Thursday, February 25, 2016


Former President Bill Clinton has grown fond of saying there's "not a single, solitary example" that repealing Glass-Steagall "had anything to do with the financial crash" of 2008. Even PolitiFact has rated President Clinton's no-fault claim as a mostly true statement.

PolitiFact argues Clinton's economic claim is technically correct primarily because we can't point to any one factor as the cause for the market meltdown. And, besides, Wall Street was already deregulated and on a reckless path. OK, fair enough. Still, Clinton's political claim is misleading and, quite frankly, a slap in the face to common sense. 

The following story on the Triangle Factory Fire helps to illustrate the flawed logic behind President Clinton's "I had nothing to do with it" claim.


In 1911 New York City's Triangle Factory Fire broke out and took the lives of 146 workers. All of the victims were young, and mostly immigrant women. It was one of the worst fires in American history. People wanted answers.

The 1911 New York Triangle Factory Fire.

During the investigation and trial, it was learned there were many factors that contributed to the numerous deaths after the fire started. Stairwell doors were locked. Rusty fire escapes collapsed. There were cluttered work spaces. Fire department ladders only reached the 6th floor. There wasn't enough water pressure for firefighter to reach the top floors. Occupational hazards like oily floors, wicker baskets full of scraps, and no sprinkler system helped to insure the fire would spread quickly. 

While no one could point to any one condition as the culprit for the catastrophe, together they created a lethal fire trap that needed a simple spark for the March 25th conflagration. This didn't just happen. Many people had to try real hard to ignore or overlook these occupational hazards. 

Owners Max Blanck and Isaac Harris would claim their innocence, arguing they didn't lock the doors. And besides, their building had been certified as fireproof. A criminal trial determined they weren't at fault for locking the doors, which cleared them of culpability. Floor managers and contractors said they had no hand in managing the building, or its policies, so they weren't to blame either.

While the owners escaped criminal prosecution, they were sued in civil court. They were eventually forced into a settlement, and paid $75 for each life lost.

Max Blanck and Isaac Harris, owners of the Triangle Shirtwaist factory, 1910.

In the end, no one was at fault criminally. But common sense tells us that many small and big decisions - which factory workers had no hand in crafting - created the right conditions for the Triangle Factory Fire to become a lethal hell hole.

The fact that everyone gave a wink and a nod to the growing fire trap allows us to return to President Clinton.

The logic behind the Triangle Fire is instructive because it helps us understand how many of former President Clinton's policy decisions played a key role in the lead up to the financial crash of 2008. Among those include his decision to reappoint Alan Greenspan as head of the Federal Reserve, and his decision to ignore and then politically maginalize CFTC commissioner Brooksley Born, who famously warned about a market collapse in 1997.

Brooksley Born, head of the Commodity Futures Trading Commission, warned that not regulating derivative markets would lead to a market meltdown. She was effectively shouted down by Alan Greenspan, Bob Rubin, and Larry Summers, then replaced by President Clinton.

But the symbolic Grandaddy of President Clinton's policy decisions was the repeal of the Glass-Steagall Act in 1999.* 

As a reminder, the 1933 Glass-Steagall Act - which was part of the Banking Act - was a Franklin D. Roosevelt initiative that helped regulate the banking industry. Loosely speaking, the idea was to prevent commercial banks from using their customer's money to gamble in the market. Repealing the Glass-Steagall Act in 1999 killed off what remained of the law (the financial sector had been chipping away at it for years). It allowed different financial institutions to once again dip their company ink, as it were, into one another's business. 

It didn't matter whether the financial institutions were (FDIC) insured or not, they could now make big reckless bets with impunity. So, yeah, in spite of what former President Bill Clinton claims, repealing Glass-Steagall both continued and legitimized a larger deregulatory process that brought down the American economy in 2008.

By removing Glass-Steagall from the books Clinton helped slam the door shut on common sense financial regulations that, for well over 50 years, had kept Main Street safe from Wall Street's reckless behavior. 

Much like the owners and managers who turned a blind eye to the hazardous conditions at the Triangle Factory, President Clinton's ideological blinders helped him ignore how reckless deregulation was going to catapult the American economy towards catastrophe. 

