. It simply moved one dollar from the SS Trust Fund into the general account by way of Bob Rubin accounting standards.
Hopefully we all remember Bob's awesome call to bail out Enron and it's 54 billion dollars in paper revenue.
...it was to correct the decade of neglect of our defense establishment.
How much of the neglect was corrected by SDI?
Reagan made an arms buildup that put the USSR in the poorhouse and ended the Cold War.
The Soviet economy was already in the crapper and its military budget increased not at all in response to US military spending. Not at all. One of the things that put the USSR in the poorhouse was the reduction of their oil income when the Saudis opened their spigots in response to the invasion of Afghanistan.
The USSR was completely capable of putting itself in the poorhouse without the Gipper's help.
Incoherent. If total spending on all items is exceeded by total tax revenue from all sources, by definition there's a surplus. Are you claiming that payroll taxes aren't taxes?
If you want to claim that Reagan's spending priorities were justified, then have at it -- I'm not concerning myself with this issue at present. But there's obviously nothing in the constitution that prevents the government from, you know, actually paying in real time for programs rather than borrowing the money. And there's also nothing in the constituion requiring the government to slash taxes on the wealthy when it embarks on a spending spree.
Regan was a fiscally irresponsible president: deal with it.
I have looked at the data: from the end of World War II to the arrival of the Reagan administration, the public debt declined as a percentage of GDP nearly every year. I'm not concerned when the government runs deficits that are sufficiently small to have their impact eaten away by growth and inflation. What I'm worried about is deficits that are large enough to harm the country's long term position. But then again, I'm a liberal.
The so-called "Reagan tax cuts" were passed by Congress, not by Reagan. Who controlled Congress then? Starts with "D"...
Presidents get more credit, and blame, than they deserve for economic policy. True, Reagan did a pretty good job of bending a hostile Congress to his will, but he didn't write the legislation and he couldn't force them to pass it. I never liked the man's policies, but it's hardly his fault if Congress gave him the tax cuts he plumped for -- while resisting the offsetting spending cuts he sought. (He should have fought a lot harder for the latter, in my opinion, but still.)
The Democrats most certainly did not "control" Congress. They had a majority -- a modest majority -- in one house. Reagan's program passed because a number of blue dogs sided with the president. If you want to say "conservative Democrats mostly from southern states enabled the Republicans to start the country down its path of fiscal irresponsibility," then I'm in agreement.
Why bring up CRA at all for this article Megan? I think you're confused..... people don't defend CRA against those who would blame it for the mortgagee meltdown because "it happened a long time ago". People defend CRA because the loans had performed comparatively well.
WAMU. Countrywide. Wachovia. Indymac. None of those giant financial institutions disappeared because of CRA. It was their own mortgage programs with lending standards far more lax than CRA.
Idiot lenders keeping their aggressive loans on their books and the "lend to securitize" business model of hundreds of non-bank mortgage lenders (that no longer exist) feeding their loans to the investment banks to be bundled and the failure of the rating agencies and end investors to properly assess the risk of those securities --- those were the two primary culprits of the mortgage meltdown.
"It was their own mortgage programs with lending standards far more lax than CRA."
Please provide some proof of this ... because I say that claim is BS.
Virtually no financial institutions had loan programs that had standards far more lax than the CRA required.
The CRA forced banks to make bad loans ... otherwise the banks would be labeled racist institutions and be prohibited from merging. Fannie and Freddie set the terms for mortgages these two institutions would buy from the market, and lenders then set about making mortgages based on those terms. Those terms were:
* no money down required
* no income verification required
* no citizenship verification required
These terms were the only way to get rid of the red lines.
Banks were forced to lend on these terms and the government promised to buy all mortgages sold on these terms.
Surprise result: bank failures.
Idiots.
You might not care about facts, but your description of CRA lending standards doesn't even remotely resemble reality.
Here's a different way of looking at the issue. Mortgage standards were loosened in the private sector housing market. At the very same time, lending standards in all sorts of other debt markets were also loosening. Banks were lending money to private equity firms left and right, and many of those debts are going bad. They were underwriting huge volumes of commercial real estate loans. Credit card debt was exploding. Small business loans were rising rapidly. Government debt was rising. The banks themselves were very highly leveraged, as were other companies.
So in a very broad range of asset classes, lending standards declined and lenders were taking much more risk for the same level of returns.
