Wednesday, October 1, 2008

WSJ & Bill Clinton On Deregulation, Glass-Steagall & The Subprime Crisis

Obama's meme is that our entire fiscal crisis centers not on the subprime crisis, but on deregulation of the financial industry. The facts are otherwise.

Deregulation occured on Bill Clinton's watch. Former President Clinton, having already weighed in on the responsibility of Democrats in Congress for the Fannie-Freddie subprime crisis, has now weighed in, noting that deregulation and the repeal of Glass-Steagall was not the cause of the current crisis. The editors at the WSJ fill that in with facts and examples, noting that the securities implicated in the current crisis had begun issuance prior to deregulation and merely continued afterwards. Further, the WSJ notes that those organizations that have taken advantage of the deregulation have best weathered the financial storm. This from the WSJ:

A running cliché of the political left and the press corps these days is that our current financial problems all flow from Congress's 1999 decision to repeal the Glass-Steagall Act of 1933 that separated commercial and investment banking. Barack Obama has been selling this line every day. Bill Clinton signed that "deregulation" bill into law, and he knows better.

In, Maria Bartiromo reports that she asked the former President last week whether he regretted signing that legislation. Mr. Clinton's reply: "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 by Bank of America, which was much smoother than it would have been if I hadn't signed that bill."

. . . 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."

. . . The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, including 38 Democrats and such notable Obama supporters as Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle -- oh, and Joe Biden. Mr. Schumer was especially fulsome in his endorsement.

As for the sins of "deregulation" more broadly, this is a political fairy tale. The least regulated of our financial institutions -- hedge funds -- have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren't diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

Meanwhile, commercial banks that had heavier capital requirements were struggling to compete with the Wall Street giants throughout the 1990s. Some of the deposit-taking banks that were allowed to diversify after 1999, such as J.P. Morgan and Bank of America, are now in a stronger position to withstand the current turmoil. They have been able to help stabilize the financial system through acquisitions of Bear Stearns, Washington Mutual, Merrill Lynch and Countrywide Financial.

Mr. Obama's "deregulation" trope may be good politics, but it's bad history and is dangerous if he really believes it. The U.S. is going to need a stable, innovative financial system after this panic ends, and we won't get that if Mr. Obama and his media chorus think the answer is to return to Depression-era rules amid global financial competition. Perhaps the Senator should ask the former President for a briefing.

Read the entire article. Obama's disengenuous musings are actually a necessity. He was heavilly immersed in pushing lenders into the subprime market in his days as a community organizer and then as a lawyer. But I would not be surprised to find that Obama believes what he says. As discussed in the post below, his worldview is much closer to Marx than Adam Smith.

(H/T Hot Air)

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