I’m reading Larry Lessig’s book Republic Lost and it has a whole section that does a brilliant job of explaining how the financial crisis came about — that is, how the deregulation that caused the crisis came about. And yes, it was deregulation that did it, and decisions not to regulate derivatives.
There are some staggering numbers in the book about how much money the industry spent to make sure they could keep making piles of money despite the enormous risk to the economy. Between 1998 and 2008, the financial services sector spent $1.7 billion on campaign contributions and another $3.4 billion on lobbying — and that doesn’t count the securities industry, which spent an additional $500 million on campaign contributions and $600 million on lobbying.
But that isn’t where the problem started. By that time, the die was already well on its way to being cast. Just as the derivatives market was developing in the early 90s, the federal agency that should have regulated that market, the Commodity Futures Trading Commission (CFTC), was led by Wendy Gramm — yes, wife of Phil Gramm, who would later author the bill that repealed Glass-Steagall and complete the deregulation of Wall Street. And after Clinton was elected, Gramm gave the industry a huge gift just before she lost her job in January, 1993, when she issued an order exempting derivatives from regulation by the agency. A few months later, Lessig notes, she was named to the Enron board of directors; Enron made lots of money from derivatives in the energy industry. The SEC could have regulated them too, but that agency also issued an order exempting them.
Clinton could have reversed that, of course, but he was trying very hard to convince Wall Street that Democrats were their friends too. He worked to prevent the passage of no fewer than four bills that would have regulated derivatives. He would later sign the Gramm-Leach-Bliley bill that eliminated most of the important federal regulations on Wall Street.
Brooksley Born, who headed the CFTC during Clinton’s second term, floated the idea of reversing Gramm’s order and having her agency start to regulate derivatives, the market for which had grown to twice the size of the nation’s GDP, but she was quickly smacked down. In a real show of bipartisanship, Lawrence Summers, Robert Rubin (former chairman of Goldman Sachs) and Alan Greenspan took turns lecturing Born on how wrong she was to think the government should regulate this massive market that held so much of our economy in its hands.
After Born resigned, Clinton put together a working group made up of Summers, Greenspan, Arthur Levitt, and William Rainer, her replacement. They quickly determined that the agency should be forbidden from regulating derivatives and Congress passed the Commodity Futures Modernization Act, which Clinton dutifully signed just before Christmas in 2000, before leaving office himself. The bill exempted credit default swaps from federal regulation, which would later play a huge roll in the 2008 economic collapse. Even after that collapse, President Obama named Summers the director of the National Economic Council, safely returning the wolf to the henhouse.