The Bipartisan Roots of the Financial Services Crisis
When the malaise in the U.S. housing sector burst forth into the financial sector as a full-scale crisis in September of 2008, the Democratic and Republican presidential candidates and their parties were quick to blame each other. Democrats pointed to the 1999 Financial Services Modernization Act, or Gramm-Leach-Bliley Act (GLBA), that dismantled the Depression-era, Glass-Steagall Act's prohibition on the mixing of commercial and investment bank functions. Specifically, the Democrats charged that a largely Republican Congress voted to allow commercial banks to securitize loans, thus leading to the current crisis. In addition, Democrats argued that the administration of George W. Bush failed to properly regulate the financial services sector, in cluding actors such as mortgage brokers and investment banks, as well as derivatives like credit-default swaps. Republicans, on the other hand, claimed that the Bill Clinton-era changes to the Community Reinvestment Act (CRA) were the real culprits behind the financial sector debacle. These changes, Republicans argued, forced banks to make economically unsound loans in the name of homeownership for minori ties and low-income Americans that would ultimately backfire in a rising tide of foreclosures. This article examines these partisan claims and finds that each argument has some merit. Furthermore, it was the strange admixture of these two phenomena?an emphasis on affordable homes and consequent emphasis on the wrong type of regulation, plus passage of the GLBA and lack of the right type of regulation?that led to the current crisis. Democratic support for home ownership for everyone, combined with Republican adherence to laissez-faire, created an environment that fostered lax lending standards, excessive risk taking, and overleveraging of financial institutions through securitization of exotic financial instruments, which themselves embodied mismatched incentives