The Good Paul Krugman and the Bad Paul Krugman

By Richard A. Posner

Paul Krugman is a first-rate economist who has written perceptively about the economic crisis. He is also an unabashed Democratic partisan who often goes overboard in his hatred of the Republians, as in his June 1 New York Times column entitled "Reagan Did It." He means that Reagan is ultimately responsible for the current crisis: "Reagan-era legislative changes essentially ended New Deal restrictions on mortgage lending--restrictions that, in particular, limited the ability of families to buy homes without putting a significant amount of money down." The specific change he mentions is the passage in 1982 of the Garn-St. Germain Depository Institutions Act, though he does not explain why he singles out that Act among the measures that the Reagan Administration took to deregulate the savings and loans institutions.

There is no doubt that the deregulation of the S&Ls, which was an initiative of the Reagan Administration, was an important step on the road to the deregulation of banking (broadly defined to include all forms of financial intermediation), and that deregulation was a significant causal factor in the risky lending of the early 2000s that precipitated our current crisis. But it ignores the other causal factors, notably the monetary policy of the Federal Reserve beginning at the end of 2000, and, more important, it ignores the bipartisan character of the deregulation movement.

The movement to deregulate the heavily regulated industries, such as transportation, telecommunciations, energy--and banking--began during the Carter Administration. One of the earliest major deregulatory measures was a measure to deregulate banking: the Depository Institutions Deregulation and Monetary Control Act of 1980--obviously it preceded Reagan's presidency. Deregulation was bipartisan. It is entirely speculative to suppose that, had Carter been reelected, the deregulation of banking, including the relaxation of mortgage standards, would have ceased. When the Democrats regained the presidency in 1993, banking deregulation continued, culminating in the repeal of the Glass-Steagall Act, which had split commercial banks from investment banks, and in the rejection of regulation of the new derivatives, notably credit-default swaps. Robert Rubin  and Lawrence Summers, Clinton's principal economic advisers, were steadfast supporters of banking deregulation. They are both Democrats.

I said earlier that the Federal Reserve's monetary policy in the early 2000s was a major culprit in the current crisis. Although the then chairman, Alan Greenspan, was a Republican who had been first appointed by Reagan, he had been reappointed by Clinton.

Loose standards for mortgage lending were not an invention of the Reagan Administration, or a Republican or a conservative preserve. Indeed, conservatives blame Fannie Mae and Freddie Mac, government-sponsored enterprises, for the loose standards and indeed for the housing bubble and the ensuing collapse. I think they exaggerate in assigning major causal significance to Fannie and Freddie, but Democrats pressed even harder than Republicans for loosening up mortgage standards so that people of moderate means could become homeowners.

The effect of Krugman's partisanship on his "public intellectual" writings is an old story, but a true one. See, for example, my book Public Intellectuals: A Study of Decline 96-99, 103-105,138 (2003 ed.). It is illustrated anew by "Reagan Did It."

"Lying in Ponds," http://www.lyinginponds.com/, a blog that does careful statistical assessments of the political partisanship of public intellectuals, in most years has ranked Paul Krugman number 1 or number 2 among Democratic columnists for partisanship, though so far in 2009 he has fallen to number 4--tied with Maureen Dowd. Need I say more?

 

This article available online at:

http://www.theatlantic.com/business/archive/2009/06/the-good-paul-krugman-and-the-bad-paul-krugman/18718/