Below is a small sample of the deregulation train of events that sandwiched the repeal of the Glass-Steagall Act in 1999.

1. 1980s, THE “GENIE ACTS”: In the early 1980s the financial industry received what amounted to 3 wishes from the U.S. Congress. Among these wishes was legislation that allowed the Savings & Loan industry to make money off of home mortgage contracts even if they were generating losses. How can this be, you ask? Simple, Congress allowed S&Ls to use delinquent loans as a tax deduction at tax time (which meant the taxpayer picked up the tab).
IMPACT: With mortgages virtually bullet-proof, the stage was set for market players to bundle up individual mortgages (into CDOs). This is where the messy mortgage loans that helped bring down our economy began.
2.1987, THE “LET-THE BANKS-DO-WHAT-THEY-WANT” ACT: In 1987 the Federal Reserve granted commercial banks – which are FDIC insured – the authority to invest in (“underwrite”) new and risky municipal and mortgage-related securities. This was once the exclusive domain of investment banks (which weren't backed by FDIC-taxpayer money). In effect the Fed said, “Sure, go ahead and invest FDIC insured bank money in risky products … it’s not like you’re playing with taxpayer money.” Oops.
IMPACT: The commercial banking sector slowly came to depend on mortgage backed assets (i.e. CDOs and other derivative products) as their primary earning tool, jumping from about 28 percent of bank earnings in 1985 to more than 60 percent in 2005.
3. 2004, HANK PAULSON DOES A NUMBER ON AMERICA: In 2004 Goldman Sach’s then CEO, Hank Paulson, led a powerful group of financial players into the Securities and Exchange Commission’s offices. They were looking for a break. They wanted the SEC to allow them to borrow and “invest” beyond a debt-equity ratio of 12: 1 (most banks won't let you and me borrow beyond a 5:1 ratio). Paulson's request was granted. When Bear Stearns and Merrill Lynch collapsed four years later in 2008 they had debt to equity ratios of 33: 1 and 40: 1. In case you're wondering, in 2008 Hank Paulson - then as Secretary of Treasury in the Bush administration - led the charge to secure taxpayer bailout money, which was used to shield Goldman Sachs and industry friends. 
IMPACT: When the SEC said "yes" to Paulson's request in 2004 they effectively said it was OK to run up ridiculous debt levels to make risky market bets on largely unregulated products. 

So, yeah, while you can argue repealing the Glass-Steagall Act didn't cause the financial crash of 2008 - as former President Clinton does - it was a big part of a long string of policy decisions that contributed to the 2008 market meltdown

So this is what we have. America’s financial sector got a deregulatory shot in the arm in the early 1980s. Financial institutions that once played it safe could now go out and make big profits by making reckless market bets. So they did. 

This pushed the financial sector to ask for even more deregulation and, eventually, the repeal of Glass-Steagall - the symbolic heart of FDR's New Deal regulatory infrastructure. It didn't matter to President Clinton that "market collapse" and "bailout" had been effectively removed from America's economic language for the better part of 50 years, in part because of Glass-Steagall. 
He ignored history because he was already on the deregulation train that had left the station.

There’s more. Lot’s more (which I discuss in my book, The Myth of the Free Market). The point here is repealing Glass-Steagall was part of a larger destructive mind-set. It now stands as a symbol of Washington - and President Clinton - bowing at the feet of Wall Street.  

The financial mess we saw in 2008 was caused by greedy people in a deregulated environment acting like idiots. 

And, yes, President Clinton's long train of policy decisions - which include reappointing Alan Greenspan, marginalizing Brooksley Born, and repealing Glass-Steagall - had a lot to do with the market 2008 meltdown.

- Mark 

* The bill that repealed the Glass-Steagall Act is also referred to as the Financial Services Modernization Act, FSMA, and, alternately, as Gramm-Leach-Bliley.

1 comment:

Guitarsandmore805 said...

Let's embellish your metaphor substantially by saying the rickety old building with the fire raging inside represents Investment Banks, while way down the street the commercial banking is still working just fine in a bank that has no fire. They are completely separated by a long street called " Glass Steagall: Investment bank on one end of the street, commercial bank on the complete opposite end of the street, miles away. The Commercial bank has only one floor because they just do simple banking.