MacKenzie: Did you know it was Bill Clinton who repealed Glass-Steagall?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 to boast about, President Barack Obama in 2012 is reprising much of his 2008 economic message. And he has two basic arguments. 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 (sometimes literally) hug former rivals Bill and Hillary Clinton as hard as he can and hearken back to the prosperity and economic growth of the 1990s.
There is one problem with this argument. The Obama campaign’s twin messages of bashing deregulation and embracing the Clinton years are inherently contradictory. He is telling Americans to look at the ’90s as our economic model, but not to look too closely, lest they see that the ’90s, perhaps even more than the ’80s, were a decade of deregulation.
In a much-hyped pro-Obama ad running in swing states such as Virginia, Clinton warns that a Mitt Romney presidency would “go back to deregulation.” Clinton made similar claims Wednesday night in his prime-time speaking slot at the Democratic convention, arguing that Republicans want to “get rid of those pesky financial regulations.” But regardless of how one views Obama’s economic record, the fact remains that on financial regulation, Bill Clinton as president was actually more of a deregulator than Bush was.
The characters quoted above, in the preachy new HBO drama from West Wing creator Aaron Sorkin, are not the only liberals who have noted that Clinton pushed for and signed the very deregulatory measures they blame (however wrongly) for causing the financial crisis of 2008. Once the 2008 election returns were in, and Obama no longer needed Clinton’s support (and thought he would never need it again), many on the left let loose on Clinton, warning Obama not to follow 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 on board, Obama should ignore their advice and simply utilize their presence “so that he can govern as a progressive in pragmatist’s clothing,” Kuttner advised.
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 Byzantine complexity and its provisions on issues that had nothing to do with the crisis, such as price controls on what retailers pay to process debit cards.
It turned out that, without the ’90s policies of liberalization, mere window dressing from that decade could not reproduce its economic success. And leaving aside his statement in the Obama commercial, Clinton knows this. He and his administration officials credited deregulation for contributing to the ’90s economic boom — the time of “shared prosperity” that Obama says he wants to resurrect.
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. Among the achievements on Clinton’s list were “modernizing for the new economy through technology and consensus deregulation.”
“In 1993, the laws that governed America’s financial service sector were antiquated and anti-competitive,” the document explained. “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 that passage is true. All that’s missing is mention of the credit owed to the GOP-controlled Congress elected in 1994, which also helped pass those policies. These bipartisan financial reforms, however, were the very same policies that Obama, Joe Biden, and other Democrats attacked during the campaign of 2008 and throughout the next three and a half years, shoehorning them into their strategy of blaming the previous administration.
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.