Obama's Clinton Problem

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

John Berlau | November 21, 2008

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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.

Comments

|11.21.08 @ 6:20PM|#

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=

|11.21.08 @ 6:25PM|#

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|11.21.08 @ 6:27PM|#

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

Douglas Gray|11.21.08 @ 6:32PM|#

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|11.21.08 @ 7:09PM|#

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'.

|11.21.08 @ 8:11PM|#

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|11.22.08 @ 8:52AM|#

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|11.22.08 @ 10:09PM|#

"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|11.23.08 @ 4:44PM|#

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|11.23.08 @ 6:29PM|#

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.

|11.23.08 @ 7:08PM|#

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!

|11.24.08 @ 1:36PM|#

This is why neocons lost...

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

Michael Ejercito|11.24.08 @ 7:41PM|#

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