President Obama’s top economic adviser on Thursday defended his role as a leading force behind the sweeping deregulation of the financeindustry a decade ago, which many experts consider to be a cause of the current economic crisis.
Appearing before hundreds of businessofficialsin Washington, Larry Summers said the financeindustry has evolved both enormously and unpredictably since he urged those changes as Treasury secretary for President Clinton in 1999.
“I think the worldhas changed in very profound ways since the 1990s,” Summers said.
In November 1999, Congress passed the most sweeping changes to the financeindustry since World WarII. The bill, known as the Gramm-Leach-Bliley Act, repealed part of the 1933 Glass-Steagall Act, in effect blurring the boundaries between commercial banks, investmentbanks, insurancecompaniesand securities firms.
At the time, Summers was a leading cheerleader for the bill, applauding its passage in no uncertain terms. ”Today Congress voted to update the rules that have governed financial services since the Great Depression and replace them with a system for the 21st century,” he said at the time, according to The New York Times. ”This historic legislation will better enable Americancompanies to compete in the new economy.”
Others weren’t so sure. Sen. Byron Dorgan (D-N.D.) said after the vote that “we will look back in 10 years’ time and say we should not have done this,” while the late Sen. Paul Wellstone (D-Minn.) warned that lawmakers ”seemed determined to unlearn the lessons from our past mistakes.”
No matter. The bill passed the upper chamber by a vote of 90 to 8, and Clinton signed it into law shortly thereafter.
A decade later, many of the nation’s top economistssay the current recession is largely a consequence of that law, which freed commercial banks to dabble in more risky investments, like mortgage-backed securities, while empowering the largely unregulated non-banks (think: AIG) to get into the mortgage lending business.
Summers said Thursday that that was a different era — a time when creditdefault swaps “were a blip” and “very few people” predicted either their meteoric rise or the degree to which an overexposure to those complex products could harm the larger economy. In the financeenvironmentof the late 1990s, he said, the deregulations made perfect sense — just as they wouldn’tmake sense today.
“You have to think about how the different parts interact,” Summers said. “That’s how you get to the best possible policies.”