Bill Clinton: I Should Have Raised More Hell About Derivatives Being Unregulated

Bill Clinton gives, to use David Leonhardt's term, an "impressively honest" analysis of his role in bringing about the financial crisis, particularly the failure to adequately regulate derivative markets:

Bill Clinton, on His Economic Legacy, by David Leonhardt: Given the range of issues Peter Baker covers in his article about Bill Clinton for the coming New York Times Magazine, there was not room for anything close to Mr. Clinton’s entire comments on his economic record. ... So we’re going to post, below, the transcript of that portion of the discussion between Mr. Clinton and Mr. Baker. ...

NEW YORK TIMES: Speaking of banks and toxic assets... You know that Time magazine named you and said you should have done this, that or the other thing. What do you say to that? Is there anything you would have done differently? ...

Mr. CLINTON: Now, there basically have been three charges,... one, because I enforced the Community Reinvestment Act for the first time and over 90 percent of all lending done under that law was done when I was president, $300 billion, that part of that was a lot of little banks made loans to people they had no business making loans to to buy houses so they could check the box for the Community Reinvestment Act. That’s the right-wing argument.

Then there’s the argument from the left that I shouldn’t have signed the bill that got rid of the Glass-Steagall law because that enabled banks and investment banks in effect to merge their functions.

And then there’s the argument that I make, which is that I should have raised more hell about derivatives being unregulated. I believe the last one is by far the most valid … although I don’t think that the Congress would have permitted anything to be done because Alan Greenspan was against it.

So let’s take them in reverse order. The argument against regulating derivatives, which Greenspan urged — and this is one of the few things I think — I think Bob Rubin and Larry Summers and those guys have gotten a little bit of a bum rap on this lately...

But I do believe on the derivatives they made the argument, the people who were against regulating it, that people like you weren’t buying derivatives. It wasn’t like you were investing your 401(k) in derivatives. You were investing your 401(k) in mutual funds, which were subject at least under normal times to the jurisdiction of the S.E.C., which was supposed to be minding the store. And so because we had a hostile Republican Congress which threatened not to fund ... the S.E.C. because of what Arthur Levitt was doing to try to protect the American economy from meltdowns. They said, “Oh, he’s interfering with a free market” and all that. This is what he’s supposed to do.

They argued that nobody’s going to buy these derivatives, we’ll do it without transparency, they’ll get the information they need. And it turned out to be just wrong; it just wasn’t true. ... That rested on a lot of assumptions, including the fact that the ratings agencies would do a good job, which didn’t happen, in evaluating risk. So I very much wish now that I had demanded that we put derivatives under the jurisdiction of the Securities and Exchange Commission and that transparency rules had been observed... That I think is a legitimate criticism of what we didn’t do.

On the Glass-Steagall, I’ve really thought about that because No. 1, nonbank banking was already a major part of American life at that time. Letting banks take investment positions I don’t think had much to do with this meltdown. And the more diversified institutions in general were better able to handle what happened. ...

I believe if you look at the blurring of the lines which already existed before that bill was signed — the bill arguably gave us a framework, at least, for which this process, which was happening anyway, could be regulated. So I don’t think that’s such a good criticism.

I think actually, if you want to make a criticism on that, it would be an indirect one; you could say that the signing of that legislation sped up what was happening anyway and maybe led some of these institutions to be bigger than they otherwise would have been and the very bigness of some of these groups caused some of this problem...

And the first argument, I think it’s totally without merit. If you look at the community banks in this country — actually I never believed I’d cite her as an authority, but Arianna Huffington had a great piece on the success of community banks yesterday in the Huffington Post. You ought to get it —

NEW YORK TIMES: Do you read the Huffington Post?

Mr. CLINTON: A lot. I read a lot of the blogs. ...

That’s my take on it. The Time magazine thing,... if you actually read what they said, they kind of hedged. They said “Well, here are some of the things people say.” But if you ask me to write the indictment, I’d say, “I wish Bill Clinton had said more about derivatives. The Republicans probably would have stopped him from doing it but at least he should have sounded the alarm bell.” ...

But you got to understand, again, we were living in a different world. We had a lot of confidence in the S.E.C. We had a lot of confidence in the broad-based nature of our economic growth. We never dreamed there’d be a time like in the first five years of this decade where literally the whole growth of the country would be in the housing, finance and consumer spending because we had no other investment strategy. ...

I made the best call I could. But I do wish — I always felt a little queasy about the derivative issue. Otherwise, I think we did a good job and I do not believe — when anybody asks me that, I ask them, I look at them and ask them, “Do you think this would have happened if we had been there? Look me in the face and say yes.” I haven’t found any takers yet.

That's the part I'm not so sure about. If a Clinton clone had been in charge rather than Bush, would this have still happened? I can't be sure, of course, and maybe the clone administration would have stepped in before things got out of hand, but little cues like the deference to Greenspan he indicates above (who would have opposed trying to prick the bubble if he had admitted a bubble was inflating) makes me wonder. So I think it probably would have happened anyway.

But, and this is important, perhaps the Treasury wouldn't have dragged its feet for months and months only to turn the problem over to the next administration if there had been more continuity, and I believe that acting faster to solve the toxic asset problem could have made a big difference in limiting the severity of the resulting downturn. In addition, without Republicans standing in the way with veto power, the shape of the initial and subsequent stimulus packages would have been different as well. So while I'm not so sure that the outcome would have been different in terms of the bubble, I do believe the response would have been quite a bit different, and much better than what actually occurred.