But on financial policy, ironically, Clinton was a far more deregulatory president than George W. Bush was. As James Gattuso of the Heritage Foundation points out, although 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 in financial services. The Senate passed the legislation by a vote of 90 to 8, with many Democrats voting for the final bill, including our current vice president, Joe 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. The repeal benefited banks of all sizes by allowing them to offer their customers insurance and brokerage services under one roof.
Further, there is little evidence that the repeal of Glass-Steagall played a role in the mortgage crisis. As the American Enterprise Institute’s Peter J. 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, whose former CEO Sandy Weill recently caused a stir by announcing he now favors restoring Glass-Steagall, the fact remains that its bad mortgage bets were not at all enabled by the lack of a firewall. As I wrote recently on NRO, Weill had pushed for the repeal of Glass-Steagall solely so that Citi could merge with the insurance subsidiaries of Travelers Group, but he spun off Travelers into a separate firm three years after Glass-Steagall’s repeal. Moreover, 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 a Democratic-controlled Congress in 1994. 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 U.S. 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. Former Federal Reserve governor Randall Kroszner has credited the law for myriad 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.”
In 2008, presidential candidate John McCain advocated letting individuals purchase health insurance across state lines, arguing 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.” In response, 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 attack ad exclaimed. “Said he’d reduce oversight of the health insurance industry, too.”
At the time, FactCheck.org lambasted his ad for quoting McCain “out of context on health care.” But as I wrote for NRO a few days before the 2008 election, “the greater worry is that the attacks on bipartisan deregulation that led to prosperity appear to be quite in context for Obama.”
Alas, with the possible exception of this year’s JOBS Act, which provides modest relief to smaller firms from Bush’s Sarbanes-Oxley and Obama’s own mammoth Dodd-Frank mandates, Obama has yet to recognize the role that deregulation played in fostering the Clinton-era growth he keeps saying he wants to achieve.
The Clinton era should not be romanticized by free marketers. Clinton did pursue some statist policies that grew government and favored public-sector unions, as Mallory Factor reminds us in his bestselling new book, Shadowbosses. The government-sponsored housing enterprises Fannie Mae and Freddie Mac that weakened market discipline grew substantially under Clinton, as did housing regulations, such as Clinton’s expansion of the Community Reinvestment Act, that provided perverse incentives. These are areas where the Clinton administration was not deregulatory, and it’s fair to blame it for encouraging bad loans.
Nevertheless, the Clinton-GOP governance of the ’90s, despite the constant bickering and backbiting, produced a shining period of prosperity, and bipartisan deregulation was a major factor in this success. In terms of economic growth, there are few better examples of bipartisan achievement than this tenure. We can only hope this aspect of Clinton’s presidency will be emulated once again.
— John Berlau is senior fellow for finance and access to capital at the Competitive Enterprise Institute.