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Did Bill Clinton Cause the Financial Crisis?

clintonglobalfinancial.jpgI think Bill Clinton makes a persuasive case that it was what he didn't do, rather than what did do, that contributed to the financial crisis. There aren't very compelling arguments out there that repealing the Glass-Steagall Act -- the law that separated commercial and investment banking -- contributed much to the crisis. Some, in fact, say it did the opposite, as it allowed commercial banks to help stabilize the system by buying investment banks, as happened when J.P. Morgan acquired Bear Stearns.

But avoiding the regulation of derivatives was a major error. And Clinton is pretty honest on that point. He thinks Republicans would have stopped him from actually doing anything about derivatives, but that doesn't absolve him of the responsibility for at least thinking he should do something about derivatives. He does, however, say that his team was pretty convinced derivatives would remain a niche market. And there's reason to believe him. I like posting this graph -- I posted it two days ago, in fact -- and it fits well here:


There was a massive acceleration in the size of the derivatives market between 2003 and 2008. You're looking at a 300 percent jump. Something, in other words, changed. Derivatives became more important to the financial system. But it happened after Clinton left office. Which makes it hard to say what he would have done if faced with the 2003 derivatives market as opposed to the 1997 derivatives market.

Clinton swears he was "queasy" about derivatives back in the '90s. Not queasy enough to do anything about them, but enough to bring them up with Alan Greenspan. If the derivatives market had been three or four times larger than it had been in 1997 -- and if it had gotten that way in a matter of years -- maybe Clinton would have gotten downright nauseous and decided something needed to be done. Or maybe not. It's hard to say. But it's not something that Clinton, or his critics, can prove or disprove. In the mid-to-late '90s, we were barely beginning to connect the dots on the tech bubble. The housing bubble was still a decade away.

Also: I find it sort of troubling that Clinton can't remember the name of, and Peter Baker doesn't seem familiar with the very existence of, Long-Term Capital Management, the hedge fund that blew up in the late '90s. By this point in the financial crisis, hasn't everyone read -- or at least pretended to read -- Roger Lowenstein's When Genius Failed?

(Graph credit: The Peterson Institute for International Economics; Photo credit: AP Photo/Hankuk Economic newspaper, HO.)

By Ezra Klein  |  May 28, 2009; 11:00 AM ET
Categories:  Financial Crisis  
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This graphic doesn't show at all what happened under Clinton - maybe the market tripled under him too?

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | May 28, 2009 11:24 AM | Report abuse

I read that book. It didn't do a good job of explaining the mechanics that led to the blowup - just that at some point correlation went to 1 and LTCM started losing hundreds of millions of dollars every day. It also made it sound more like LTCM started making too many unhedged and unscientific bets, which undercuts the whole "even with the best science, you can't eliminate risk" moral of the story.

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | May 28, 2009 11:30 AM | Report abuse

In 1997 Congress made the first $500,000 of capital gains on the sale of a home tax-free for a married couple and $250,000 tax-free for a single person. This gave real estate a distinct advantage over other capital investments and distorted investment decisions from that time on. I'm sure you could find a graph that would show the beginnings of the housing bubble in 1997. I'm not blaming the entire crisis on this tax change or on the Clinton Administration but it definitely constituted a significant Governmental puff into the housing bubble.

Posted by: fallsmeadjc | May 28, 2009 11:40 AM | Report abuse

Drew: What the graph shows, though, is that derivatives outpaced actual capital in 2003.

Falls: That's a great point. I'll post it up.

Posted by: Ezra Klein | May 28, 2009 11:58 AM | Report abuse

Since the graph fixes all three curves at 2003=100, it's not quite clear what it shows.

Posted by: tl_houston | May 28, 2009 12:15 PM | Report abuse

Clintion, Carter, Nixon - I've seen the finger of blame pointed at all three presidents.

And yes, government needs to protect the people from the wolves.

But I am needled by the idea that the bright boys on Wall Street are simply wolves - that they have no morality at all other than greed to govern their behavior - that they absolutely MUST be strictly regulated or their actions will blow us all up.

