Bill Clinton’s Self-Criticism

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Peter Baker interviewed Bill Clinton for a New York Times Magazine article and some interesting material from the interview ended up on the cutting room floor. David Leonhardt does us all the favor of posting an interesting section on the Economix blog in which Clinton expresses some regrets about his administration’s economic policy. He defends himself (persuasively, I think) from the charge that Glass-Steagall repeal was key to the economic crisis. He also defends his trade policy record (which I agree with, but what he actually says here is probably too vague to convince anyone) but says that he thinks he erred on derivatives regulation:

But I do believe on the derivatives they made the argument, the people who were against regulating it, that people like you weren’t buying derivatives. It wasn’t like you were investing your 401(k) in derivatives. You were investing your 401(k) in mutual funds, which were subject at least under normal times to the jurisdiction of the S.E.C., which was supposed to be minding the store. And so because we had a hostile Republican Congress which threatened not to fund — I don’t know if you remember this but we had a huge knock-down fight when they threatened not to fund the S.E.C. because of what Arthur Levitt was doing to try to protect the American economy from meltdowns. They said, “Oh, he’s interfering with a free market” and all that. This is what he’s supposed to do.

They argued that nobody’s going to buy these derivatives, we’ll do it without transparency, they’ll get the information they need. And it turned out to be just wrong; it just wasn’t true. And once you got that massive amount of money invested in derivatives that people thought — it’s like these credit default swaps, where people thought, the Lehman people talk about it, they thought, or the A.I.G. people, they thought it was 100 percent safe investment, they thought there would never be defaults on these mortgage securities. So of course you wanted insurance there because you got the insurance premium, you make the profit and you couldn’t possibly lose money, right? Well, it turned out to be all wrong. That rested on a lot of assumptions, including the fact that the ratings agencies would do a good job, which didn’t happen, in evaluating risk. So I very much wish now that I had demanded that we put derivatives under the jurisdiction of the Securities and Exchange Commission and that transparency rules had been observed and that we had done that. That I think is a legitimate criticism of what we didn’t do.

This seems about right. That said, regulation is only as good as the regulators, and I think Clinton could probably say in his defense that even if SEC authority had been on the books and even if the Clinton-era SEC had zealously used that authority, that the Bush administration almost certainly wouldn’t have and basically the same stuff would have happened.