MacKenzie: “Did you know it was Bill Clinton who repealed Glass-Steagall?” Will: “Everybody knows that.” Conversation on HBO’s “The Newsroom,” originally broadcast July 22, 2012
With little success on the economic front, President Obama in 2012 is embracing much of his message on the economy from 2008. And from that playbook, he has two basic strategies.
One is to blame the supposed deregulation policies of the George W. Bush administration that Obama and his surrogates endlessly say “got us into this mess.” And the second is to hug former rivals Bill and Hillary Clinton as hard as he can and harken back to the prosperity and economic growth of the 1990s.
But there is just one problem with this theme. The Obama campaign’s twin messages of bashing deregulation and embracing the Clinton years are inherently contradictory. He is telling Americans to, in essence, look at the ‘90s, but don’t look too closely. Or they might see that the ‘90s, perhaps even more than even the ‘80s, was a decade of deregulation.
In a much-hyped new pro-Obama ad, Clinton warns that a Mitt Romney presidency would “go back to deregulation,” and we can expect Clinton to make similar claims in his prime speaking slot in the Democratic convention. The fact remains, however, that on financial regulation, Bill Clinton as president was actually more of a deregulator than Bush.
The characters quoted above from “West Wing”-creator Aaron Sorkin’s preachy new HBO drama “The Newsroom” are not the only liberals who have noted that Clinton pushed for and signed the very deregulatory measures they blame (wrongly) for causing the financial crisis of 2008. Once the 2008 election returns were in, and Clinton’s support of Obama was no longer needed (and was thought to be never be needed again), those on the left let loose on Clinton in warnings to Obama to not follow the Clinton’s deregulatory ways.
In late November 2008, American Prospect co-editor Robert Kuttner expressed concern in the Huffington Post that Obama was filling his economic team with “Clinton retreads--the very people who brought us the deregulation that produced the financial collapse.” If he must have them onboard, Kuttner advised that Obama ignore their advice and simply utilize their presence “so that he can govern as a progressive in pragmatist's clothing.”
Obama largely followed Kuttner’s advice on financial regulation, most notably by ramming through the 2,500 page Dodd-Frank “reform” in 2010, which has attracted bipartisan criticism for its overkill as well as its provisions on issues that had nothing to do with the crisis, such as the use of “conflict minerals.”
But window dressing from the ‘90s could not produce the economic success of those years without the policies of liberalization. And his statement in the Obama commercial, Clinton knows this. He and his administration officials have credited deregulation for contributing to the ‘90s economic boom — the very “shared prosperity” that Obama says he wants to go back to.
Late in Clinton’s tenure, the White House put forth a document celebrating “Historic Economic Growth” during the administration and pointing to the policy accomplishments it deemed responsible for this growth. Among the achievements on Clinton’s list were “Modernizing for the New Economy through Technology and Consensus Deregulation.”
“In 1993,” the document explained, “the laws that governed America’s financial service sector were antiquated and anti-competitive. The Clinton-Gore administration fought to modernize those laws to increase competition in traditional banking, insurance, and securities industries to give consumers and small businesses more choices and lower costs.”
Everything in those passages is true. All that’s missing is credit to the GOP-controlled Congress elected in 1994 for passing most of the policies that led to the prosperity. These bipartisan financial policies, however, were the very same policies that Obama, Joe Biden, and other Democrats attacked during the campaign of 2008 and throughout the next four years, as part of their strategy of blaming the previous administration.
But on financial policy, ironically, Clinton was a far more deregulatory president than George W. Bush. As James Gattuso of the Heritage Foundation points out, while there may have been flawed oversight, there really was no financial deregulation under Bush. Indeed, Bush’s signature achievement in the financial area was the signing and implementing of the costly and counterproductive Sarbanes-Oxley accounting mandates.
By contrast, Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act, benefited the economy by creating more choice and competition. The Senate passed the legislation by a vote of 90-8, with many Democrats voting for the final bill, including now-Vice President Biden. There is now a chorus of voices, including some on the populist Right, who blame the demise of Glass-Steagall, which had strictly separated traditional commercial banking from investment banking, for contributing to the credit blowup.