If you are going to argue that the CRA was responsible (even partly), then one of the following two things must be true:
1. Either the CRA also caused all the other credit bubbles, or
2. The CRA caused the housing bubble and all the credit bubbles just happened at the same time by coincidence.
I think both are very strained accounts. It's much easier, isn't it, to just acknowledge that there was a huge credit bubble in the private sector, period?
The banks themselves were very highly leveraged, as were other companies.
I'm not going to argue that the '92 and onward changes to the CRA were responsible for the entire mortgage crisis. But in regards to the housing market, banks being more highly leveraged was enabled by changes to the CRA which reduced the funds lending institutions had to hold against particular loans. So you're basically making the case for the CRA here.
At the very same time, lending standards in all sorts of other debt markets were also loosening.
Then what was the point of legislation forcing it to happen, and punishing those institutions which don't comply by refusing their mergers and so forth?
1. Either the CRA also caused all the other credit bubbles
Interesting theory. And it seems plausible that it contributed, since instead of putting their savings in the bank, Americans were putting money "in their homes." This seemed to have created a lot of money sloshing around looking for somewhere to be invested, and I certainly recall that to be the case after the dot com bust.
It's much easier, isn't it, to just acknowledge that there was a huge credit bubble in the private sector, period?
I agree that low interest rates over a long period fed the bubble, kindof like a car going downhill with the brakes out. What causes it to crash? The fact that it's going downhill or that it has no brakes. But I've seen a lot of good arguments that the 92-and-after CRA-related changes contributed to the bubble, and not much aside from defensive handwaving in the other direction.
It's much easier, isn't it, to just acknowledge that attitudes towards debt and credit changed, and those changes were reflected both in the private sector and in public policy and activities? The government didn't cause all the lending standards to decline. But the government certainly was cheering it on, not saying "stop." It wasn't cheering it on from a laissez-faire attitude, either; it was actively encouraging loosening credit standards to keep housing affordable in the face of a price bubble. (Although that also fueled the bubble.)
The CRA was passed in 1977. But the dollar value of mortgages under the CRA massively expanded starting in the late '90s. The CRA provides a lot of wiggle room for the executive branch; the executive branch started taking it a lot more seriously.
Note obviously that GWB's Administration deserves a lot of the blame.
The government saw loosening credit standards and a price bubble in housing in the private market, and decided that the only thing it could do was make credit easier for people that still couldn't get bank loans so that they wouldn't be left behind in the bubble.
It's silly to say that the government caused it all. But it's also silly to say that it was all the private sector; the government was behaving no better or worse.
"The CRA was passed in 1977. But the dollar value of mortgages under the CRA massively expanded starting in the late '90s."
There was also a major shift in the 1990s in terms of how the CRA was administered. It was changed to a quota system. Before, a bank could defend itself by showing that it had maintained consistent lending standards and had lent to all qualified borrowers in the target areas. Under Clinton, the program was changed so that a certain proportion of loans had to be made regardless of whether the people qualified. Hence, if not enough borrowers met the bank's traditional lending standards, the bank was forced to lower those standards to meet the quota.
The other shift in the 1990s, of course, was that the CRA was more actively used as a tool by groups like ACORN. If a bank was planning a merger, ACORN could effectively hold it hostage until the bank did what the activists wanted.
"People defend CRA because the loans had performed comparatively well."
Do you have evidence for this? I know that one woman made a casual, unsubstantiated claim in a speech, but does anyone actually have these numbers?
Note that, to be relevant to this discussion, the data would have to be on loans made after the Clinton administration shift to a quota system for the CRA, when banks were required to make a certain proportion of loans to target groups by whatever means necessary.
Re:when banks were required to make a certain proportion of loans to target groups by whatever means necessary.
In what alternate universe? Do you have any hard evidence that racial quotas were required by the CRA? That sounds like rant radio BS, and without evidence I'm extremely skeptical (and no, media mouthfrothers are not a valid source).
More to the point, the CRA only applied to traditional lending banks. It did not apply to the "new" mortgage houses, and it was with these businesses that the collapse in standards originated-- companies like the extraordinarily reckless New Century whose collapse in early 2007 began the toppling of the dominoes. The banks resisted the erosion in lending stendards for quite a while and only threw in the towel around 2005 when competition from the New Centuries and Countrywides forced them to do so.
