The Ghost of Reagan Hovers Over AIG

In every article assessing the roots of today's financial crisis, one theme stands out: As would-be Wall Street wizards came up with ever-more-fantastical strategies for making obscene profits, the guardians of the public trust either snoozed or egged them on.

The Washington Post on Monday told the story [1] of three whiz kids who came up with the interest-rate swap strategy that brought down AIG and prompted a so-far $152 billion bailout by the federal government. As the article notes, the series of events that transformed AIG from a rock-solid financial powerhouse to the poster child of today's economic collapse includes heavy dollops of hubris and greed from several quarters. But a critical formula was the atmosphere on Wall Street carefully cultivated by Reagan's conservative cadre in Washington. As the Post notes of the three men who approached AIG with a plan to put what had been a staid financial management tactic on steroids with the promise of huge profits:

Their plan fit perfectly with another revolution they saw unfolding in Washington. Ronald Reagan's unwavering belief in free markets—and his distaste for regulation that put hurdles in the way of entrepreneurs—had steadily spread through the government. "The United States believes the greatest contribution we can make to world prosperity is the continued advocacy of the magic of the marketplace," Reagan told a U.N. audience that fall.

More robust financial oversight would have not allowed billions of dollars worth of financial transactions that few people fully understood, including AIG president Hank Greenberg, to mushroom to the point that the nation's economy is put at risk. Allowing private enterprise to engage in risk, with the promise of innovation for the marketplace and profit for the risk-taker, is one thing. But good public policy draws the line at the point that risk jeopardizes the larger public good. When that line isn't clear, regulators demand the transparency necessary to make that line clear and then use their authority to penalize those who dare cross it.

You would think that this lesson would be clear as we live with the effects of deregulatory excess. But, as a recent story from the normally nonideological Bloomberg News Service noted that is remarkable in its unabashed bias—headlined "Saving Capitalism No Sure Thing as Statism Undermines Economy" [2]—the argument that the American economy will pay "a steep price" when there are cops on the beat to curb capitalism's excesses will still be fervently argued when the Congress and administration get to work in January. "Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it," the article says.

The articles sweeping statements are hyperbole masquerading as analysis. But even if the sweeping conclusions become true, would not a more risk-averse Wall Street be far better for the economy than the catastrophe Reaganism has wrought? It certainly would have been for AIG, and for us taxpayers who were forced to pay for their recklessness.