November 1, 2008
Obama runs against Clinton prosperity by attacking deregulationBy John Berlau
Ever since the economy and the credit crisis emerged as the top campaign issue, Barack Obama has developed two basic messages. One is to blame the policies of deregulation that John McCain voted for. And the second is to hug former rivals Bill and Hillary Clinton as hard as he can and hearken back to the prosperity and economic growth in 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, 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 on Wednesday night, Obama gushed that "in case all of you forgot, this is what it's like to have a great president."
But what most of the media has overlooked is that Obama's twin messages of bashing deregulation and embracing the Clinton years are inherently contradictory. Nearly all the deregulatory measures that John McCain backed - that are now being blamed (wrongly) for helping to cause the current crisis - were signed by Bill Clinton. What's more, Clinton administration officials have even 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 Clinton 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 none other than "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 in the document is true except that it omitted credit to the GOP-controlled Congress elected in 1994 for passing these policies that led to the prosperity. But the Clinton administration, whatever its other personal and policy flaws, should indeed be praised for signing and advocating this deregulation. These bipartisan financial policies, however, are now the very ones Obama, running mate Joe Biden and other Democrats attack. "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.
And even on regulation in general, my CEI colleague Wayne Crews notes in his study "10,000 Commandments" that the Bush administration has set records for the tens of thousands of pages it put in the Federal Register. So to the extent that Obama says he will reverse financial deregulation, what he would largely be overturning are the financial modernizations Clinton signed that Clinton administration officials agree led to the ‘90s prosperity.
To be sure, Obama usually isn't too specific on what exactly he would reregulate. He speaks vaguely, as does McCain, of more oversight and a regulatory framework for the 21st century. But to the extent his campaign is attacking specific deregulation policies that McCain backed, Obama is not just running against McCain and advisers like the much-vilified Phil Gramm. Obama is also campaigning against Bill Clinton, Robert Rubin, Larry Summers and virtually all the administration's economic officials who now often surround, um, Barack Obama.
Take Gramm-Leach-Bliley, the 1999 law Clinton signed repealing the Depression-era Glass-Steagall Act that strictly separated traditional commercial banking from investment banking. Obama supporters claim that getting rid of Glass-Steagall led to the credit blowup and seize 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 90-8, with many Democrats voting for the final bill, including Obama running mate 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 Summers had a different view. Summers told the Wall Street Journal in 1999 that the 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."
Summers and Clinton were, and are, correct. The law benefited the economy through 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 a Wall Street Journal op-ed, "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 is 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. And The Clinton White House "Historic Economic Growth" document boasts that "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. And 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 lambastes this ad for quoting McCain "out of context on health care." But the greater worry is that the attacks on bipartisan deregulation that led to prosperity appear to be quite in context for Obama. Deregulation has never meant non-regulation, and indeed, updating laws for some of the new challenges we face will be an urgent task of any new administration. A good updating would also take into account 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 encouraged bad loans to be made.
But when attacked today for supporting general financial deregulation, candidates can respond that they are simply being faithful to the GOP-Clinton legacy of prosperity, which bipartisan deregulation was so much a part of.