Paul Krugman has a fascinating OpEd today, essentially tracing the current economic crisis all the way back to Ronald Reagan.
In Bailout Nation, I place a small measure of blame on Reagan for a) appointing Greenspan; and 2) being the intellectual father of the radical deregulation movement.
Krugman goes much further than I. Beyond the financial deregulation issue, he mentions something I was unaware of: Eliminating the down payment requirements of home buying:
“But there was also a longer-term effect. 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.
These restrictions were put in place in the 1930s by political leaders who had just experienced a terrible financial crisis, and were trying to prevent another. But by 1980 the memory of the Depression had faded. Government, declared Reagan, is the problem, not the solution; the magic of the marketplace must be set free. And so the precautionary rules were scrapped.
Together with looser lending standards for other kinds of consumer credit, this led to a radical change in American behavior.”
Allow me to put Professor Krugman’s criticism into a little context, via Chapter 3 of Bailout Nation:
“The market for financing homes was quite different in the 1920s and 1930s than it is today. There were no such things as 30-year, fixed-rate mortgages. Instead, the typical mortgage was an interest-only loan for a period ranging from three to five years. These non-amortizing mortgages called for a balloon payment upon maturity. Most were renewed without much fuss—assuming the borrowers had maintained their jobs and payment histories.
As the 1930s economy went from bad to worse, this cozy home financing arrangement ran into trouble. Home prices entered into a steep decline. A cash-strapped populace, suffering from massive job losses, was frequently unable to meet its mortgage payments.
In History and Policies of the Home Owner’s Loan Corporation, C. L. Harriss writes, “What had generally been regarded as a reasonably sound arrangement by all parties concerned proved to be very weak when a set of interrelated forces combined to bring on a severe depression after 1929 and to disrupt seriously the structure of home-ownership finance.”
I am curious about one thing: Does anyone know specifically what legislation Krugman was referencing that eliminated the down payment requirement ?
Reagan Did It
NYT, May 31, 2009