Obama's Clinton Problem

Deregulation made the prosperity of the 1990s possible. Just ask Bill Clinton.

Republicans had many things going against them this election, but the financial market implosion in September proved to be the final blow that sealed their losses, as voters almost always associate the economy with the party in power. And when the credit crisis emerged as the top campaign issue, Sen. Barack Obama (D-Ill.) pounced on his opponent with two basic messages. One was to blame the policies of deregulation that Sen. John McCain (R-Ariz.) voted for. And the second was to hug former rivals Bill and Hillary Clinton as hard as he could and harken back to the prosperity and economic growth of 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."

And as a contrast to the last eight years, Obama said in a speech that his administration would go back to the "shared prosperity...when Bill Clinton was president." When campaigning for the first time with Bill Clinton at a Florida rally in late October, Obama gushed that, "in case all of you forgot, this is what it's like to have a great president."

But now that he has won the presidency and must, as the cliché goes, shift from campaigning to governing, Obama and his economic team will have to face up to a paradox that most of the media overlooked during the campaign. Namely, the Obama campaign's twin messages of bashing deregulation and embracing the Clinton years were inherently contradictory. Bill Clinton signed nearly every deregulatory measure that John McCain backed—the same measures that are now being blamed (wrongly) for helping cause the current crisis. What's more, Clinton administration officials have credited these policies for contributing to the ‘90s economic boom—the very "shared prosperity" that Obama says he wants to go back to.

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 for this growth. Among the achievements on Clinton's list were "Modernizing for the New Economy through Technology and Consensus Deregulation." That's right, a Clinton White House document credited part of the administration's success to that now dreaded d-word, 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."

Everything in those passages is true. All that's missing is credit to the GOP-controlled Congress elected in 1994 for passing most of the policies that led to the prosperity. But the Clinton administration, whatever its personal and policy flaws, should indeed be praised for signing and advocating this deregulation. These bipartisan financial policies, however, were the very same policies that Obama, running mate Sen. Joe Biden (D-Del.) and other Democrats attacked during the campaign. "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.

But if Obama follows through on his campaign rhetoric on regulation, it will not be the Bush economic policies he will be overturning. In the financial area, ironically, Clinton was actually the more deregulatory president. 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 signing and implementing of the costly and counterproductive Sarbanes-Oxley accounting mandates.

When it comes to overall regulation, as my Competitive Enterprise Institute colleague Wayne Crews notes in his study "10,000 Commandments," the Bush administration has set records with the tens of thousands of pages it put in the Federal Register. So to the extent that Obama has said he would reverse financial deregulation, what he would largely be overturning are the financial modernizations Bill Clinton signed into law and that Clinton administration officials agree led to the ‘90s prosperity.

To be sure, Obama hasn't been too specific on what exactly he would reregulate. He spoke vaguely, as did McCain, of more oversight and a regulatory framework for the 21st century. And McCain further blurred this distinction with his misguided attacks on Wall Street "greed" and on the short-sellers who actually should be praised for recognizing the mortgage market's weakness before other players did.

To the extent that Obama's campaign attacked the specific deregulation policies that McCain backed, Obama ended up doing more than just running against McCain and his advisers, such as the much-vilified former Texas Sen. Phil Gramm. Obama was also campaigning against Bill Clinton, Robert Rubin, Larry Summers and virtually all of the Clinton administration's economic officials. The same folks, it's worth nothing, that now often surround Barack Obama.

Take Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act, which had strictly separated traditional commercial banking from investment banking. Obama's supporters, claiming that getting rid of Glass-Steagall led to the credit blowup, have seized on the first name on the law, that of former Sen. Gramm, to bash it as a piece of Republican deregulation. Never mind that the Senate passed the legislation by a vote of 90-8, with many Democrats voting for the final bill, including Obama running mate 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 Larry Summers had a different view. Summers told the Wall Street Journal in 1999 that the new 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' 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."

Editor's Note: We invite comments and request that they be civil and on-topic. We do not moderate or assume any responsibility for comments, which are owned by the readers who post them. Comments do not represent the views of Reason.com or Reason Foundation. We reserve the right to delete any comment for any reason at any time. Report abuses.