Meanwhile, the surge in household debt can largely be attributed to financial deregulation... Did we lose our economic morality? No, we were the victims of politics.
Wow, that's practically a caricature of "I blame society" liberalism.
Yeah, Paul Krugman is a nut. And it doesn't really matter who started the "free lunch" model of American politics (Carter, Reagan, who cares). But both parties today are unable to help (lead?) Americans to make real choices about taxes and spending. They all promise lower taxes but do nothing to balance budgets with lower spending. I wish we could elect a politician who really tried to level with the voters: if you want these expensive programs, you need to pay higher taxes; if you want lower taxes, these are the services that will no longer be provided. And it is true that government waste needs to be addressed. But I am pretty sure that eliminating all waste will not close the existing budget gap.
Nonsense. Obama has made it quite clear that he intends to raise taxes on people making more than $250,000 per year. He also has made it quite clear he supports taxing carbon via cap and trade. He's also made it clear he's open to taxing Cadillac health insurance plans. Now, this is only a start -- and I think in his second term he'll have to tell the American people the $250K threshold has to be considerably lower (I'm personally hoping for a VAT, as well) -- but to paint the two parties with broad brush strokes of equal fiscal irresponsibility is risible. One party, the Democratic, is comprised of adults. The other party is fundamentally, unconservatively unserious about governance. (Though I gotta say the GOP's devotion to fighting cost-cutting measures in Medicare is impressive).
Obamas efforts to balance the budget would be more impressive if he hadn't quadrupled his predecessors already excessivly high dreficit. In other words it may well be required to raise taxes to the level you describe in order to finance just the pre Obama entitlement programs
There quite rightly is no effort to balance the budget at this time. Indeed, we're paying the price for insufficiently high deficit spending right now in the form of extra joblessness.
Jasper, how do you know when it's sufficiently high? Remember, barring major wars(which wreck up the economy in all sorts of interesting ways), it's never been this high, or even especially close. Where's the magic line that's supposed to stop us?
Jasper, doesn't this serve largely to make the point you wish to refute? The President said, repeatedly and without equivocation, no new taxes for those earning less than $250,000, in part to counter the cries of socialism throughout the campaign. But there is almost no serious-minded wonk on either side of the aisle who believes that we can come anywhere close to financing existing entitlements and non-discretionary spending, plus TARP and other bailouts, plus healthcare reform, etc., entirely on the shoulders of the top 2-5%. Surely Obama and his advisors know this, but as you suggest, I suspect we'll hear not a word about it unless and until he is elected a second time. So serious are they about good governance that they can't/won't level with the electorate until political risk has been muted?
I agree that the Republican party has been a right and proper mess of late, but doesn't this sort of thing bother you when it comes from the left as well? Or when the "adults" in the House couldn't bring themselves to ask anyone other than the top 1 or 2% to pay for a healthcare benefit that would purport to benefit all of society? To Mark's point, we seem to want something for nothing, and our politicians tend to give us what we ask for.
I think if Obama is able to keep his promise during the first term, that's all anybody can ask given the current state of American politics. I don't remember his promising the keep the same policies in place operative in the first term in his second.
Also, given the weakness in the economy, I expect we'll be able to get by without any broad-based tax increases in the next few years.
Anyway, I don't think the fundamental difference between the two parties is one of words, but rather of actions. If Obama wins reelection (and the Democrats maintain majority status in Congress), I expect substantive action will be taken to address the country's long term fiscal problem. If the other party wins -- at least if the other party continues on its current path of demagoguery -- I don't expect such action to be taken.
Obama has made it quite clear that he intends to raise taxes on people making more than $250,000 per year. He also has made it quite clear he supports taxing carbon via cap and trade. He's also made it clear he's open to taxing Cadillac health insurance plans. Now, this is only a start -- and I think in his second term he'll have to tell the American people the $250K threshold has to be considerably lower (I'm personally hoping for a VAT, as well)
I wish you (or someone) was repeating this on the boob tube. I very much suspect that for the majority of BHO voters this would be a revelation.
David's point above, about the rise of consumer credit cards is very important. Till the mid 70s, they simply did not exist. Charge cards, like Amex, Diners Club, and department store charge cards were the norm and, like David said, they had to be paid in full each month.