But Clinton was correct to sign Glass-Steagall’s repeal, which benefitted banks of all sizes by allowing them to offer their customers insurance and brokerage services under one financial services roof. And there is little evidence of Glass-Steagall’s repeal playing a role in the mortgage crisis.
As the American Enterprise Institute’s Peter Wallison noted in The Wall Street Journal, “None of the investment banks that have gotten into trouble—Bear, Lehman, Merrill, Goldman or Morgan Stanley — were affiliated with commercial banks.” He also pointed out that “the banks that have succumbed to financial problems — Wachovia, Washington Mutual and IndyMac, among others got into trouble by investing in bad mortgages or mortgage-backed securities, not because of the securities activities of an affiliated securities firm.”
As for Citigroup, which had former CEO Sandy Weill recently cause a stir upon announcing he now favors restoring Glass-Steagall, the fact remains that its bad mortgage bets were not at all enabled by Glass-Steagall. Weill had pushed for Glass-Steagall repeal solely so that Citi could merge with the insurance subsidiaries of Travelers Group, yet he spun off Travelers into a separate firm three years after Glass-Steagall’s repeal. Had Citi used its newfound freedom from Glass-Steagall to hold on to its acquisition, it probably would be in much better shape today, given Travelers’ relative financial strength in recent years.
Clinton also championed the Riegle-Neal Interstate Banking and Branching Efficiency Act, which passed in 1994, before Republicans even took over Congress. As the previously mentioned Clinton White House “Historic Economic Growth” document put it, “in 1994, the Clinton-Gore Administration broke another decades-old logjam by allowing banks to branch across state lines.”
Riegle-Neal finally allowed the US to have nationwide banking chains, as virtually every other developed country does. Anyone who remembers the inconvenience of not being able to access your own bank’s ATM when driving into another state can attest to the benefits this law brought. Federal Reserve Governor Randall Kroszner has credited the law for a myriad of economic benefits including “higher economic and employment growth, spurred by more-efficient and more-diverse banks” and “more entrepreneurial activity, as the more bank-dependent sectors of the economy, such as small businesses and entrepreneurs, achieve greater access to credit.”
Yet when Republican rival John McCain in 2008 advocated letting individuals purchase insurance across state lines and wrote in a journal article that “opening up the health insurance market to more vigorous nationwide competition, as we have done over the last decade in banking, would provide more choices of innovative products,” the Obama campaign hit the roof and attacked McCain for daring to praise this Clinton initiative. “McCain just published an article praising Wall Street deregulation,” an Obama’s attack ad exclaimed. “Said he’d reduce oversight of the health insurance industry, too.”
At the time, FactCheck.org lambasted this ad for quoting McCain “out of context on health care.” But as I wrote for Reason magazine just after the 2008 election, “the greater worry is that the attacks on the bipartisan deregulation that led to prosperity appeared to be quite in context for Obama, at least during the campaign. If President-elect Obama wants to pull the U.S. economy out of its rut, he must face up to the fact that ’90s deregulation was an essential ingredient in Clinton’s recipe for an economic boom. He also must recognize that substantially undoing the liberalizations that Clinton and the GOP Congress achieved would crimp recovery as well as create new problems.”
Alas, with the possible exception this year of his signing of the Jumpstart Our Business Startups Act, which provides modest relief to smaller firms from Bush’s Sarbanes-Oxley and Obama’s own mammoth Dodd-Frank mandates, Obama has yet recognize the role deregulation played in fostering the Clinton-era growth he still says he wants to achieve.
The Clinton era should not be romanticized by free marketeers. Clinton did pursue some statist policies that grew government and favored public sector unions, as author Mallory Factor reminds us in his blockbuster new book, Shadowbosses. The government-sponsored housing enterprises Fannie Mae and Freddie Mac that weakened market discipline grew substantially, as well as housing regulations that encouraged perverse incentives, such as Clinton’s expansion of the Community Reinvestment Act. These are areas where the Clinton administration was not deregulatory and can be blamed for encouraging bad loans to be made (as can the George W. Bush administration).
Nevertheless, the Clinton-GOP governance, despite the constant bickering and backbiting, ironically left a shining legacy of prosperity, which bipartisan deregulation was so much a part of. In terms of economic growth, there are few better examples of bipartisan success than this tenure. We can only hope this aspect of Clinton’s presidency will be emulated once again.