  • ||

    Yo. What are your thoughts on Timothy Geithner as Treasury Secretary?

    Seems like another Clinton holdover, but on the other hand he's been nick-deep in the bailout ... http://www.washingtonpost.com/wp-dyn/content/article/2008/09/18/AR2008091804211.html?sid=ST2008091703965&s_pos=

  • ||

    This is a very informative article, Mr. Berlau. There is a disconnect in the Obama-Clinton policies and rhetoric that may boil down to simple campaign stance.

    You miss what I consider the dual crux of the credit meltdown though - capital ratios and CDS exposure.

    How did bank mortgage investors get into a position that took them into 80-1 debt-to-capital ratios? (from historic 12-1 ratios?)

    When you are that highly leveraged a 10% fall in home prices is devastating to your balance sheet. These guys piled on shaky debt without proper safeguards (insurance).

    The balance sheet issue has been the death of these banks - and may nab Citigroup before the end of the month.

  • nonPaulogist||

    There is a hilarious video that was just posted about Obama and regulation.

  • Douglas Gray||

    There was a time when Clinton was being bashed, and he was defended by the best and most principled conservative we ever had; Barry Goldwater. He basically said of Clinton, "Leave him alone and let him do his job; he's not doing that bad."

  • Paul||

    How did bank mortgage investors get into a position that took them into 80-1 debt-to-capital ratios? (from historic 12-1 ratios?)

    When you are that highly leveraged a 10% fall in home prices is devastating to your balance sheet.


    ?!! When banks were leveraged 40:1, a 2% drop in your investment is devastating. Just sayin'.

  • ||

    Don't forget the other stellar economic accomplishment of the Bush I (negotiated), and Clinton (tweaked and passed) administrations. NAFTA.

    Of course Mr Obama campaigned against and sorta, kinda, maybe, wishy washily suggessted renopgotiating NAFTA. I suspect that was all cynical lying to garner votes though.

  • Wicks Cherrycoke||

    You mean, the news media failed to pick up on this contradiction? NO! I mean, wasn't the price of Sarah Palin's skirt far more critical to the nation's future.

  • economist||

    "I suspect that was all cynical lying to garner votes though."
    We priests of the Obama reject your interpretation of His words. He never suggested renegotiating NAFTA. He also believes stronly that NAFTA must be renegotiated. These are not contradictions, buy sacred mysteries not to be grasped by the minds of men.

  • economist||

    I just realized that "buy" should be "but" in the last post. This shows that even I, the high priest of the Obama, have been corrupted by American consumerism. I will give myself forty lashes in penance.

  • Jumbie||

    If you were really serious about the economy, you'd pay a dominatrix to give you those forty lashes and thus feed some liquidity into the system.

  • ||

    It was time for a change, time to rotate Party A out of power, and rotate Party B into power.

    So, just before the election, crash the economy by restricting the money supply. Rape the taxpayer to the tune of a few trillion, foreclose on a lot of homes and businesses, and buy up a bunch of failing banks holding the foreclosed properties using the bailout money sent to the banks (they haven't been lending it out...what a surprise!).

    Put your new guy Geithner in at Treasury (Paulson successfully finished his assignment, so he could be retired with full pension).

    After a few months with Party B in power, open the lending floodgates at your banks, and the economy magically perks up. But now you and your buds own most of it, and all the little people will work for almost nuthin'.

    Let the cycle begin again!

  • ||

    This is why neocons lost...

    http://www.pbs.org/wgbh/pages/frontline/bushswar/

  • Michael Ejercito||

    Amazing how people decry deregulation without explaining exactly how regulation is supposed to help.

  • دردشه عراقية||

    Thanks

  • دردشه عراقية||

    Thanks

  • johnson29||

    I want to thanks for sharing your thoughts and time into the stuff you post.

    http://www.reversemortgagelend.....age-rates/
    http://www.reversemortgagelend.....-mortgage/

GET REASON MAGAZINE

Get Reason's print or digital edition before it’s posted online

  • Video Game Nation: How gaming is making America freer – and more fun.
  • Matt Welch: How the left turned against free speech.
  • Nothing Left to Cut? Congress can’t live within their means.
  • And much more.

SUBSCRIBE

advertisement