Bank Of America introduced the first revolving credit card, BankAmericard (now Visa). Master Charge quickly followed. All of a sudden people did not have to pay cash, or even have the money to buy what they wanted. they could charge away and make minimum payments. While the invention of these cards preceded Reagan, it took a little while to catch on and for more issuers to enter the field. As more players entered, creditworthiness for holders declined. This was when excess credit card debt started to become a problem.
Another factor that increased Americans' personal debt was the hyper inflation of the Carter years. That inflation included houses. On top of that, we had sky high interest rates and exorbitant income tax rates due to "bracket creep". The response to all this was longer mortgage periods. I bought my first house in 1975 and had the standard 15 year mortgage. One of my friends did likewise but got a GI mortgage for 20 years. In response to the possibility of the housing market cratering due to rapid appreciation, high interest and declining real income, the banks and the gov't responded with longer mortgage terms. 30 years became common quite quickly.
The increase in mortgage terms, meant that people remained in debt longer and that they paid far more interest on their loans. That got coupled with the credit card debt that consumers could not have done just a few years earlier because revolving credit cards did not exist before. this was followed by a new type of second mortgage - one taken to pay off excess credit card debt. Mortgage companies opened just to sell that type of second mortgage.
While a lot of this did happen during Reagan's term, it all started under Carter. It's also worthwhile to remember that Reagan was not elected King. Congress, controlled by Democrats, had to approve anything that Reagan asked for.
It is important to note that extending the terms of mortgages has two goals.
1) It lowers interests rates making entrance into home ownership easier without a large down payment.
and
2) It shores up long term equity capital to secure reserves in the private banking system.
Japan has moved to 60 year mortgages now to shore up their banking sector and to keep home ownership a social goal the average citizen can reach.
This hacktastic column got beat down all over the 'sphere. I thought Reason had the best take.
If Paul Krugman didn't exist, conservatives and libertarians would have to invent him.
Marginal Revolution also has a nice long post of the flaws in the Garn-St. Germain argument. About 2 weeks or so ago it went up.
"It's also worthwhile to remember that Reagan was not elected King." Actually, the near-universal American tendency to attribute more importance to Presidents than is realistic implies that they are elected as Kings - or perhaps Emperors.
Man, these guys have no sense of irony...
The really sad thing about Krugman (as Megan well knows) is that, when he isn't drawn astray by the siren song of partisan politics, he can be fantastic on economic issues. Unfortunately he shows increasingly little interest, and less inclination, to just focus on what he actually knows. Dude, it's called "comparative advantage". Word.
Heh, the Nobel Prize winning economist who has got it right every step of the way is an idiot and nut. This, according to the same 101st Keyboard Commandos who cheered on the Iraq War.
Dave Krugman ain't perfect. But compared to folks like Mankiw who thought that the 2008 rebates would forestall a recession and then completely failed to foresee the financial meltdown , he looks like an economic Einstein.
When he goes one on one with conservative economists, he looks like George Foreman vs Frazier.
http://www.cnn.com/video/savp/evp/?loc=dom&vid=/video/bestoftv/2009/06/28/gps.krugman.taylor.econ.cnn
It's a travesty that Paul Krugman is considered a leading economist and policy expert in this country. He won a Nobel prize in trade theory (for some reason), not financial regulatory policy, and veils the most infantile economic analysis under academic sounding Neo-Kenyesian language. None of the work he has ever done or any of the theories he follows have ever predicted anything. He completely ignores the role of the federal reserve in the business cycle, and is unable to separate monetary policy from partisan politics. Can we please rid the economic debate of this intellectual dishonesty?!
He won a Nobel prize in trade theory (for some reason)
Maybe because he is really, really good? That IS why most Nobels are awarded.
None of the work he has ever done or any of the theories he follows have ever predicted anything.
Heh,he predicted the housing meltdown here:
http://www.nytimes.com/2005/08/08/opinion/08krugman.html?_r=2&scp=18&sq=krugman+housing+bubble&st=nyt&oref=slogin
and before that, the dot.com meltdown here:
http://www.nytimes.com/2000/03/12/opinion/reckonings-the-ponzi-paradigm.html?scp=1&sq=krugman+stocks+qualcommed&st=nyt
Of course, according to the Chicago boys, such meltdowns were impossible because the markets are "efficient".
