The Bipartisan Blame for the Financial Crisis

The Bipartisan Blame for the Financial Crisis January 17, 2012

I’m reading Larry Lessig’s book Republic Lost and it has a whole section that does a brilliant job of explaining how the financial crisis came about — that is, how the deregulation that caused the crisis came about. And yes, it was deregulation that did it, and decisions not to regulate derivatives.

There are some staggering numbers in the book about how much money the industry spent to make sure they could keep making piles of money despite the enormous risk to the economy. Between 1998 and 2008, the financial services sector spent $1.7 billion on campaign contributions and another $3.4 billion on lobbying — and that doesn’t count the securities industry, which spent an additional $500 million on campaign contributions and $600 million on lobbying.

But that isn’t where the problem started. By that time, the die was already well on its way to being cast. Just as the derivatives market was developing in the early 90s, the federal agency that should have regulated that market, the Commodity Futures Trading Commission (CFTC), was led by Wendy Gramm — yes, wife of Phil Gramm, who would later author the bill that repealed Glass-Steagall and complete the deregulation of Wall Street. And after Clinton was elected, Gramm gave the industry a huge gift just before she lost her job in January, 1993, when she issued an order exempting derivatives from regulation by the agency. A few months later, Lessig notes, she was named to the Enron board of directors; Enron made lots of money from derivatives in the energy industry. The SEC could have regulated them too, but that agency also issued an order exempting them.

Clinton could have reversed that, of course, but he was trying very hard to convince Wall Street that Democrats were their friends too. He worked to prevent the passage of no fewer than four bills that would have regulated derivatives. He would later sign the Gramm-Leach-Bliley bill that eliminated most of the important federal regulations on Wall Street.

Brooksley Born, who headed the CFTC during Clinton’s second term, floated the idea of reversing Gramm’s order and having her agency start to regulate derivatives, the market for which had grown to twice the size of the nation’s GDP, but she was quickly smacked down. In a real show of bipartisanship, Lawrence Summers, Robert Rubin (former chairman of Goldman Sachs) and Alan Greenspan took turns lecturing Born on how wrong she was to think the government should regulate this massive market that held so much of our economy in its hands.

After Born resigned, Clinton put together a working group made up of Summers, Greenspan, Arthur Levitt, and William Rainer, her replacement. They quickly determined that the agency should be forbidden from regulating derivatives and Congress passed the Commodity Futures Modernization Act, which Clinton dutifully signed just before Christmas in 2000, before leaving office himself. The bill exempted credit default swaps from federal regulation, which would later play a huge roll in the 2008 economic collapse. Even after that collapse, President Obama named Summers the director of the National Economic Council, safely returning the wolf to the henhouse.

"Or humans of the male persuasion. It's no longer necessary for a woman to do ..."

Diamond and Silk: Coronavirus Death Rate ..."
"You're truly charitable, there. I just assume they're the standard rapacious grifters that infest the ..."

Diamond and Silk: Coronavirus Death Rate ..."
"Fuck them. My whole life has been trying to survive these idiots. You kill one, ..."

Howard-Browne Faces Arrest for Refusing to ..."

Browse Our Archives

Follow Us!


TRENDING AT PATHEOS Nonreligious
What Are Your Thoughts?leave a comment
  • I’ve thought for some time that lobbying for money ought to be made a crime.

    Maybe we could all get together and pay some lobbyists to…

    Oh! Damn!!

  • eric

    At a minimum, we need more truth in advertising. I.e., revised ratings systems for financial institutions and instruments that more accurately reflect risk. I am thinking specifically that whether a market is regulated should factor in, with unregulated markets being rated as riskier. I’m okay with people taking risks with their money, if its informed.

    I think one of the big problems over the past decade has been a push by financial instutions to hide relevant information and try to prevent truly informed investment on the part of individuals and small investors. I think the motivation for this is greed: informed investors have a significant advantage over uninformed ones. Firms that both invest in and help create financial instruments have the ability to play both sides: create complex instruments that only a few large companies understand, then turn around and use that knowledge to do better in their own investments (than their competitors).

    What’s the term the libertarians use…rent-seeking? Large corporations that both create financial instruments and trade them can rent-seek, using their (self-created) better market information to force smaller investors to invest through them or buy that (again, self-created) information from them.

  • Michael Heath

    Ed writes:

    Brooksley Born, who headed the CFTC during Clinton’s second term, floated the idea of reversing Gramm’s order and having her agency start to regulate derivatives, the market for which had grown to twice the size of the nation’s GDP, but she was quickly smacked down. In a real show of bipartisanship, Lawrence Summers, Robert Rubin (former chairman of Goldman Sachs) and Alan Greenspan took turns lecturing Born on how wrong she was to think the government should regulate this massive market that held so much of our economy in its hands.

    I saw an excellent documentary on this topic (I gave it 4 of 5 stars at Netflix). It was produced by Frontline and titled (in Netflix at least), Frontline: The Warning. There was even Congressional Hearings where Ms. Born testified to a hostile Congressional Committee where Bob Rubin, Larry Summers, and Alan Greeenspan all sided with Republicans (and perhaps some congressional Democrats as well), that documentary showed some clips of this hearing. It can not be emphasized enough how prescient Ms. Born was and how wrong they were. If one were forced to consider only five factors that led to the financial crisis, or perhaps only three, Ms. Born not getting what she sought has to be on any well-informed reasonable person’s short-list.

