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Tuesday, September 23, 2008

"Bill Clinton Revisits His Economic Legacy"

Bill Clinton on deregulation and the bailout:

Bill Clinton Revisits His Economic Legacy, Dana Goldstein: At a meeting with progressive bloggers and journalists ... Monday night, Bill Clinton ... spoke freely about the financial crisis, and reexamined his own administration's economic legacy in light of the meltdown.

"I have thought about that," Clinton told me when I asked whether he was reconsidering any of the de-regulatory economic policies his administration pursued under Treasury Secretary Robert Rubin. ...

Clinton said he has two regrets: First, not pursuing more aggressively an aborted attempt to provide stricter oversight of Fannie Mae and Freddie Mac. According to Clinton, the move was stymied by Democratic and Republican members of Congress and by mayors, who saw the lending giants as "the New Jerusalem" and "pure" because of their role in increasing home-ownership to historic levels. But "it just didn't feel good," Clinton said of Fannie and Freddie's outsized political influence.

Clinton also said he should have subjected derivative trading to more public oversight. "We would have failed, but at least we could've sounded the alarm."

One policy Clinton said he doesn't regret is his repeal of the Glass-Steagall Act in 1999, which, for the first time since the Depression, allowed commercial banks to engage in investment banking activities. Clinton said the commercial banks were an important moderating force on the risk-taking of the big investment firms that collapsed this week. "In the case of the current crisis, I believe the bill I signed allowed Bank of America to take over Merrill Lynch," he said.

Also during the interview, Clinton urged Congressional Democrats to work quickly to pass a bailout package for Wall Street, but said Democrats must lobby in the current weeks to pass a comprehensive package of "Main Street" economic measures, including a moratorium on foreclosures, and should create a homeowners loan corporation similar to the one active during the Depression. Such an agency would refinance sub-prime mortgages into traditional ones, but should do so only for borrowers with steady incomes, Clinton said. ...

The former president mentioned his wife frequently during the meeting... "Hillary called and said it's really interesting how this is going down [in Kentucky]," Clinton said. "She said, out here, they don't yet see it as a big crisis requiring an urgent response, because they've been in trouble for years."

That is why, Clinton reiterated, Democrats must sell the bail-out of Wall Street as an investment in regular Americans' retirement savings and the security of their mortgages.

From the Washington Post:

Near the end of the Clinton administration, some of its officials had concluded the companies were so large that their sheer size posed a risk to the financial system.

In the fall of 1999, Treasury Secretary Lawrence Summers issued a warning, saying, "Debates about systemic risk should also now include government-sponsored enterprises, which are large and growing rapidly."

It was a signal moment. An administration official had said in public that Fannie Mae and Freddie Mac could be a hazard.

The next spring, seeking to limit the companies' growth, Treasury official Gensler testified before Congress in favor of a bill that would have suspended the Treasury's right to buy $2.25 billion of each company's debt -- basically, a $4.5 billion lifeline for the companies.

A Fannie Mae spokesman announced that Gensler's remarks had just cost 206,000 Americans the chance to buy a home because the market now saw the companies as a riskier investment.

The Treasury Department folded in the face of public pressure.

There was an emerging consensus among politicians and even critics of the two companies that Fannie Mae might be right. The companies increasingly were seen as the engine of the housing boom. They were increasingly impervious to calls for even modest reforms.

As early as 1996, the Congressional Budget Office had reported that the two companies were using government support to goose profits, rather than reducing mortgage rates as much as possible.

But the report concluded that severing government ties with Fannie Mae and Freddie Mac would harm the housing market. In unusually colorful language, the budget office wrote, "Once one agrees to share a canoe with a bear, it is hard to get him out without obtaining his agreement or getting wet."

And, for those trying to blame Democrats for the problems with Fannie and Freddie, from the same article:

In June 2003, Freddie Mac dropped a bombshell: It had understated its profits over the previous three years by as much as $6.9 billion in an effort to smooth out earnings. ...[A]n outside accountant ... reported in September 2004 that Fannie Mae also had manipulated its accounting, in this case to inflate its profits. ...

The companies soon faced new bills in both the House and the Senate seeking increased regulation. ...

Fannie Mae and Freddie Mac succeeded in escaping once more, by pounding every available button. ... Most of all, the company leaned on its Congressional supporters.

In the Senate, Robert F. Bennett (R-Utah) added an amendment giving Congress the ability to block receivership, weakening that bill to the point where the White House would no longer support it. Bennett's second-largest contributor that year was Fannie Mae; his son was then the deputy director of Fannie's regional office in Utah.

    Posted by on Tuesday, September 23, 2008 at 12:24 AM in Economics, Housing, Regulation | Permalink  TrackBack (0)  Comments (55)


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