Deregulation didn't cause today's problems

The Wall Street Journal looks at an interview that Bill Clinton gave to CNBC defending singing the reform of Glass Steagall that he signed in 1999. This is the bill sponsored by Phil Gramm that the Obama campaign and other Democrats have been slamming as deregulating banks and leading to the problems we're facing today. That is just economic nonsense and demonstrates either how little they understand of the issue or how much they are willing to demagogue to try to pin the problems on conservatives.

The Gramm-Leach-Bliley Act passed the Senate on a 90-8 vote, including 38 Democrats and such notable Obama supporters as Chuck Schumer, John Kerry, Chris Dodd, John Edwards, Dick Durbin, Tom Daschle -- oh, and Joe Biden. Mr. Schumer was especially fulsome in his endorsement.

As for the sins of "deregulation" more broadly, this is a political fairy tale. The least regulated of our financial institutions -- hedge funds -- have posed the least systemic risks in the current panic. The big investment banks that got into the most trouble could have made the same mortgage investments before 1999 as they did afterwards. One of their problems was that Lehman Brothers and Bear Stearns weren't diversified enough. They prospered for years through direct lending and high leverage via the likes of asset-backed securities without accepting commercial deposits. But when the panic hit, this meant they lacked an adequate capital cushion to absorb losses.

Meanwhile, commercial banks that had heavier capital requirements were struggling to compete with the Wall Street giants throughout the 1990s. Some of the deposit-taking banks that were allowed to diversify after 1999, such as J.P. Morgan and Bank of America, are now in a stronger position to withstand the current turmoil. They have been able to help stabilize the financial system through acquisitions of Bear Stearns, Washington Mutual, Merrill Lynch and Countrywide Financial.

Mr. Obama's "deregulation" trope may be good politics, but it's bad history and is dangerous if he really believes it. The U.S. is going to need a stable, innovative financial system after this panic ends, and we won't get that if Mr. Obama and his media chorus think the answer is to return to Depression-era rules amid global financial competition. Perhaps the Senator should ask the former President for a briefing.

Perhaps next CNBC could have Barney Frank on and try to pin him down on his fantastic spin trying to hide his role in encouraging, or even demanding that, mortgage firms to offer these risky loans while blocking any attempt to regulate Fannie Mae and Freddie Mac. They can read this article by Marc Sheppard to see how Frank is trying to twist his role in causing this whole breakdown and how he now is twisting things to avoid that responsibility.