Tuesday, June 23, 2009

Did Bill Clinton Cause the Financial Crisis?

I saw an interesting article today blaming Bill Clinton for the financial crisis. You can find the article here: http://www.marketwatch.com/story/bill-clintons-legacy-is-our-financial-disaster.

The crux of the argument against Clinton concerns certain financial reforms. The first reform the author dislikes was a reduction in the amount of taxes one had to pay on the sale of a home over $500,000. This made buying and selling a home the best investment from a tax perspective one could make. According to the author, this fueled a wave of speculation that helped lead to the housing bubble in the 2000s.

Second, Clinton failed to regulate derivatives when counseled against it by some of his economic advisors. Derivatives are not a simple concept, but the essence is that they are contracts whose prices are derived from the something else such as an asset. Given what an esoteric financial concept it is, it’s little wonder that so many Americans had never heard of them before the financial crisis.

Lastly, the author charges that Clinton was wrong to allow the repeal of the Glass-Steagall act. He reasons that banks were thus allowed to become “too big to fail” which caused the need for all of the bank bailouts in the present crisis.

I think it is probably fair to blame Clinton for some of the financial crisis. Many observers have said that derivatives were a cause of the financial crisis. However, I don’t think there’s any way Clinton could have foreseen the damage derivatives would bring 10 years later.

In all of this, we must remember that as the author points out, Clinton faced a Republican congress bent on deregulation. It is hard to see a tougher regulatory scheme getting through such a congress. And as the economy was booming, there were comparatively few people pushing for such reforms in the first place.

The roots of this crisis are complex and deep. Clinton deserves some blame, as does George W. Bush, politicians of both parties in congress, unscrupulous lenders, and irresponsible financial institutions (they could have chosen not to use 100x leverage without the government telling them not to). And ultimately, American consumers bear some responsibility. They bought houses they couldn’t afford, and took on too much debt.

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