On America By Paul Craig Roberts
08 October, 2008
Counterpunch
America has become a pretty discouraging place. Americans, for the most part, will never know what happened to them, because they no longer have a free and responsible press. They have Big Brother’s press. For example, on September 28, 2008, a New York Times editorial blamed the current financial crisis on “antiregulation disciples of the Reagan Revolution.”
What utter nonsense. Every example of deregulation that the New York Times editorial provides is located in the Clinton Administration and the George W. Bush administration. I was a member of the Reagan administration. We most certainly did not deregulate the financial system.
The repeal of the Glass-Steagall Act, which separated commercial from investment banking, was the achievement of the Democratic Clinton Administration. It happened in 1999, over a decade after Reagan left office.
It was in 2000 that derivatives and credit default swaps were excluded from regulation.
The greatest mistake was made in 2004, the year that Reagan died. That year the current Secretary of the Treasury, Henry M. Paulson Jr, was head of the investment bank Goldman Sachs. In the spring of 2004, the investment banks, led by Paulson, met with the Securities and Exchange Commission. At this meeting with the New Deal regulatory agency tasked with regulating the US financial system, Paulson convinced the SEC Commissioners to exempt the investment banks from maintaining reserves to cover losses on investments. The exemption granted by the SEC allowed the investment banks to leverage financial instruments beyond any bounds of prudence.
In place of time-proven standards of prudence, computer models engineered by hot shots determined acceptable risk. As one result Bear Stearns, for example, pushed its leverage ratio to 33 to 1. For every one dollar in equity, the investment bank had $33 of debt!
It was computer models that led to the failure of Long-Term Capital Management in 1998, the first systemic threat to the financial system. Why the SEC went along with Paulson and set aside capital requirements after the scare of Long-Term Capital Management is inexplicable.
The blame is headed toward SEC chairman Christopher Cox. This is more of Big Brother’s disinformation. Cox, like so many others, was a victim of a free market ideology, itself a reaction to over-regulation, that was boosted by academic economic opinion, rewarded with Nobel prizes, that the market “always knows best.”
The 20th century proves that the market is likely to know better than a central planning bureau. It was Soviet Communism that collapsed, not American capitalism. However, the market has to be protected from greed. It was greed, not the market, that was unleashed by deregulation during the Clinton and George W. Bush regimes.
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Source Watch
Dr. Paul Craig Roberts is the John M. Olin fellow at the Institute for Political Economy and a research fellow at the Independent Institute.
Roberts has held numerous academic appointments. He was a Distinguished Fellow at the Cato Institute from 1993 to 1996. He held the William E. Simon Chair in Political Economy at the Center for Strategic and International Studies, Georgetown University, from 1982 through 1993. He was a Senior Research Fellow, Hoover Institution on War, Revolution and Peace, Stanford University.
Roberts was Assistant Secretary of the Treasury for Economic Policy (1981-82) in the Ronald Reagan administration. "President Reagan and Treasury Secretary Regan credited him with a major role in the Economic Recovery Tax Act of 1981, and he was awarded the Treasury Department’s Meritorious Service Award for 'his outstanding contributions to the formulation of United States economic policy.' From 1975 to 1978, Dr. Roberts served on the congressional staff where he drafted the Kemp-Roth bill and played a leading role in developing bipartisan support for a supply-side economic policy."
He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review, and a columnist for Business Week and the Scripps Howard News Service. Roberts's columns are released weekly by Creators Syndicate, Inc.
