Ronald Reagan: The Precursor to Subprime Loan Mess

The subprime loan mess may seem like a relatively new phenomenon, but the reality paints a different picture. The subprime loan fiasco started about 30 years ago under the reign of President Reagan. Reagan served as the American President from 1981-1988. The Garn-St. Germain Depository Institutions Act is where it all started to go wrong. In 1982, Reagan signed the bill into law and heralded the bill. Said Reagan, as reported in the New York Times, ‘This bill is the most important legislation for financial institutions in the last 50 years. It provides a long-term solution for troubled thrift institutions. … All in all, I think we hit the jackpot’ (Krugman, 2009, p. 1).  Nothing could be further from the truth. Reagan’s “jackpot” turned into a “crockpot” of bad ideas and financial practices that burned American home buyers and the eventually the federal government.

The Alternative Mortgage Transactions section of the bill allowed housing creditors to give alternative mortgages, which resulted in many subprime loans that people could not afford (GARN-ST GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982, 2014).  Furthermore, Reagan’s deregulation policies gave much free reign to savings and loans institutions. Subprime loans with ridiculous interest rates were born out of these lax economic policies. Savings and loans companies made plenty of bad investments, which resulted in the government needing to use $150 billion dollars to try and fix the problem when things spiraled out of control (Toplin, 2008).

I agree with Thiel, Bagdasarov, Harkrider, Johnson, & Mumford (2012) that social responsibility and using common sense is needed when leaders makes decisions, which is demonstrated in the follwing passage: “From a constructivist viewpoint, sensemaking is critical to leader EDM because ethical dilemmas are inherently complex, have ambiguous implications, and are often difficult to recognize” (Thiel et al.  (2012, p. 51).  While I doubt that Reagan purposely tried to get borrowers to default on subprime loans, letting the Savings and Loans institutions get too much power should have been reconsidered.

Subprime loans were at its first peak in the 1990’s.  However, the 1990’s were also the start of outsourcing jobs to other nations with the help of the North American Free Trade Agreement. This created more unemployment, which ultimately affects people’s ability to pay for loans and mortgages. However, without Ronald Reagan’s impetus, I doubt that things would have become as bad for the United States financially.

References

GARN-ST GERMAIN DEPOSITORY INSTITUTIONS ACT OF 1982. (2014, April 20). Retrieved from Federal Deposit Insurance Corporation : https://www.fdic.gov/regulations/laws/rules/8000-4100.html

Krugman, P. (2009, May 31). Reagan did It. Retrieved from The New York Times : http://www.nytimes.com/2009/06/01/opinion/01krugman.html

Thiel, C. E., Bagdasarov, Z., Harkrider, L., Johnson, J. F., & Mumford, M. D. (2012). Leader ethical decision-making in organizations: strategies for sensemaking. J Bus Ethics, 49-64.

Toplin, R. B. (2008, September 8). Blame Ronald Reagan for our current economic crisis . Retrieved from History News Network.com : http://historynewsnetwork.org/article/53527

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