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Clinton on Banking Deregulation & the Financial Crisis:

Some have argued that deregulation of the financial services industry, and the 1999 Gramm-Leach-Bliley Act which repealed the Glass-Steagall Act of 1933 in particular, caused or contributed to the current financial crisis. In a recent iterview, BuisnessWeek asked President Bill Clinton, who signed Gramm-Leach-Bliley into law, whether he shared that view.

BW:Mr. President, in 1999 you signed a bill essentially rolling back Glass-Steagall and deregulating banking. In light of what has gone on, do you regret that decision?

Clinton:No, because it wasn't a complete deregulation at all. We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure. I thought at the time that it might lead to more stable investments and a reduced pressure on Wall Street to produce quarterly profits that were always bigger than the previous quarter. But I have really thought about this a lot. I don't see that signing that bill had anything to do with the current crisis. Indeed, one of the things that has helped stabilize the current situation as much as it has is the purchase of Merrill Lynch (MER) by Bank of America (BAC), which was much smoother than it would have been if I hadn't signed that bill.

BW:Phil Gramm, who was then the head of the Senate Banking Committee and until recently a close economic adviser of Senator McCain, was a fierce proponent of banking deregulation. Did he sell you a bill of goods?

Clinton: Not on this bill I don't think he did. You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything. On the Glass-Steagall thing, like I said, if you could demonstrate to me that it was a mistake, I'd be glad to look at the evidence. But I can't blame [the Republicans]. This wasn't something they forced me into. I really believed that given the level of oversight of banks and their ability to have more patient capital, if you made it possible for [commercial banks] to go into the investment banking business as Continental European investment banks could always do, that it might give us a more stable source of long-term investment.

[Hat tip: WSJ.]

Gregory Conen (mail):
Oh, THAT Clinton. I had forgotten about him.

Seriously, it was mature of him to not get in on the CRA/deregulation blame game, and admit that Gramm-Leach-Bliley was a joint effort. Even if he seems more confident than perhaps he should be that it wasn't a factor in the crisis.
10.2.2008 10:41pm
Sagar (mail):
But this doesn't fit the current narrative (of the media and the Democrats, even if that is redundant) that this is all Bush's fault.

This is the big difference between a centrist Dem like Bill Clinton and the current left-wing leadership of the party.
10.2.2008 10:48pm
Smokey:
Classic Clinton:
"You know, Phil Gramm and I disagreed on a lot of things, but he can't possibly be wrong about everything."
And the current nominee makes Bill Clinton look like a right-wing fanatic.
10.2.2008 10:51pm
MnZ:
You know this is what I always liked about Clinton. He had a willingness to challenge the left wing conventional wisdom in a pretty blunt way. I suspect that this is why a lot of people on the left don't like him.
10.2.2008 11:02pm
Assistant Village Idiot (mail) (www):
Let me just bring up the possible cynical interpretations. I'm not sure I believe either of them, but they need to be part of the discussion.

1. He is protecting his own legacy.
2. He believes this is advantageous for Hillary 2012

That said, I think he makes good points. When Clinton believes the facts are mostly in his favor, he has always been at his best - willing to be evenhanded, gracious, candid, show some humility. When he is attacked he is a different animal.
10.2.2008 11:13pm
Sagar (mail):
Wish there were a debate thread!

They are being nice to each other and trying to stay with the message - repeatedly attacking the other party Prez candidate and talking up their own party prez candidate.

Biden looks cool - wonder why he never got more than a couple of % votes during primaries in his Prez runs!

Palin clearly made a mistake in her CBS interview - not sure what the reasons were - as it is apparent she is not as bad as she looked on that one.
10.2.2008 11:14pm
Oren:

This is the big difference between a centrist Dem like Bill Clinton and the current left-wing leadership of the party.

