Krugman Is Half-Right About Reagan, Kinda

Krugman asserts that the banking crisis is traceable to Ronald Reagan (among others.)

Well, it's a stretch, but then, that's Krugman. He refers to Garn-St.Germain.

Garn-St.Germain was a Reagan initiative, yes. On the other hand, it passed through Congress with LARGE bi-partisan majorities. It is the Act which virtually erased the differences between commercial banks and savings-and-loans (S&L's).

Here's the quick-and-dirty summary:

(1) savings and loan associations were authorized to make commercial, corporate, business, or agricultural loans up to 10% of assets after January 1, 1984.

(2) the deposit interest rate differential, allowing savings and loans and savings banks to offer rates on interest-bearing deposit accounts l⁄4 of 1% higher than commercial banks was lifted, as of January 1984.

(3) the act authorized a new capital assistance program, the Net Worth Certificate Program, under which the Federal Savings and Loan Insurance Corp. And the Federal Deposit Insurance Corp. Would purchase capital instruments called Net Worth Certificates from savings institutions with net worth to assets ratios under 3%, and would later redeem the certificates as they regained financial health.

(4) the act permitted savings associations to offer checking accounts (demand deposit accounts) to individuals and business checking accounts to customers who had other accounts.

(5) savings and loans were authorized to increase their consumer lending, from 20% to 30% of assets, and to expand their dealer lending and floor-plan loan financing.

(6) the act raised the ceiling on direct investments by savings institutions in nonresidential real estate from 20% to 40% of assets, and also allowed investment of 10% of assets in education loans for any educational purpose, and up to 100% of assets in state and municipal bonds.

(7) the act preempted state restrictions on enforcement by lenders of due-on-sale clauses in most mortgages for a three year period ending October 15, 1985, and authorized state chartered lenders to offer the same kinds of alternative mortgages permitted nationally chartered financial institutions.

(8) authorized the Comptroller of the Currency to charter Bankers' Banks, or depository institutions owned by other banks.

(9) made state chartered industrial banks eligible for federal depository insurance.

(10) raised the legal lending limit for national banks from 10% to 15% of capital and surplus.

The part pertinent to Krugman's accusation is red-highlighted.

Clearly, Krugman over-reaches.

By this act, S&L's became "me, too!!" banks (why do you think that Guaranty changed its name to Guaranty BANK from Guaranty Savings & Loan?)

And that "me, too!!" extended to loan policies. Thus, S&L's were able to offer mortgages on the same terms as Banks. NOT 'more loosely' than Banks, but on the same terms. Krugman, however, would have us ignore the Banks--which had exactly the same lending policies as the S&L's, not to mention Fannie/Freddie/FHA.

But hey: when you're bound and determined to take down Ron Reagan, any old BS will do.

HT: Ritholtz

UPDATE: Much more on the Act here, HT McIlheran