Barack Obama never misses a chance these days to allege that the financial crisis is due to the right-wing philosophy of deregulation, “a philosophy that views even the most common-sense regulations as unwise and unnecessary.” The charge is echoed by fellow Democrats such as House Speaker Nancy Pelosi.
They’re often unclear on specifics, and for a good reason: Not all deregulation hurts, and not all regulation helps. Republicans and Democrats alike supported a 1999 deregulation that has actually made this crisis easier to handle, for example. Also, Republicans have supported regulations that could have helped avert this problem, while the regulations Democrats enacted worsened it.
The aforementioned 1999 legislation, pushed through Congress by then-Senate Banking Committee Chairman Phil Gramm, repealed the 65-year-old Glass-Steagall Act. In late September, Obama was blasting Gramm as “the architect in the United States Senate of the deregulatory steps that helped cause this mess.” Glass-Steagall had mandated separation of commercial banking, based on deposits, from investment banking, based on issuing and trading securities such as stocks and bonds. The financial community had long ago eaten gaping loopholes in this Swiss-cheese regulation, attempting to compete with the universal banks of Europe, which had never suffered such confused rules.
This long-overdue deregulation played no role in the current crisis. Bill Clinton, who signed the legislation, and his treasury secretary, who told him to do so, Obama adviser Robert Rubin, have both said as much. The bill passed the Senate 90-8, with the votes of Obama supporters Joe Biden, Chuck Schumer, John Kerry, John Edwards, Chris Dodd, and Tom Daschle.
Indeed, exactly contrary to Obama’s claims, the repeal of Glass-Steagall has helped to
counter the current crisis
. It allowed Bank of America to buy out Merrill Lynch, JP Morgan Chase to buy out Bear Stearns, and Barclays Bank to work on buying up the remains of Lehman Brothers. It allowed investment banks Goldman Sachs and Morgan Stanley to take up refuge as bank holding companies. If investment banks Bear Stearns and Lehman Brothers had diversified more into commercial banking, taking commercial deposits — as the Act’s repeal made possible — that might have provided them with the superior capital cushions needed to survive.
More recently, Obama has attacked McCain on deregulation by saying, “Senator McCain wrote that we need to open up health care to ‘more vigorous nationwide competition as we have done over the last decade in banking.’ That’s right, he wants to deregulate the insurance industry just like he fought to deregulate the banking industry. And we’ve all seen how well that worked out.” Obama is talking here about the deregulation to allow interstate banking, which McCain referenced in proposing interstate sales of health insurance. But the analogy actually supports McCain’s position: Interstate banking has been an unqualified success, strengthening banks and providing more competition and services for consumers. It has not contributed to the financial crisis as Obama implied.
The least regulated of our financial institutions, hedge funds, have fared the best in the current crisis.
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