Obama specifically bashed this bipartisan achievement in a March speech on the economy in New York. There he said, “By the time the Glass-Steagall Act was repealed in 1999, the $300 million lobbying effort that drove deregulation was more about facilitating mergers than creating an efficient regulatory framework.” But then-Clinton Treasury secretary and now-Obama adviser Summers had a different view. Summers told the Wall Street Journal in 1999 that the law would spur economic growth “by promoting financial innovation, lower capital costs, and greater international competitiveness.”
What’s more, Clinton himself defends the law to this day. In a recent Business Week interview
with CNBC personality Maria Bartiromo, Clinton said plainly, “I don’t see that signing that bill had anything to do with the current crisis.” He even added that its lifting of barriers to financial-service mergers may have lessened the crisis’s impact, pointing out, “Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch by Bank of America, which was much smoother than it would have been if I hadn’t signed that bill.”
Summers and Clinton were, and are, correct. The law benefited the economy through more choice and competition, 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 a Wall Street Journal op-ed, “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.”
Even stranger than the Obama camp’s attack on Gramm-Leach-Bliley is their slap at a bill that cleared barriers to interstate banking. This law, the Riegle-Neal Interstate Banking and Branching Efficiency Act, was passed in 1994, before Republicans even took Congress. And the Clinton White House’s “historic economic growth” document boasts that “in 1994, the Clinton-Gore Administration broke another decades-old logjam by allowing banks to branch across state lines.”
Riegle-Neal finally allowed the U.S. to have nationwide banking chains, as virtually every other developed country does. And anyone who remembers the inconvenience of not being able to access your own bank’s ATM 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 McCain 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. “McCain just published an article praising Wall Street deregulation,” Obama’s attack ad exclaimed. “Said he’d reduce oversight of the health insurance industry, too.”
FactCheck.org lambastes this ad for quoting McCain “out of context on health care.” But the greater worry is that the attacks on bipartisan deregulation that led to prosperity appear to be quite in context for Obama. Deregulation has never meant non-regulation, and indeed, updating laws for some of the new challenges we face will be an urgent task of any new administration. A good updating would also take into account existing regulations that encourage perverse incentives, such as Clinton’s expansion of the Community Reinvestment Act.
But when attacked today for supporting general financial deregulation, candidates can respond that they are simply being faithful to GOP-Clinton legacy of prosperity.
– John Berlau is director of the Center for Entrepreneurship at the Competitive Enterprise Institute.