Michael M. Thomas insisted, correctly, that we post on a wee bit of history unearthed by Daily Bail: a video showing the key actors in the passage of the bill that formally ended Glass Steagall patting each other on the back. Well, almost all of the key actors. Most of the speakers make a point of singling out former Treasury Secretary Bob Rubin as a moving force, along with former New York Senator Al Damato.
Mind you, despite the self-congratulatory tone of this meeting, Glass Steagall was a dead letter when it was formally dismantled. The only reason for taking the final step of tearing it down was that the insurer Travelers had cheekily struck a deal to buy Citigroup, and Glass Steagall stood in the way. Glass Steagall had been breached when Credit Suisse invested in bulge bracket investment bank First Boston in 1988, which enabled the bank to take a majority interest in 1990 as part of a rescue. During the 1990s, financial regulators liberalized the rules under which banks could engage in investment banking activities, to the point that it merely took a little attention to certain structural and accounting niceties for banks to operate largely unfettered.
This clip is a reminder of the ideology that got us into our current mess: rising inequality and debt levels, a global meltdown that led to the greatest looting of the public purse in history, followed by stagnation and deflation that is too widely blamed on the march of technology and not on poor policies and overt corruption. And this thinking is very much alive.
You’ll see Phil Gramm, at the outset, praise “free markets” even though that is an intellectually incoherent notion and depict the New Deal reforms as the result of Depression-bottom lack of faith. At around 12:00, Larry Summers tells the audience how great it is that the Federal government has been running a surplus. In fact, the Federal government acting as a fiscal drag meant some other sector had to dissave, as in borrow and spend, to make up for that to keep the economy from contracting. Since businesses had already gotten in the habit of being overly short-termist, it was consumers who were increasingly taking up the slack. And as we know now, high levels of consumer debt are a negative for growth. Yet that was the driver of the Clinton “prosperity”.
Summers also gives a pean to the fact that big bad government was no longer such a big presence in the financial markets (Treasury bonds outstanding were going down) meant that financial players were out there, doing a marvelous job of allocating. This was two years after Greenspan had already voiced doubts about the dot-com bubble with his “irrational exuberance” remark.
At 14:00, Bill Clinton takes the stage, and at around 16:00, he turns his pitch on how great the economy is. He cites productivity gains that were later called into question (I recall a Barrons article in 1999 or 2000 that identified that all of the productivity gains for the previous period (a quarter? a year?) were entirely due to increases in computer manufacturing, and that in turn was due to hedonic price adjustments. In other words, the Barrons article raised big red flags about the extent of the New Economy productivity miracle.
But even allowing for the fact that some and probably most of the gains were real, you’ll see Clinton try to sell a Big Lie: that productivity gains were tied to increased worker prosperity. As numerous commentators pointed out, that story had stopped being true as of roughly 1976. Businesses once did share the benefits of productivity gains with workers, but as labor bargaining power weakened, kept it for themselves. Clinton continues with his canards, praising “open borders” as keeping inflation low. The mechanism by which inflation is contained is by restricting wage growth. A prosperous, full employment economy will feature strong growth in pay levels, and will at some point lead to pricing pressure (mind you, profit levels in the US are now so far outside historical norms that businesses could go a long way in increasing wages if they weren’t so greedy). So his low inflation story is again at odds with his effort to depict everything as rosy for average workers.
One commentor at Daily Bail pointed out how Clinton later attempted to deny his enthusiasm for shredding Glass Steagall. From Bill Clinton on deregulation: ‘The Republicans made me do it!’ at the Columbia Journalism Review in 2013:
Bill Clinton sat down with Fareed Zakaria last week ….Clinton’s comment about his record on regulation is an actual newsmaker, because it’s a giant whopper:
What happened? The American people gave the Congress to a group of very conservative Republicans. When they passed bills with the veto proof majority with a lot of Democrats voting for it, that I couldn’t stop, all of a sudden we turn out to be maniacal deregulators. I mean, come on. I know Senator Warren said the other day, admitted when she introduced a bill to reinstate the division between commercial and investment banks, she admitted that the repeal of Glass-Steagall did not cause one single solitary financial institution to fail.
This is, to be kind, bullshit….Clinton installed Robert Rubin and Larry Summers in the Treasury, which resulted in the Gramm-Leach-Bliley Act, which officially did in Glass-Steagall and the Commodity Futures Modernization Act, which left the derivatives market a laissez-faire Wild West (not to mention a disastrous strong dollar policy that was a critical and underrated factor in the bubble). He also reappointed Ayn Rand-acolyte Alan Greenspan, who has as much responsibility as anyone for creating the crisis, as Fed chairman—twice….his administration actively encouraged the big deregulatory legislation, and squashed its own dissenters, like Brooksley Born, who saw disaster ahead.
There’s even more detail in the CJR story, in case you’d ever need to cite it to Clintonistas.
The large point is the Clintons have been loyal followers of the Robert Rubin school of thinking, that bankers should run the economy, not just ours but everywhere. And he and his acolytes have been extremely successful in promoting finance-friendly policies around the world. And despite the wreckage of the global financial crisis, there has been little change in either the fealty to neoliberal ideology or the power of financiers. But both are seen as less and less legitimate by broader society, which is a key first step in reducing their influence.