Ever since the economy emerged as the top campaign issue, Barack Obama has developed two basic messages. One is that the deregulation John McCain voted for is to blame. The second is that former rivals Bill and Hillary Clinton deserve credit for the prosperity and economic growth in the 1990s.
In the presidential debates, Obama charged that McCain “believes in deregulation in every circumstance,” and claimed “that’s what we’ve been going through for the last eight years.” As a contrast to the Bush II years, Obama said in a speech, his administration would go back to the “shared prosperity . . . when Bill Clinton was president.”
But these two messages are inherently contradictory: Bill Clinton signed nearly all the deregulatory measures John McCain backed. Clinton administration officials have even credited these policies for contributing to the ’90s economic boom — the very “shared prosperity” to which Obama says he wants to return.
Late in Clinton’s tenure, the Clinton 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 was none other than “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.”
The document neglected to credit the GOP-controlled Congress for passing these policies, but the Clinton administration indeed deserves praise for signing and advocating this deregulation. These bipartisan financial policies are the very ones Obama, Joe Biden, and other Democrats attack. “Let’s, first of all, understand that the biggest problem in this whole process was the deregulation of the financial system,” Obama proclaimed in the second presidential debate.
In the financial area, Clinton was actually more deregulatory then Bush II has been. 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 costly and counterproductive Sarbanes-Oxley Act. My CEI colleague Wayne Crews notes in his study “10,000 Commandments” that the Bush administration has set records for the ten of thousands of pages it put in the Federal Register.
To be sure, Obama usually isn’t too specific on what exactly he would re-regulate. But to the extent he is specific, he’s running against not only McCain, and not only Clinton, but also people like Robert Rubin, Larry Summers, and virtually all the Clinton administration economic officials now surrounding, um, Barack Obama.
Take Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act that strictly separated traditional commercial banking from investment banking. Obama supporters claim that getting rid of Glass-Steagall led to the credit blowup. They seize on the first name on the law, that of former senator Phil Gramm, to bash it as a piece of Republican deregulation. Never mind that the Senate passed the legislation 90-8, with many Democrats voting for the final bill, including Joe Biden.
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.