The actions of the people who profited most from the riskiest behaviors - the esteemed members of the financial community - are what caused the downfall. The bankers made the choice to be driven by greed instead of the best interests of their business.

So yes, the government failed to step in to prevent a meltdown - yes, the government dismantled Glass-Steagall - yes, yes to all of that.

But the bankers chose to engage in the actions that took down the economy. And they profited nicely as it happened.

Posted by: anne3 | May 28, 2009 12:37 PM | Report abuse

Say whatever about LTCM; I don't remembere the details all that well. My recollection as a non-economics person is that some of the book's explications were useful, some were too glossy. The book's main value to me was the revelation of the sheer number of players who are the same people today, doing the same "jobs" (badly), looking for the same outcomes. Except on a larger scale.

The. Same. People.

Posted by: ajw_93 | May 28, 2009 12:57 PM | Report abuse

Yeah, that's what struck me about the LCTM story too. The prologue, in fact, has Bear Stearns as the key player *refusing* to bail out a struggling hedge fund!

Posted by: Ezra Klein | May 28, 2009 2:13 PM | Report abuse

To be fair to Baker, Clinton does keep referring to LTCM as a bank - which it wasn't. Took me a couple tries to realize he was talking about LTCM and not Giant Insolvent Commercial Bank.

Why Clinton couldn't remember the name is downright bizarre.

Posted by: flory | May 28, 2009 2:19 PM | Report abuse

To paraphrase Marx, history is repeated, played out the first time as tragedy, the second time as farce. The Glass-Steagall Act and other Depression-era reforms were written to prohibit the financial schemes that brought upon the Depression. Under Reagan and Bush they began to be dismantled, leading first to the Savings and Loan debacle. Ignoring this warning sign, the cult of deregulation (and that's what it is---a cult) kept casting its spells, leading to the overturning of Glass-Steagall; less than a decade later, we are on the precipice of Depression II. And those responsible for this are now in charge of the economy! Farce indeed.

Posted by: mmayerson | May 28, 2009 3:57 PM | Report abuse

I think the US "went to hell in a basket" when Clinton signed the NAFTA agreement. But what the hay----Mexico sent 30 mil up here to see that it was signed.

Jobs started disappearing. At first, low paying jobs. That was OK. Who care about the working poor? It must be so because nobody uttered a complaint.

Then the illegals started pouring in to take the low paying jobs. The mantra was "jobs nobody wanted". I ask you, how were those jobs handled BEFORE illegals???

I suppose I have the IQ of a gnat but I actually thought the politicians were in Washington to protect the US citizens.

Now, we have a Clinton Whitehouse and Obama is only a figurehead (or is he a beard). Color me stupid but I actually voted for him.

Now, in the popular fashion, he is going after Medicare and Medicaid. He has done more to bankrupt this country than even Clinton did.

I thought he was so smart but he has just taken snippets (unsuccessful ones) from other Presidents. I noticed the part taken from Nixon DID NOT include his price and wage controls. Sorry people, he seems to actually want to use inflation to deplete the average person's savings. That's not change the way us voters envisioned it.

Posted by: redhotpapasan | May 28, 2009 4:07 PM | Report abuse

I can make a strong case the the root cause of the financial crisis was the failure of the Savings and Loans in the 1980's and then the abuses of ENRON. None of those reasonably can be blamed on President Clinton.

I guess the headline on the column makes for an eye catcher, but in terms of a realistic claim, NO.

Posted by: oldgeek143 | May 28, 2009 4:35 PM | Report abuse

It was not the capital gains deduction increase, Clinton, Carter or Glass Steagal repeal that caused the financial debacle. The banks and Wall Street decided that they could make a lot of money if they securitized mortgages, passing them off to whomever would buy those securities. They had incentive to loan to anyone who walked in the door regardless of qualifications, because they were passing those loans off and they thought real estate would appreciate forever. There was no link in the securitization chain that did their job the way the system was designed. Mortgagees, appraisers, bankers, rating agencies all failed to act ethically, and the regulators of the Bush administration all looked the other way because everyone was getting rich. This was a total breakdown of the system and the watchdogs who were the last line of defense. And to top it all off, the CDS market magnified the risk a thousand fold with absolutely no one raising a finger because they were designed to go under the regulatory radar. Hopefully the deregulation/no regulation crowd has learned a lesson, but I doubt it.

