Reagan Deregulates S & L

In the crisis that followed the oil crisis there was a lot of confusion and a lot of money was pumped-in to create the campaign for free markets and there was the idea that things are going very badly in America was it was projected much more than the reality. There were small disturbances in the economy and that was made out to be a very big disturbance in order to create a perception of a crisis and this led eventually to the coming to the power of Reagan and Thatcher. These are the famous Reaganomics and supply-side economics. Basically Keynes emphasis was on demand side because it's all about management of the aggregate demand while Reaganomics was about the supply-side it said that demand doesn't matter and Keynes is completely wrong and what we need to worry is about the supply.

The money makers are the producers, the more money you gave them the more money with that will be produced. So Reagan actually makes that changes in which the poor was taxed to give money to the rich. This was a very unusual policy but he defended that if we give the money to the poor they will just eat it and that will not add to the economic productive capacity and if we give it to the rich people they mean business factories and that wind creates additional capacity. This didn't happen as the wealthy people didn't invest in factories they invested in stocks and other assets i.e. artificial wealth. This is one very important problem that people when you measure the wealth some of the wealth is artificial for example if the stock market doubles in value today then according to the standard measures of your GDP the wealth will double but it's not true. But this is an illusion as the real economy has not changed, but previously as in 19th century and in earlier 20th century people understood this and people said that this kind of wealth production is harmful and the people who speculated stocks do harm the economy, and we should tax this kind of windfall gains. But the capitalists fought back and said that we are creating wealth but in fact they were not but their arguments became accepted and now the conventional economics that you studied believes in these arguments i.e. if the prices of land in Islamabad got five times or ten times then the nation has become wealthier but it is completely ridiculous. As if you just count the money value of the assets it has definitely increased and GDP will go up but is it not true. So you have to differentiate between productive increases and financial increases which is an illusion.

Reagan deregulated the savings and loan associations. He said that the banking rules are bad because they are stifling the growth of the financial industry so we take away the rules. Almost immediately the thing that had happened in the great depression repeated themselves in about three years there had a complete collapse as the savings and loans industries started gambling with their depositor’s money and lost about 80 billion dollars which was a very large sum of money. Nasim Taleb calculated that the entire profit of the banking industry for 50 years was wiped out in this one single savings and loan crisis. In a result of this what happened was that the government's this time, unlike the great depression, that this time the government did not let the banking industry to collapse but they bailed them out as they put billions of dollars to save the banks and to save the depositors as a result there was no loss to the depositors, and there was no loss to the bankers from all this gambling. The whole loss went to the general taxpayer who could not any understand as it was distributed over millions of people so it was not obvious and the economy as a whole suffered from decline in growth.