Blame Ronald Reagan For Our Current Economic Crisis

reagan.gifby Robert Brent Toplin–

Ronald Reagan rarely catches any blame these days for the present economic mess that is destabilizing markets in the United States and around the world. In fact, Americans often praise the former president for taking the country in bold new directions during his years in the White House. Politicians contribute to this love-fest by naming schools and roads after the iconic president.

These admirers rarely acknowledge how central Reagan’s ideas are to the market difficulties troubling us today. As the country’s greatest modern champion of deregulation, perhaps Ronald Reagan contributed more to today’s unstable business climate than any other American. His long-standing campaign against the role of government in American life, a crusade he often stretched to extremes, produced conditions that ultimately proved bad for business.

Ronald Reagan promised to take government off the backs of enterprising Americans. He told voters that government was not the solution to the nation’s problems; it was the problem. “The nine most terrifying words in the English language,” said Reagan, are, “ ‘I’m from the government and I’m here to help.’ ” His speeches contained numerous warnings about the chilling effects of bureaucratic regulation. Government leaders think, he said, “If it moves, tax it. If it keeps moving, regulate it. And if it stops moving, subsidize it.”

Ronald Reagan was not the only major champion of deregulation. Economist Milton Friedman served as the idea’s principal philosopher, and Newt Gingrich was a leading advocate in Congress. But Reagan was the most influential figure to make the term “government” sound like a naughty word.

The main problem with Reagan’s outlook was a failure to recognize that government regulation can serve business interests quite effectively. Many of the regulatory programs started by Franklin D. Roosevelt’s New Deal in the 1930s aimed to promote fairness in economic competition. That legislation required greater transparency so that investors could more intelligently judge the value of securities in the stock market. The reforms mandated a separation of commercial and investment bank activities, since speculative investments by commercial banks had been one of the principal causes of the financial crash. Roosevelt’s New Deal also created a bank insurance program, the FDIC, which brought stability to a finance industry that had been on the verge of collapse.

These and other improvements of the 1930s worked splendidly. For the next half century American markets operated with impressive stability. There were periods of boom and recession, but the country’s financial system did not suffer from the kinds of shocks that have upset the American economy in recent years.

The turn away from rules that promote fair business practices fostered dangerous risk-taking. An early sign of the troubles occurred on Reagan’s watch. When the requirements for managing savings and loan institutions became lax in the 1980s, leaders of those organizations invested money recklessly. Many institutions failed or came close to failure, and the cleanup cost more than $150 billion. Yet blame for that crisis did not stick to the Teflon President.

Recent troubles in the American economy can be attributed to a weakening of business regulation in the public interest, which is, in large part, a consequence of Reagan’s anti-government preaching. In the absence of oversight, lending became a wildcat enterprise. Mortgage brokers easily deceived home buyers by promoting sub-prime loans, and then they passed on bundled documents to unwary investors. Executives at Fannie Mae packaged both conventional and sub-prime loans, and they too, operated almost free of serious oversight. Fannie’s leaders spent lavishly to hire sixty Washington lobbyists who showered congressmen with campaign funds. Executives at Fannie were generous to the politicians because they wanted to ward off regulation.

Meanwhile, on Wall Street, brokerage firms became deeply committed to risky mortgage investments and did not make their customers fully aware of the risks. The nation’s leading credit rating agencies, in turn, were not under much pressure to question claims about mortgage-based instruments that were marketed as Blue Chip quality. Government watchdogs were not active during those times to serve the interests of the public and the investors.

The most influential person to call for a more powerful watchdog recently is Secretary of the Treasury, Henry Paulson. After responding to the credit crisis by working with the Federal Reserve to shore up and bail out floundering business organizations, Paulson has become the leading challenger to Reagan’s outlook on government. During an August 10 interview on Meet the Press Paulson stressed over and over again that “the stability of our capital markets” requires “a strong regulator.” Our regulatory system is badly “outdated,” Paulson complained. Market discipline should be tightened by assigning a “regulator with the necessary power,” said the Treasury Secretary.

toplin_bob.jpgHenry Paulson never mentioned Ronald Reagan’s name during the interview, but the implications of his remarks were clear. Reagan’s views of the relationship between government and business helped to put the nation and the world into a good deal of trouble. It is time to recognize that the former president’s understanding of economics was not as sophisticated as his enthusiastic supporters often claimed.

Reagan deserves credit for serving as a vigorous defender of free markets, but he carried the idea to extremes. Ironically, the great champion of business enterprise advocated policies that have seriously hurt business here and abroad.

by Robert Brent Toplin

Mr. Toplin, Professor of History at the University of North Carolina, Wilmington, is the author of a dozen books including Radical Conservatism: The Right’s Political Religion (2006).

Republished with permission from the History News Network.

Published by the LA Progressive on September 11, 2008
Related Posts Plugin for WordPress, Blogger...

Comments

  1. the last quarter of 2009 seems promising as we have seen lots of signs of econic recovery against the massive economic recession. i hope that in 2010 all our economies would be back on track. recession really sucks.

    • Looking at your comment on August 31, 2010…sorry not much better and probably won’t be for several years. One can’t expect 25+years of bad policy to be corrected so quickly.

  2. I have been saying for years that air fares and airlines are screwed up due to Reagan’s push to deregulate them. Remember World Airways’ cross country fare of $99? I do! Long before 9/11 and gas problems, the consumers of airfares had to change planes, lose in-flight benefits and routes, and suffered needlessly with the high prices of flight. Now, only the rich can afford to fly! Regulation stablized and the market became mythologized. I never understood the elevation of “the market forces” to a litmus test of everything American. Which market? A market of corporate cheating and accounting scandals? A market with the Abrahamhoffs of the the world? A market of price-gouging? Regulation is like the anti-trust laws. A necessity of democracy.

  3. Dr(I hope) Toplin
    As you probably know,many of us in the sciences feel humanities/social studies have become ‘faith based’ fields rather than knowledge based.Rather than criticise only,I will specify.First,according to Boolean (symbolic) logicthere is no known term(s0 to specify ‘fairness.And I see you don’t .Saying Gov’t regulations weakening contributed to disasters like Fan/Fred is simply ludicrous.They were quasi gov’t agencies whose charters and gov’t implied protection allowed them to escape market forces.Had the government washed its hands of them-i.e.less gov’t-the problems would have been exposed much sooner and much smaller.
    Finally,I know of no one who feels FDR’s economic moves-which were remarkably inconsistent-shortened the depression.It lingered for his first two terms.Indeed his tinkering is thought to be a factor by many economists for the longevity of itGive FDR his due;he was a courageous man who gave his life as a war president.But,please remember Just Holmes comment re his intellect.
    And to paraphrase “My Cousin Vinnie”;”Ronald Reagan’s dead.

Speak Your Mind

*

Visit us on Google+