Saturday, October 15, 2011

Krugman not telling the truth about deregulation? Gee, hoodathunkitt?

One of the enduring themes in Paul Krugman's columns is that the entire economic mess today is due to the fact that "free markets" have been permitted to run wild, and had the entire economy been under state control, we would be prosperous and happy. His recent screed on the subject, while more of the same, also includes something that, frankly, is untrue: financial deregulation was borne out of free-market ideology:
In the real world, recent events were a devastating refutation of the free-market orthodoxy that has ruled American politics these past three decades. Above all, the long crusade against financial regulation, the successful effort to unravel the prudential rules established after the Great Depression on the grounds that they were unnecessary, ended up demonstrating — at immense cost to the nation — that those rules were necessary, after all.
As I pointed out in my last post, major deregulation efforts came through a Democratic Congress and President Jimmy Carter, who at last check still was a Democrat. However, another major deregulation moment came in 1998, when Congress repealed much of the Glass-Steagall Act and President Bill Clinton (who I think was and still is a Democrat) signed the bill. (I also need to point out that Regulation Q, which was part of the original G-S Act, was repealed in 1980 in the deregulatory act known as DIDMCA -- a move supported by the New York Times, which in modern times is not exactly known as a staunch supporter of free markets.)

Well, it turns out that another blow to Krugman's "The-Free-Marketers-Did-It" theme comes from the NYT, which is highlighted in this recent blog post from journalist Paul Mulshine:
But back when he was Speaker of the House, Gingrich was quite comfortable with the Fed. In fact he led the fight to repeal Glass-Steagall, a move that many argue was a key factor in the financial meltdown that occurred in 2008. Consider that when he talks about jailing "the politicians who put this country in trouble."

Check this excerpt from an April 1998 New York Times article on the effort to repeal Glass-Steagall and Gingrich's cozy relationship with Alan Greenspan:

It pitted Treasury Secretary Robert E. Rubin, who opposed the bill, against Alan Greenspan, the chairman of the Federal Reserve, who favored it.

All but a handful of big banks opposed the bill, as did nearly all small and medium-sized banks and savings and loan companies. Wall Street backed the bill, as did insurance companies. Consumer groups fought the bill.

While the debate has less to do with ideology than with members of Congress forced to choose among powerful friends, the end game came down to partisan maneuvering. Republicans from Speaker Newt Gingrich on down scurried through the afternoon to line up the necessary votes
Less to do with ideology? What? CONTRADICT PAUL KRUGMAN? THE NEW YORK TIMES? Surely not!

But, it gets even better, as Mulshine highlights an interview with Ron Paul in which the congressman notes that he voted against repeal of G-S. That can't be, according to Krugman's theme, but there it is. Dr. Paul says:
I voted on the Glass-Steagal change and I voted against it. The free market though would not have a Glass-Steagal. Banks could do what they want and they have to suffer the consequence. The reason I voted against it, that bill did have some bad parts to it, but one of the reasons I argued against it, repealing it, it was that it was going to put a greater burden on the banks and the taxpayer was at risk, at greater risk through the FDIC and other insurance programs of the government.
In other words, Dr. Paul recognized the moral hazard in having the Fed acting as a backstop against bank losses (Surely, the Fed NEVER would do anything like that, would it?), and knew that the bill would foster excessive risk taking.

Paul Krugman forever is claiming that people who think free markets might be a good thing never take into account any of what has happened in the last decade, yet he cannot even correctly note who were the players in deregulation -- and who were not. While accusing others of running "down a rabbit hole," Krugman seems to have taken permanent residence in that same hole while claiming that his fractured version of history is the Only Truth.


Lord Keynes said...

"In other words, Dr. Paul recognized the moral hazard in having the Fed acting as a backstop against bank losses "

Let me get this straight.

You are acknowledging that Glass-Steagall had a major role to play in stopping excessive risk taking and poor lending standards by banks? (just as in the last post I pointed to the effective financial regulatory system in Canada).

So Ron Paul now emerges as a defender of New Deal financial regulation, if his imaginary "free market" wasn't an option?

And as for "free market" ideology having inspired the Gramm–Leach–Bliley Act, that is perfectly correct: it was mainstream neoclassical economics (New classical macro, the New Consensus macroeconomics), not Austrian economics. The latter remains a fringe cult whose vision of the "free market" is a fantasy world, a utopia as unreal as Marx's pure communist society.

In the real world, when people talk about "free market economics" they refer to the mainstream neo-Walrasian, neoclassical economics.

William L. Anderson said...

Looks as though you did not read what Ron Paul said. Not that it surprises me.

Bob Roddis said...


Are you still censoring posts to your blog that eviscerate your various rantings?

What's the matter? Do the critics hurt your feelings?

Bala said...


You should be a little more understanding. He lost his guts when he got eviscerated.

Dennis said...

We've all heard over and over how a well-regulated banking system would be so much better than the supposed "laissez-faire" banking that the United States has. So then what's the cause of the problems with so many European banks? I highly doubt that they are operating in any kind of a "laissez-faire", law of the jungle environment. Why are the European authorities panicking at the thought of bank failures over there? How could such systemic failure even be possible in light of the fact that many European nations are run by overtly socialist governments?

William L. Anderson said...

Dennis, STOP IT!! You are using logic, and logic and reason are not permitted in the present economic discussion. Krugman won't permit it!

Anonymous said...


European bank problems exist because there never was a Glass-Steagal act in Europe.

One of the often overlooked issues is that the Gramm–Leach–Bliley Act was a response to the decision of European supervisors to allow mergers of banks with insurers and other financial entities to create financial firms far larger in size than the largest US banks.

Citibank wanted to keep its position in the top-rank and get rid of regulations that blocked them from owning banks in multiple states etc. when in Europe, with the arrival of the Eurozone nascent, banks were on the verge of merging themselves into continental behemoths, while they were expanding into the USA too.

There was a big corporation friendly business rationale behing Gramm-Leach-Bliley.

Anonymous said...

Did Krugman steal your girlfriend in high school or something? The hyperbole and contempt with which you write seems suspiciously personal, rather than substantive. I don't know much about Krugman, but, oddly, I like him a little more now.