Amen. It's ****ed up that we have to chose between Tom Delay and Nancy Pelosi (or Frist v. Reid).
10.2.2008 11:16pm
Paul Allen:
Clinton gets it right. The repeal of Glass-Steagall has been a critical stabilization step. This sort of thing deserves front-page coverage. "90s Era Deregulation Stabilizing Banking System"
10.2.2008 11:26pm
A. Zarkov (mail):
Clinton:
We still have heavy regulations and insurance on bank deposits, requirements on banks for capital and for disclosure.
This answer demonstrates that Clinton has little grasp of how the repeal of Glass-Steagall contributed to the current mess. Gramm-Leach-Bliley repealed the provisions of Glass-Steagall that prohibit bank holding companies from owning other financial institutions separating commercial banking, investment banking and insurance.
10.3.2008 1:21am
c.gray (mail):

This answer demonstrates that Clinton has little grasp of how the repeal of Glass-Steagall contributed to the current mess.


Apparently, nobody has any grasp of how Gramm-Leach brought about the current mess, because nobody who is making that claim can provide a coherent explanation of why we ought to believe its true.

That's because its contradicted by all the evidence. The failures are taking place primarily in organizations that were never covered by Glass-Steagall, like the GSEs and the big 5 investment banks. Bank holding companies that built investment arms are either still functioning, like Citigroup, or are being sold out in an orderly fashion without bankruptcy, like Wachovia.

Clinton's right. The people blaming the "repeal" of Glass-Steagall don't know WTF they are talking about. It's the left wing fairy tale about how we got here, serving the same function that blaming the CRA does for the right.
10.3.2008 2:08am
PGofHSM (mail) (www):
I don't consider myself knowledgeable enough about banking to say how Gramm-Leach-Bliley interacted with other conditions and whether, absent GLB, we would be in a different (better? worse?) situation today.

What I do know is that I'm getting really sick of the WSJ and other conservative folks claiming that there was a 90-8 Senate vote in favor of GLB. The Senate vote to approve or disapprove the bill itself was a party-line vote in a Republican-controlled Senate: no Republican voted against GLB, and the only Democrat to vote for it was Hollings (SC).

The 90-8 vote was on the conference report, at the point when the bill had passed both Houses and was on its way to the White House for Clinton's signature. From what I understand, once the deal is done and the bill has passed, it's considered part of comity to vote to approve the conference report. It is not considered to be a sign that one wanted the underlying bill to pass in the first place (one decided on that when the bill, not the report, was before one's House).

If the GLB was a good thing, have the courage of your convictions to say, "This was good, and Hollings was the only Senate Democrat who realized that. The rest of y'all were dumb." Instead, there's the attempt to say that the Democrats can't criticize because they voted for it when they didn't.
10.3.2008 2:24am
PGofHSM (mail) (www):
"It's the left wing fairy tale about how we got here, serving the same function that blaming the CRA does for the right."

You're probably right, but CRA was supposed to assist low-income and especially minority home-ownership. Out of curiosity, which group are left-wingers obliquely attacking when they go after GLB?
10.3.2008 2:26am
A. Zarkov (mail):
c.gray:

"... because nobody who is making that claim can provide a coherent explanation of why we ought to believe its true."

Let me help you. One of the big failures was AIG and the primary cause of that failure comes from it's London-based banking unit which traded Credit Default Swaps. Glass-Steagall separated investment banking and insurance.

Commercial banks bear credit risk, while investment banks bear market risk, and the latter is far more profitable than the former because it's much easier to control credit risk. A company making a loan from a commercial bank can induce it to make a bad loan by threatening to take away the more profitable investment banking business.

The repeal of Glass-Steagall like the CRA functioned as a catalyst not a cause. What about the GSEs? Simple. They wanted a piece of the highly profitable unregulated shadow banking system that the repeal helped create.

I hope this helps.
10.3.2008 2:32am
Ricardo (mail):
Let me help you. One of the big failures was AIG and the primary cause of that failure comes from it's London-based banking unit which traded Credit Default Swaps. Glass-Steagall separated investment banking and insurance.

Yes, and the part of AIG that had to be rescued was... the part that traded credit default swaps. AIG's insurance subsidiaries are separate entities, are regulated the same way that every other insurance company is, and are solvent and not in need of a bailout. The fact that AIG is involved in the regulated insurance business was not a factor in the Fed rescue and is a red herring.