Apparently, he was right again on the stimulus , unfortunately:
And the worst of it is that it was more or less predictable. I went back to my first blog post — January 6, 2009 — worrying that the Obama economic plan was too cautious. I wrote:
really does look like a plan that falls well short of what advocates of strong stimulus were hoping for — and it seems as if that was done in order to win Republican votes. Yet even if the plan gets the hoped-for 80 votes in the Senate, which seems doubtful, responsibility for the plan’s perceived failure, if it’s spun that way, will be placed on Democrats.
see the following scenario: a weak stimulus plan, perhaps even weaker than what we’re talking about now, is crafted to win those extra GOP votes. The plan limits the rise in unemployment, but things are still pretty bad, with the rate peaking at something like 9 percent and coming down only slowly. And then Mitch McConnell says “See, government spending doesn’t work.”
Let’s hope I’ve got this wrong.
Alas, I didn’t have it wrong — except that unemployment will, if we’re lucky, peak around 10 percent, not 9.
http://krugman.blogs.nytimes.com/2009/10/03/obamas-anzio/
I do understand the Krugman hate here, though-he is right so often and the conservative economists are so often proved wrong.
So he predicted a 1999 meltdown in 2000, and that unemployment would go up during a recession. Wow, he's a regular Nostradamus.
You can say that non-ironically, considering that a lot of conservative and libertarian economists were saying that all was fine up to the meltdown.
And that includes Megan. 31 July 2008:
I know I aw that recession around here somewhere
And that includes Megan. 31 July 2008:
I know I Saw That Recession Around Here Somewhere
Umm, Nimed, that was a response to the fact that I had previously been predicting a recession for quite some time--I was wondering why it wasn't showing up in the data . . .
@Megan McArdle
I could have linked the usual example. But, come on. Are you telling me that, when you wrote that post, you weren't seriously wondering whether we would have a recession or not? At the very least, you seemed to be suggesting we wouldn't have one in time for the 2008 elections (hence Obama would have to rethink his electoral strategy).
Krugman was talking about a housing bubble precipitating a serious recession at least since December 2007. He was far from being alone on this, but the prediction was by no means consensual either.
He won a Nobel prize in trade theory (for some reason)
His work in the late 70s and into the 80s on New Trade Theory was legitimately a breakthrough.
Debt The Legacy of Reagan ?
It was a Communist Plot to destroy our moral fiber. :)
It is human nature, MM:
"Raise up a child in the way that he should go,
and when he is a man, he will not depart from it."
Unfortunately, many people never become adults,
and hence cannot raise their children.
Unless constrained by necessity, the Common (Child) Man
will spend every dime he earns (or can borrow) foolishly,
"trying to keep up with the Joneses".
The unprecedented, corrosive, prosperity of the Common Man
in the Us for the last 50 years has taken its toll:
"what do you mean there is no more ? There is always more;
That is what more means."
Water runs downhill, eventually reaching bottom;
Studying the chaotic perturbations of the flow,
produced by the hillside topography, does not
add to one's understanding of gravitation.
The increase in consumer indebtedness is not the legacy of Reagan. It is the legacy of double digit inflation. The idea of saving your money to buy something doesn't work if inflation devalues your dollars faster than they earn interest. If any one man is to blame for the increase in willingness to take on debt, it's Jimmy Carter, not Ronald Reagan. Reagan's policies turned the economy around and a couple of years after he took office, inflation and unemployment dropped to single digits.
If you want people to save, make it worth their while. Raise interest rates.
I suggest that the tightening of the IRS rules on reporting interest income also has something to do with it.
If the interest on your savings account is already less than the inflation rate, taxes on the interest add insult to injury.
If the interest and capital gains you earned are not liquid you have to scratch up cash to pay taxes on them every April 15. It's direct negative reinforcement.
Incentives matter!
I'm sure by now blogosphere economists are getting tired of having to clean up after Dr. Krugman on a weekly basis.
Megan, I'm too young to know for sure which events in the two versions of the debt story matter more, but I appreciate your efforts to beat back Krugman's one-sided-militant-liberalism.
Translation - I have no idea what's going on, but I'm sure my side is right. Krugman is a librul.
Which side am I on? And I have a great idea of what's going on. Psuedo-Nobel in hand, Krugman now thinks he can re-write history to suit any story he wishes to tell. When Krugman wants your opinion he'll give it to you. I prefer to collect all relevant data.
