Describe financial deregulation introduced by the Reagan administration. (15 marks)

ANSWER

About Reasgan

Ronald Wilson Reagan was the 40th U.S. president, serving from Jan. 20, 1981, to Jan. 20, 1989.? His first task was to combat the worst recession since the Great Depression.

Reagan promised the "Reagan Revolution," focusing on reducing government spending, taxes, and regulation. His philosophy was, "Government is not the solution to our problem. Government is the problem'

Reagan was an advocate of laissez-faire economics. He believed that a free market and capitalism would solve the nation's woes. His policies matched the "greed is good" mood of 1980s America.

The Policies of Reaganomics

Reagan based Reaganomics on the theory of supply-side economics. This theory proposes that tax cuts encourage economic expansion enough to broaden the tax base over time. The increased revenue from a stronger economy is supposed to offset the initial revenue loss from the tax cuts.

According to the Laffer Curve, this only works if the initial tax rates are high enough to fall in the “Prohibitive Range.”Reagan's first tax cuts worked because tax rates were so high. The 1986 and 1987 tax cuts weren't as effective because tax rates were already reasonable at that time.

Reagan also offset these tax cuts with tax increases elsewhere. He raised Social Security payroll taxes and some excise taxes, and he cut several deductions.

Reagan cut the corporate tax rate from 46% to 40%, but the effect of this break was unclear. He changed the tax treatment of many new investments. The complexity meant that the overall results of his corporate tax changes couldn't be measured.

Reagan and Deregulation

Reagan was applauded for continuing to eliminate Nixon-era price controls.They constrained the free-market equilibrium that would have prevented inflation. Reagan removed controls on oil and gas, cable television, and long-distance phone service. He further deregulated interstate bus service and ocean shipping.

Reagan deregulated banking in 1980 and Congress passed the Garn-St. Germain Depository Institutions Act in 1982.The Act removed restrictions on loan-to-value ratios for savings and loan banks. Reagan's budget cut also reduced regulatory staff at the Federal Home Loan Bank Board. As a result, banks invested in risky real estate ventures. Reagan's deregulation and budget cuts contributed to the savings and loan crisis of 1989. The crisis ushered in the 1990 recession.

Reagan did little to reduce regulations affecting health, safety, and the environment. In fact, he reduced these regulations at a slower pace than the Carter administration did.

Reagan's enthusiasm for the free market did not extend to international trade. Instead, he raised import barriers. Reagan almost doubled the number of items that were subject to trade restraint from 12% in 1980 to 23% in 1988