The problem as far as regulation is concerned is that investment banks have started acting more and more like insurance companies (by selling credit default swaps) and like commercial banks (by buying CDOs, making massive loans and doing all this with borrowed funds). The fact that commercial banks or insurance companies now have investment banking units is not in itself a problem.
10.3.2008 2:59am
A. Zarkov (mail):
"The fact that AIG is involved in the regulated insurance business was not a factor in the Fed rescue and is a red herring."

From the NYT
"It is beyond shocking that this small operation could blow up the holding company," said Robert Arvanitis, chief executive of Risk Finance Advisors in Westport, Conn. "They found a quick way to make a fast buck on derivatives based on A.I.G.'s solid credit rating and strong balance sheet. But it all got out of control."
This statement directly contradicts your assertion that only the London unit had a problem and the rest of the holding company was ok.
10.3.2008 6:47am
Jonathan H. Adler (mail) (www):
PGofHSM wrote:
The 90-8 vote was on the conference report, at the point when the bill had passed both Houses and was on its way to the White House for Clinton's signature. From what I understand, once the deal is done and the bill has passed, it's considered part of comity to vote to approve the conference report. It is not considered to be a sign that one wanted the underlying bill to pass in the first place (one decided on that when the bill, not the report, was before one's House).
This is not true. The point of a conference report is to reconcile competing versions of the bill if the House and Senate pass different versins. It is the vote on final passage. In this case, the conference report incorporated various changes that made the bill more favorable to Democrats and passed both Houses by veto-proof majorities. The margins of the two Senate votes were different because the bill was different.

JHA
10.3.2008 9:44am
AB (mail):
Does anyone know of any scholarly works (something more in-depth than a newspaper article or an interview with Bill Clinton) arguing that Gramm-Leach-Bliley is not responsible for our current predicament?

The only studies I've been able to find are linked to by this Marginal Revolution post, and I'm looking for something more. Unfortunately, even the ones included in the post are several years old.

Even citations would be greatly appreciated. I figure that if such scholarship exists, someone reading this blog will have come across it.

Thanks.
10.3.2008 11:54am
Daniel San:
Zarkov, That is the most coherent explanation of the problems caused by G-L-B that I have seen. I'm not sure I buy it, but you can safely attribute that to my ignorance, if you like.
10.3.2008 12:30pm
A. Zarkov (mail):
"Does anyone know of any scholarly works (something more in-depth than a newspaper article or an interview with Bill Clinton) arguing that Gramm-Leach-Bliley is not responsible for our current predicament?"

You might not find such a thing because Clinton's wrong.

Here is another essay on Glass-Steagall and the credit crisis. In reading this essay I see that in 1987 Paul Volker also made my argument against eroding Glass-Steagall.
* Lenders will "recklessly lower loan standards in pursuit of lucrative securities offerings, and"
* "Market bad loans to the public"1

An argument against this view was made by Citigroup Vice-Chairman Thomas Theobald who argued that reckless corporate behavior would be prevented by:

* "An effective SEC"
* "Knowledgeable investors"
* "Very sophisticated" ratings agencies
We now see how hollow Citibanks argument was. The SEC did not have the power. Investors are greedy fools, and the rating agencies are easily corrupted.

If you want to understand all this quantitatively then you should understand the concept of maturity matching.
10.3.2008 1:20pm
c.gray (mail):

Let me help you. One of the big failures was AIG and the primary cause of that failure comes from it's London-based banking unit which traded Credit Default Swaps. Glass-Steagall separated investment banking and insurance.


Ok, I was mistaken. The "Gramm-Leach" crazies aren't always incoherent. Sometimes they are just flat out wrong. Sometimes they just make things up.

For example, the above argument the fact that AIG Financial was opened in 1987, and began trading in the CDS market immediately, 12 years _BEFORE_ Gramm-Leach. It was set up in London specifically to avoid the issues raised by Glass-Steagall.