I'm fine with liberals. The same way I'm fine with atheists. But Krugman's militant attitude is on par with Richard Dawkins. I place them in the Smart-Guys-Who-Aren't-Helping-Anyone-Box.
See, the "pseudo-nobel" expression kinda suggests you're not that neutral. Economists pretty much agree that Krugman deserved the Nobel (although some say he probably should not have had the greater distinction of being the only laureate of his year).
If you mean that the work that got him the Nobel is different the stuff he writes about, I agree. But then again, a Nobel in macroeconomics is an overly stringent requirement to give an opinion about these things.
Finally - gee, thanks for giving atheists your blessing. I'm not sure where you want to go with the Dawkins comparison, though. It's true that Dawkins sometimes has an extremely obnoxious and excessively confrontational approach (much more so than Krugman IMHO). But, if you ignore his style, he is usually right in substance.
Not sure why I can't reply underneath this, but I'll post here.
I say "Pseudo-Nobel" because it's not a real Nobel. It's still an honor designated for the highest achievement in economics, but pseudo nonetheless since a central bank awards it. About as neutral as it gets, because I think every "Nobel" given to economists are in the same boat, not just Krugman's.
I drew the distinction to religion to get away from being accused of bashing liberals. In a debate, I don't question your right to a particular world-view. It is not Krugman's liberal-ness that I disagree with but rather his militant attitude which he tries to use as a substitute for logic and reason. Count Dawkins in that camp too. Their use of the "if you don't agree with me, you're wrong" tactic, is ineffective.
Again, militant attitudes maybe annoying, but I just don't think it is the case that either Krugman or Dawkins use them "as a substitute for logic and reason".
I must confess I'm especially intrigued about Dawkins. He gets on my nerves because he is often callous and offensive. And yes, that may be counterproductive to his stated goals. But when did he ever abandoned logic and reason?
I guess high consumer debt could be considered a legacy of Reagan indirectly, in that he ushered in a new wave of unskilled immigration with the amnesty bill he signed. As America has imported more poor, unskilled immigrants over the last couple of decades, we have become poorer, on average. Debt enables poor people to artificially maintain a higher lifestyle than they would otherwise. And then last year, the clock struck midnight and we reverted to the pumpkin.
During the entire post WWW II period through 1980 total debt as a percent of GDP never exceeded 170%. In fact it had been fairly constant.
Then in 1980 something changed:
Between 1980 and 1988 household debt grew from $1396 billion to $3043.6 billion, business debt grew from $1478.1 billion to $3409.2 billion, financial sector debt grew from $771.5 billion to $2415.6 billion and government sector debt grew from $1079.4 billion to $2997.9 billion. Total debt grew from $4725 billion to $11,866.3 billion between 1980 to 1988. As a percent of GDP it grew from 169.5% to 232.7%. (Nominal GDP grew from $2788.1 billion to $5100.4 billion.) Total debt grew faster than nominal GDP at an average rate of 4.0% annually.
Prior to Reagan financial sector debt had never exceeded 30% of GDP and household debt had never exceeded 60% of GDP in the entire history of the republic. Both records were shattered during his presidency.
Between 1988 and 2000 total debt as a percent of GDP continued to grow albeit at a much slower pace. It rose to 272.7%, growing faster than nominal GDP at an average annual rate of 1.3%. However under Bush 43 total debt reached 363.8% of GDP by 2008, growing faster than nominal GDP at an average annual rate of 3.7%. As of 2008 household debt stood at $13,794.8 billion or 95.5% of GDP and financial sector debt stood at a staggering $18,947.9 billion or 131.2% of GDP.
Bush would have made Reagan proud, but even he failed to match him in terms of the rate at which total debt grew during his presidency.
Yes, another hack column by Megan because our resident lefty trolls said so. I'm getting tired of this shit.
Why does my CRA default stat post (I don't see it being off topic) keep getting eaten while any other comment I have goes straight thru?
This is a new perspective for me but whatever is the reason behind this financial mess, we are of one mind that this has to be corrected. One thing I believe in is to bring back the regulation. With credit cards and bank industries and investment firms, not regulated, we will find ourselves at the mercy of the few. Even the telephone company and the cable TV have got to be regulated.
Evelyn Guzman
http://www.debtchallenges.com (If you want to visit, just click but if it doesn’t work, copy and paste it onto your browser.)