HOW THE FISCAL CRISIS CAME ABOUT

Paul Krugman, NY Times - Lets recall how we got into our current mess. America emerged from the Great Depression with a tightly regulated banking system. The regulations worked: the nation was spared major financial crises for almost four decades after World War II. But as the memory of the Depression faded, bankers began to chafe at the restrictions they faced. And politicians, increasingly under the influence of free-market ideology, showed a growing willingness to give bankers what they wanted.

The first big wave of deregulation took place under Ronald Reagan - and quickly led to disaster, in the form of the savings & loan crisis of the 1980s. Taxpayers ended up paying more than 2 percent of G.D.P., the equivalent of around $300 billion today, to clean up the mess.

But the proponents of deregulation were undaunted, and in the decade leading up to the current crisis politicians in both parties bought into the notion that New Deal-era restrictions on bankers were nothing but pointless red tape. . . .

And the bankers - liberated both by legislation that removed traditional restrictions and by the hands-off attitude of regulators who didn't believe in regulation - responded by dramatically loosening lending standards. The result was a credit boom and a monstrous real estate bubble, followed by the worst economic slump since the Great Depression. Ironically, the effort to contain the crisis required government intervention on a much larger scale than would have been needed to prevent the crisis in the first place: government rescues of troubled institutions, large-scale lending by the Federal Reserve to the private sector, and so on.