History Lesson Needed On Tough Economy

Published in the Telegraph-Journal 6th November 2012

Barack Obama won the 2008 election at a time when the United States was trapped in a downward financial spiral brought on by predatory lending, legally sanctioned pyramid schemes, and an economic policy synchronized to the priorities and the ambitions of an elite minority.

The consequences of this financial crisis were staggering. More than two-and-a-half million jobs vanished in 2008 alone. In the same year, the U.S. GDP was shrinking at a rate of nine per cent, and housing prices, credit markets and the stock market all simultaneously collapsed. The retirement prospects of millions of Americans were swept away in a matter of months. Foreclosures and evictions became routine news items as entire neighborhoods overnight became deserted ghost towns. The automobile industry was careening towards bankruptcy. Lehman Brothers was among the largest banks to declare bankruptcy and even more banks teetered on the edge of solvency. In 2008 the financial crisis was of unprecedented proportions with many global consequences still to be felt. No matter the skills and expertise of Beltway management, the slump was to last longer than any since the Great Depression. The Great Recession had arrived.

A now-routine reading of history has George W. Bush and the Republicans responsible for the financial crisis. But while the financial crisis was precipitated on his watch, the U.S. was engaged in a profound process of financial deregulation that had begun before the Bush Presidency when the Democrats held the balance of power in Washington.

Before George W. Bush had come to exemplify the Republican drive to reducing the size of government, President Bill Clinton had supported the deregulation of the banks, including the 1999 repealing of the Glass-Steagall Act, publicly declaring it “no longer appropriate.” Clinton’s policies effectively prevented financial derivatives from being regulated at all.

A term named after its Congressional sponsors, Senator Carter Glass of Virginia and Representative Henry Steagall of Alabama, the Glass-Steagall Act refers to four provisions of the Banking Act of 1933 that limited commercial bank securities activities and affiliations between commercial banks and securities firms. The U.S. Congress passed the Glass-Steagall Act to correct the perceived abuses of the American national banking system. These abuses were thought to have stemmed from the involvement of commercial banks in securities underwriting, which purportedly contributed to the Great Depression by fueling rampant speculation.

The purpose of the Glass-Steagall Act was to prevent the exposure of commercial banks to the risks of investment banking and to ensure stability of the financial system. The repealing of the Act created a policy vacuum that was not wholly filled by subsequent policy measures. This repealing occurred at a time when institutions were developing financial instruments that existed outside of the ability – or the willingness – of government regulatory bodies such as the Securities and Exchange Commission to manage them.

Clinton also signed the Commodity Futures Modernization Act, which exempted credit-default swaps from regulation. In 1995, he relaxed housing rules by rewriting the Community Reinvestment Act, which had the effect of placing additional pressure on banks to make loans to people residing in low-income neighbourhoods.

Political and academic debates continue over whether any of Clinton’s initiatives were the causes of the financial crisis. But there is little doubt that cumulatively these initiatives played an important role in creating a permissive lending environment. What is less obvious is if there is any clear ideological demarcation between Republicans and Democrats on policies that ultimately would have a significant impact on American financial regulations.

Clinton is a significant face of the Obama campaign and gave the most important speech at the Democratic Convention. In Democratic campaign ads, Clinton railed at Republican tax cuts for the wealthy and Wall Street deregulation. How ironic is it then that Clinton and the Democrats of the day were directly involved in precipitating this weakened regulatory environment that ultimately would lead to the financial crisis.

On the financial regulatory matters that have affected so many, the positions of Republicans and Democrats historically have been virtually interchangeable even if the writing of history has been blind to them.

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