[R-G] Reagan didn't do it

[Sid Shniad]

http://www.truthdig.com/report/item/20090603_reagan_didnt_do_it/ 

Truthdig June 3, 2009 

Reagan Didn't Do It 

By Robert Scheer 

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 years. 

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 stability. 

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.