Posted by: jd51 | May 28, 2009 4:42 PM | Report abuse

This is muckrake journalism at its worst. A 'reporter' thought of a good headline and is using it, with the approval of the Washington Post. But there isn't a substantial word or thought in the article...only sensational suggestion. Shame on Mr. Klein, shame on The Washington Post.

Halli Casser-Jayne

Posted by: PolitiHAL | May 28, 2009 4:58 PM | Report abuse

Every President since FDR repeated the mantra that every American, no matter how poor, should have a home. Fannie and Freddie were founded for the express purpose of giving mortgages to people who could not afford a mortgage. Democrats pushed the idea hardest, but even
Reagan and George W. Bush often repeated it. Greenspan's zero interest rate finally made it possible to write mortgages with no down payment and ridiculous interest rates. It simply HAD to happen!

Posted by: dunnhaupt | May 28, 2009 5:03 PM | Report abuse

Clinton did not fully cause the financial crisis, but he was an aider and abettor. Many in the party think he was "Republican lite", and I do as well. He did some good things but in the "modernization financial reform act" he was under the influences of his Treasury Secretary Rubin and Summer. They were too close to Wall St and we are paying for that closeness now. However, he didn't create the corruption of the SEC and Bush philosophy was to look the other way when things started to go bad.

Posted by: Fremon | May 28, 2009 7:12 PM | Report abuse

Well, let's see. Granddaddy Bush ran Brown Brothers Harriman in NY. Averill Harriman's last wife Pamela put Bill Clinton in power socially in Washington, got rewarded by being Ambassador to France. Bush I and Bill Clinton are big pals post-Katrina. And someone posted BHO is a puppet if not a beard, well, gee whiz. Now Bill Clinton and Bush II are appearing together onstage for around $200 a ticket (but they can't sell out). Gee, there wouldn't be any long-term heavy financial connection here, would there? LOL

Posted by: daddio | May 28, 2009 7:15 PM | Report abuse

Yes, Ezra, let's "all" forget that we had Bush in office for the past EIGHT years. Makes sense to blame Clinton, right?
Give us a break.

Posted by: mappy1 | May 28, 2009 8:07 PM | Report abuse

The collective strategy and resources of the Wall Street barons could not save Genius from failure in 1998.
But the collective strategy and resources of the American people will save this nation from their foolishness in days to come.

Although we've been slapped silly by the notional hand of excess--we're at a better place than we were before the derivatives hit the fan.
We are now required to discipline ourselves back to thrift and innovation.

Placing blame at this point is pointless. What are you going to do to improve the condition of your loved ones and your community in the challenges ahead of us?

Carey Rowland, author of Glass half-Full

Posted by: carey_glasshalffull | May 28, 2009 8:45 PM | Report abuse

Because, Carey, understanding history, perhaps in this case fault, is supposed to help us in the future. And, accpeting your stand would make my thought silly: Overlay onto the chart of the growth of derivatives one showing the rise in use of subprime mortgage lending and the rise in rate of appreciation of residential real estate. Perhaps a perfect storm?

Posted by: jackshipley1 | May 29, 2009 12:07 AM | Report abuse

Haha, you can't catch a break - "You're not blaming Clinton enough!"; "You're blaming Clinton too much!"

I agree with jd51 et al that the problem was about how we have handled housing, going back however long. As a country, as an extension of the American dream, we have prioritized owning a house over finding a good job, or being able to move to a good job if it opens across the country. We made it exceptionally easy through deductions and interest rates and securitization to buy a house and settle down, and excessively difficult due to job-based health insurance and home-closing costs to move into a better situation. All that is a big part of why we don't have as much class mobility as people think, and why the current economic crisis is happening.

And I think we should appreciate that Ezra is at least somewhat focused on both of these primary problems.

Posted by: Drew_Miller_Hates_IDs_That_Dont_Allow_Spaces | May 29, 2009 12:43 AM | Report abuse

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