So no cigar. Even without Gramm-Leach, AIG Financial company still got set up. Arguably, Glass-Steagall's old restrictions made the problem worse, since it was directly responsible for moving the problematic activity offshore, where it was difficult for both AIG holding's management and US regulators to monitor, let alone regulate. And AIG's insurance company subsidiaries are, by all accounts, perfectly sound despite almost a decade of operating under Gramm-Leach.

And the vague claim that the GREs failed because they "They wanted a piece of the highly profitable unregulated shadow banking system" doesn't even pass the laugh test. It's just made up. The GREs simply did not participate in the CDS market, as customers or brokers, although many of the institutions that bought the soon-to-be-worthless paper they shoveled out did. The GREs failure had nothing to do with derivatives, and everything to do with a collapse in the perceived value of high-risk mortgage backed paper on their books after real estate prices tanked worldwide and exposed the fact that CDO risk models were perfect examples of GIGO.

The current crisis originated in the way risk was assessed for traditional home mortgage lending, which was never really within the ambit of Glass-Steagall. The bottom line on "Gramm-Leach" is that none of the evils predicted by its detractors seem to have taken place at all, let alone contributed to the current crisis. Commercial banking entities that moved into investment banking, like Citigroup, have acted much more cautiously and retained higher reserves than the traditional Wall Street firms, probably because the entire entity as whole is subject to FDIC oversight as long as it is involved in commercial banking. The result is that they have been far less badly burned by the current meltdown.
10.3.2008 2:39pm
c.gray (mail):

You're probably right, but CRA was supposed to assist low-income and especially minority home-ownership. Out of curiosity, which group are left-wingers obliquely attacking when they go after GLB?


Yeah, yeah. I get it. Evil conservative troglodytes hate minorities. Thoughtful progressives just want a sound regulatory environment.

I don't care. Fantasy is fantasy, and leads to terrible policy regardless of whether the true believer is a pure-hearted crusader or a wicked fool.

If people believe come to believe the current mess was caused by the CRA or Gramm-Leach, or both together, they'll think they can avoid it by repealing one or both. And they'll be wrong. It will just happen again in 20 years
10.3.2008 3:03pm
Jim at FSU (mail):
I hate to admit it, but I sometimes miss Bill Clinton.
10.3.2008 3:04pm
Smokey:
Zarkov, as usual, provides the most reasonable explanation. Thanks.

Jim at FSU:
I hate to admit it, but I sometimes miss Bill Clinton.
With what we're faced with now, a true war hero but a politician with no fire in the belly, and an Affirmative Action hero with no credible experience, I have to admit that I'd prefer Clinton, too.

He was middle of the road [and he would appear downright right-wing today, compared with Barry Zerobama].

And he was always entertaining.
10.3.2008 10:21pm
EconReal:


I've been inundated by friends and relatives asking for my explanation of the current financial meltdown. Unfortunately, those asking are ones who only get their information from major networks or comedians posing as news anchors (my god, there is a whole generation that actually believe comedians are honest news brokers). Many of these friends and relatives believe deregulation and corporate greed were the root causes of the meltdown and the Republicans are the ones responsible. I just look at them in wonder, internally shake my head and silently gasp -- "dude, how in the world did you come to those conclusions?"

Anyways, out of sheer frustration, I put the below document together to help explain things in a plain as language as possible -- it's helped a few to finally get their heads straight on what's going on. If you have friends or loved ones that only get their "news" the morning shows and comedians, the below may help them also -- feel free to use.

*****************************************

First, deregulation did not cause the current financial fiasco in subprime loans. In fact, quite the contrary, it was federal government intervention starting in the late 1970's with a new piece of legislation called the Community Reinvestment Act. The purpose of this act was to provide "affordable housing" for all by simply forcing banks to lend money to people who really couldn't afford a mortgage. The popularity of subprime loans emanates from this legislation.

In 1994, the Clinton administration decided that banks were not doing enough subprime loans so they enhanced the legislation to tighten the screws on banks. Guess what? The bankers had to make more of these high-risk mortgage loans (subprime) because the federal government threatened them with fines and potentially a lot worse. Bankers were feeling the hot and heavy breath of a group elected politicians who decided everyone deserved an affordable home and bad credit risk was not a valid concern for bankers.

