Bill Clinton

Fortunately, my life should soon get back to normal, and I will resume my usual posting schedule. In the meantime, I thought I would bring to your attention a passage from Bill Clinton's new book Back to Work, which is, on the whole, one the more sensible volumes you are likely to see this year. Some of my readers will not forgive his soft attitude toward the Obama administration, but, to me, that part is understandable. (And I refuse to make opposition to Obama the polar star of my existence, as some of my readers do.)

I've seen the following passage discussed in various web forums, but always in garbled form. In the original, Clinton is as clear as a bell.

Clinton discusses Glass-Steagall here. Oddly, he doesn't mention that the reform bill passed by a veto-proof majority, or that the original version threatened CRA. The text after the asterisks is his...

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I made some mistakes too, though not the ones I’ve been most widely criticized for: aggressively enforcing the Community Reinvestment Act (CRA) and signing the bill repealing the Glass-Steagall Act, the Depression-era law requiring commercial and investment banking to be done by separate institutions.

Conservatives blame the CRA, which requires banks to make loans in the communities from which they take deposits, for forcing banks to make risky mortgage loans they wouldn’t have made otherwise. It’s true that my administration vigorously enforced the CRA requirement and that by the time I left office, more than 95 percent of the CRA loans made since the law was passed in the 1970s, more than $800 billion worth, had been made in the eight years I served. Of course, not all the CRA loans were for mortgages. Some were small-business loans, which are in short supply again today. And making mortgages available to people in the community didn’t cause the meltdown. One study found that CRA–compliant banks were actually less likely to fail during the financial crisis than banks that shipped more of their deposits out of the community in hopes of getting higher returns elsewhere.

Many progressives believe the mortgage crisis was hastened and enlarged by the end of the division between commercial and investment banks. I’ve seen this argument in print dozens of times without supporting examples, as if it were self-evident. It isn’t. Many purely commercial banks made bad mortgage loans and failed. The first bailouts went to an insurance comp any, AIG, and Bear Stearns, an investment bank with no commercial operations.

By the time Glass-Steagall was repealed, Federal Reserve rulings, beginning in the late 1980s, had already eliminated restraints on big banks’ ability to engage in both commercial and investment banking activities, except for restrictions on underwriting insurance. The real problem was that both before and after I signed the bill, the Securities and Exchange Commission (SEC), which oversees investment banks, lacked the authority to require them to set aside more cash to cover high-risk investments (though there were other steps a vigorous SEC commissioner could have taken to reduce the risks of a crash), and the bank regulators didn’t do enough to limit commercial banks’ risky loans.

At any rate, now federal regulators do have the authority to limit leverage under the financial reform bill, and two big investment banks, Goldman Sachs and Morgan Stanley, have decided to become bank holding companies, and therefore subject to cash reserve requirements.

The best argument against repealing Glass-Steagall is that it may have accelerated the speed of bank consolidations, which were already well under way, encouraging banks to get bigger, faster. Some believe that big banks are less inclined to make small-business loans than community banks.

I do think I can be fairly criticized for not making a bigger public issue out of the need to regulate financial derivatives. I couldn’t have done anything about it, because the Republican Congress was hostile to all regulations, going so far as to threaten to leave the SEC with no budget because the commissioner, Arthur Levitt, was vigilant in doing his job. But I should have spoken out more, especially after Congress included a measure barring financial derivatives from being regulated as securities or commodities in an appropriations bill that passed by a veto-proof majority. In not doing so, I ignored one of my own rules: even when you can’t win, it’s best to get caught trying.