Former President Bill Clinton refuses to accept the reality of his presidential tenure.
In a recent interview with film producer and movie studio chairman Harvey Weinstein, Mr. Clinton claimed the financial crisis was caused by the following from 2000-2008, after he left office:
1. Return to policies that his predecessors initiated.
2. Undercapitalized risk (i.e., insufficient capital to absorb losses incurred by excessive risk taking).
3. Inadequate monitoring of financial assets and liabilities.
4. Insufficient long term, productive investment in value added products
However, the policies enacted by President Clinton actually enabled the four items above to occur, which accelerated the onset of the global financial crisis.
1. Housing and Urban Development policy under President Clinton promoted homeownership with less scrutiny of debt service capability (e.g., adequate levels of income and assets to support the debt payments).
2. Financial Services Modernization Act of 1999. This act removed the Glass-Steagall regulations enacted in 1933. Hence, commercial banks were permitted to take on more risk by allowing them to integrate their activities with other business, such as investment banking, investment dealer, brokerage, and insurance.
3. Commodity Futures Modernization Act of 2000. This act permitted financial derivatives to trade on the over-the-counter (OTC) market with little monitoring of available capital reserves to protect against high risk activities and potential losses.
These policies were mistakes.
This environment enabled the creation of highly undercapitalized and inadequately monitored financial derivatives. From 2000 to 2008, the face value of these financial products exploded nearly sevenfold to $700 trillion!
Moreover, the creation of these artificial financial assets reduced the level of long term investment in value added products.
This misallocation of resources created a financial dislocation that crippled our global economy. The ill effects of these policies will be felt for decades to come.
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