Obama's Clinton Problem
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
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
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.
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
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.
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
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.
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.
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."
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."
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.
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
John Berlau is director of the Center for Entrepreneurship at the Competitive Enterprise Institute.