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Summers and Clinton were—and are—correct. The law benefited the economy by creating more choice and competition, 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." 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."
Even stranger than the Obama camp's attack on McCain's support of the bipartisan Gramm-Leach-Bliley was their slap at his support for a bill that cleared barriers to interstate banking. This law, the Riegle-Neal Interstate Banking and Branching Efficiency Act, was passed in 1994, before Republicans even took over Congress. 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. Federal Reserve Governor Randall Kroszner has credited the law for a myriad of 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."
Yet when McCain advocated letting individuals purchase insurance across state lines and wrote in a journal article 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," the Obama campaign hit the roof. "McCain just published an article praising Wall Street deregulation," Obama's attack ad exclaimed. "Said he'd reduce oversight of the health insurance industry, too."
FactCheck.org lambasted this ad for quoting McCain "out of context on health care." But the greater worry is that the attacks on the bipartisan deregulation that led to prosperity appeared to be quite in context for Obama, at least during the campaign. But if President-elect Obama wants to pull the U.S. economy out of its rut, he must face up to the fact that '90s deregulation was an essential ingredient in Clinton's recipe for an economic boom. He also must recognize that substantially undoing the liberalizations that Clinton and the GOP Congress achieved would crimp recovery as well as create new problems
Deregulation has never meant non-regulation, and my boss, Competitive Enterprise Institute President Fred L. Smith, Jr., has stressed the "competitive regulation" that comes from market discipline. Creating a modernized regulatory regime for some of the new challenges we face would have been an urgent task of any new administration, but the key is what type of updating would be done. Good updating would take into account government subsidized institutions—such as Fannie Mae and Freddie Mac—that have weakened market discipline, as well as existing regulations that encourage perverse incentives, such as Clinton's expansion of the Community Reinvestment Act, an area where the administration was not deregulatory and actually encouraged bad loans to be made.
Nevertheless, the Clinton-GOP governance, despite the constant bickering and backbiting, ironically left a shining legacy of prosperity, which bipartisan deregulation was so much a part of. In terms of economic growth, there are few better examples of bipartisan success than this tenure.
John Berlau is director of the Center for Entrepreneurship at the Competitive Enterprise Institute.