    Ed, I also think the lessons learned in hind-sight are illustrative of why your argument that presidents don’t have much of an impact on the economy is so very way off-base. Which has you not considering the actions of the president in the economy when concluding that, “he’s a disaster.” [Yes, I’m bulldog on this who doesn’t want to let go of your pant-leg.] Certainly morons and partisans attribute far too much credit or blame, where I think we shouldn’t even consider their arguments. I of course concede the general public doesn’t attribute nearly enough blame to Congress, but both Congress and President can and often have a big impact on the economy.

  • Abby Normal

    Why does it seem like whenever Republicans and Democrats decide to get along, it’s so they can screw us? Equal rights, health care, immigration, drugs… sorry, can’t do it, Washington gridlock. Wiretapping, finance, indefinite detention, immunity… look how well we get along.

    Your right to life, liberty, and the pursuit of happiness is never secure while Congress is in session. I feel like from now on, after any performance of the national anthem, there should be a legally required disclaimer, like the warnings in pharmaceutical commercials. “And the home, of the, brave… Some restrictions apply. Void where prohibited. America may cause headaches, nausea, rectal bleeding, and mild heart explosions. Do not use America if you are poor, sick, elderly, or thinking of becoming elderly. Depression or thoughts of suicide are typical. If you are not depressed, pay more attention.”

  • Michael Heath

    Ed writes:

    After Born resigned, Clinton put together a working group made up of Summers, Greenspan, Arthur Levitt, and William Rainer, her replacement. They quickly determined that the agency should be forbidden from regulating derivatives and Congress passed the Commodity Futures Modernization Act, which Clinton dutifully signed just before Christmas in 2000, before leaving office himself. The bill exempted credit default swaps from federal regulation, which would later play a huge roll in the 2008 economic collapse. Even after that collapse, President Obama named Summers the director of the National Economic Council, safely returning the wolf to the henhouse.

    I’m not sure President Obama would know of Larry Summer’s culpability until sometime in 2009. It took some time to properly analyze and assess root cause. And while he certainly failed big-time on this issue, him and Rubin also did a lot of great things as well. So let’s insure we consider their entire record prior to criticizing the president for taking him on, like their work with Asian, Mexico, and Brazil credit crisis in the 1990s.

    Another big defect this group had, including Clinton, was their success in the 1990s at reducing the deficit. I argue that was a defect because I think we would have been better off investing that money at transforming our labor market to strengthen it and our economic growth rates in the long term. Another liberal who was in Clinton’s cabinet, economist Bob Reich, fought them on this issue early in the Clinton presidency and lost. However Reich was essentially a voice crying in the wilderness where there was very little political capital to do anything but cut the deficit.

    These are two examples of why I’ve adapted my positions and consider what liberal economists argue far more than what political moderates espouse if it supports conservative economists (I’ve mostly ignored conservative economists since the mid-1980s and obviously don’t regret that. Bruce Bartlett, who technically isn’t an economist though he was a policy-maker on economics is an exception.)

    It should also be noted the aforementioned Commodities Act passed on a voice vote with no roll call just prior to the Christmas break where Clinton was deep into his lame-duck tenure.

  • Dennis N

    Clinton could have reversed that, of course, but he was trying very hard to convince Wall Street that Democrats were their friends too.

    So you’re BFFs with Republicans and they give you what you want. You hate on Democrats and they give you what you want. Sounds like these guys can’t lose.

  • mikey

    Abby wins the Internet. That is all….

  • unbound

    Abby – If you keep in mind the political party trends since about the early-80s, it may make some degree of sense. At that time, Democrats started the trend of becoming a party of moderates with a few mildly conservatives thrown into the mix, and Republicans started the trend of becoming extreme conservatives with a few strong conservatives thrown into the mix.

    What happens when a party of moderates and a party of extreme conservative agree with each other? Legislation that is at least mildly conservative.

    As an example of the truth of this concept, keep in mind that the 2 Democratic Senators of North Dakota (who were known in the early 90s to be mildly conservative) became the beacons of liberalism (relatively speaking) by the end of the 2000s. I was floored reading articles 4 to 5 years ago about these liberal senators who are certainly not liberal in any meaningful sense.

    We have not had a liberal president in this country in over 30 years now. We have had 3 extreme conservative presidents (Reagan was extreme for his time) and 2 moderate to mildly conservative presidents during this time.

  • If you are interested in a book-length account of the origins of the financial crisis I am half way through All the Devils are Here and highly recommend it. It backs up the account given by Lessig. It goes all the way back to the early 70s to the Freddie/Fannies invention of mortgage-backed securities and follows the evolution of ever increasingly complex financial instruments (derivatives, CDOs etc) and the battle waged against any form of regulations of said instruments, and any attempts to control the sub-prime mortgage market, especially by Greenspan.

  • The full episode of Frontline’s “The Warning” is available for online viewing at http://www.pbs.org/wgbh/pages/frontline/warning/view/

  • juice

    I am thinking specifically that whether a market is regulated should factor in, with unregulated markets being rated as riskier.

    Why do you think that a product is automatically riskier if it’s not regulated? That’s like assuming that state licensing automatically makes a service provider more trustworthy or competent. It doesn’t. I agree that risk ratings of some sort would definitely help people in the derivatives market, but I don’t think that saying that something is regulated necessarily means that it’s less risky.

    Why does it seem like whenever Republicans and Democrats decide to get along, it’s so they can screw us?

    I forget who said it first, but: Bipartisanship is just a euphemism for double penetration.