Ahead of Bill Clinton’s convention speech Wednesday night, former Bush administration spokesman Ari Fleischer predicted rightly that the former president would conveniently ignore his own role in the Great Crash of 2008 — specifically, his signing into law the repeal of the Depression-era Glass-Steagall firewall between commercial and investment banks. That was progress, I thought.
More typical since the crash have been strained deregulation apologetics like this, from the Competitive Enterprise Institute’s John Berlau:
Clinton was correct to sign Glass-Steagall’s repeal, which benefitted banks of all sizes by allowing them to offer their customers insurance and brokerage services under one financial services roof. 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 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.”
True, but incomplete. The repeal of Glass-Steagall was not the proximate cause of the crash, but rather the culmination of a deregulatory trend that, as the Washington Post’s Barry Ritholtz has noted, encouraged banks to merge “into more complex and more leveraged institutions.” The upshot: “These banks, which were customers of nonbank firms such as AIG, Bear Stearns and Lehman Brothers, in turn contributed to these firms bulking up their subprime holdings as well. This turned out to be speculative and dangerous.”
Inequality watchdogs like Timothy Noah claim that the hollowing out of the middle class was briefly interrupted by Clinton’s term. That’s not entirely true, either. Dylan Matthews observes that “the Clinton years saw the top 1 percent and top 0.1 percent pull away from the rest of the country more aggressively than they had before.” Matthews also points to Bureau of Economic Analysis data demonstrating that “trend of finance taking up a greater and greater share of the economy continued apace during the Clinton years.”
All the fixin’s for our current mess were alive and present during the reign of Clinton, Alan Greenspan, and Robert Rubin: financialization; deregulation; and the willy-nilly leap into the word of “global interdependence,” in which the U.S. blithely shed manufacturing jobs and ran increasingly high trade deficits.
Democrats are right to point out that it’s absurd to blame President Obama for the fallout of an economic disaster that was years in making. That disaster was indeed years in the making — and the first year was not 2001.
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Clinton has acknowledged that the repeal of Glass-Steagall was an error, something many politicians rarely admit.
One of the major problems was almost everyone believing Alan Greenspan was a financial genius and others not having the knowledge to know the difference. Greenspan has not acknowledged his errors.
The Commodity Futures Modernization Act of 2000 (CFMA) was a much larger cause of the financial crisis. The CMFA that ensured most derivatives would not be regulated, as proposed by Brooksley Born, CFTC Chair. Treasury Secretary Robert Rubin, Federal Reserve Board Chair Alan Greenspan, and SEC Chair Arthur Levitt strongly opposed Born’s proposal.
Senator Phil Gramm (R-TX), the Chair of the Senate Banking Committee, buried the approximate 300 page CMFA in an 11,000 page must pass appropriations bill the day Congress was leaving for Christmas vacation. It was never debated in the House or senate. Gramm’s wife as the CFTC Chair in the early 90s wrote rules to exempt derivatives a few weeks before leaving for a job at Enron.
Republicans had the opportunity to correct the problem after Enron use of derivatives in their California manipulation of energy prices. Congress debated the issue for years, but did not take the needed action to prevent the subprime mortgage gambling spree that made many traders millionaires and billionaires. In 2008, Bush vetoed a law that that contained the “Close the Enron Loophole Act.” I watched the 2006-2008 Congressional Committee Hearings lead by Maria Cantwell (D-WA) and Senator Carl Levin (D-MI). Levin introduced the bill that Bush vetoed
The high gas prices before the financial collapse were caused by derivatives trading. The CFTC has still not implemented adequate rules to control the derivatives market – they love the revolving door to big dollar salaries. The price of gas started going down in the summer of 2008 because of Senator Cantwell telling the CFTC to do their job – speculators started backing out of the market. After the collapse, they did not have the money for trading.
Romney, Ryan, and Republicans want to deregulate the already too weak rules over trading. The House Republicans have blocked additional funding for CFTC to provide needed oversight for the wrong reasons. The Republicans motive is too much Regulation, but the problem is the CFTC and the SEC motivation caused by the revolving door.