The above is called government intervention (intimidation) into the free market -- there was no deregulation regarding the subprime loan market. In fact, there never was a regulatory body assigned to monitor these very high-risk mortgage loans. Since there never was regulation of subprime loans, it's a wonder how politicians and the news media have convinced so many that subprime loans were "deregulated" -- never underestimate the power of the boob tube or "objective" journalists.

Because the high-risk subprime loan market became a growth market, due to politician/government intervention and negative incentives (threats), two federally chartered corporations, the only two in the world by the way, decided they had to facilitate the growth of "affordable housing" by greasing the skids. These two federal corporations, Fannie Mae and Freddie Mac, encouraged by senators and Congressmen, and having the status of being federally-backed institutions that could "not" fail, went flat-out, hog wild subsidizing these high-risk loans for affordable housing. As this quote from New York Times 1999 article reveals, even they saw the potential problem brewing.

"Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits."

Okay, for the record, Fannie Mae is not a Wall Street firm, it's a government corporation. Along with Freddie Mac, it's a Frankenstein monster created by guess who.....the government, our elected politicians. Oversight of these two monsters is done not by the free market but by guess who.....the government, specifically Congress. Want to see how Congress does this oversight when a real regulator comes to them with concerns about Fannie and Freddie, watch this:

http://www.youtube.com/watch?v=_MGT_cSi7Rs

Did you note the party affiliation of those defending Fannie and its executives from needed regulation? Did you note the party affiliation of those that were demanding more regulation? These are our great "check &balance" Democratic Party representatives in action. Why do they act so angrily against new regulatory efforts suggested for the two federal government sponsored monsters? Is it corruption? Is it greed? Or, is it total lack of incompetence? Take your pick, but one thing is for sure, money talks, as well as greasing the skids.

Ever wonder why Senator Obama and his partisan associates never spoke out for more regulation of the two government subprime monsters? Well…..besides being Senator "Present" he is also the second largest recipient of Fannie Mae contributions, after only four years in the Senate. It only took him four years to exceed the contribution levels of senators who have been supporters of Fannie Mae for two decades. Come on now, be honest….do ya think Senator Obama is the solution, or part of the problem?

The good senator did not cause this problem by himself but he is the epitome of what's wrong with our political class and our present government. They are not the solution, nor our salvation. (Sorry if I'm bursting anyone's balloon here, but Obama, and others of his ilk, created the subprime mess and continue to make it worse.) Unfortunately, these politicians will never be held accountable despite gross negligence, possible corruption, and intimidating government interference in the free market.

Okay, I'm almost done here, so let me finish up with a few more points: social security, energy, health care, public education, housing, banking, insurance, transportation. What do these have in common? All are in various forms of a crisis situation, teetering on failure; all are victims of government dominance or significant intervention by government; and, all are the favorite interests of our political class and mainstream news media because of regulation, which attracts the corrupting influence of lobbyists. None of these entities or industries operates in a reasonable free market environment; they operate in a political and bureaucratic environment that has totally ruined any potential of free market solutions and guarantees corruption to prevail.

The free market or capitalism or even high Wall Street compensation is not the root cause of the recent failures or soon-to-be failures. The news media and politicians conveniently use these as scapegoats to convince the average citizen that blame lays elsewhere. Unfortunately, the truth is a little more personal. Namely, we keep electing idiots who think they're smarter than the free market. We keep electing idiots who think they can micro-manage huge segments of our economy without any negative impacts. These are the same idiots who promise they can provide us affordable housing, affordable health care, affordable retirement, affordable insurance, affordable energy, affordable education, affordable food, affordable child care, and affordable you-name-it. The question is, are we the bigger idiots for electing them? Can we still "afford" to keep electing them?
10.5.2008 10:28pm
AMM:
EconReal is parroting the right wing talking points about CRA. The vast majority of the loans made were by mortgage lending institutions not under CRA regulation. With a little research one will find that non CRA loans are defaulting at more than twice the rate of CRA loans. This means that CRA may have added to the problem but it is hardly the dastardly villain which people are trying to paint.
10.7.2008 4:37pm