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This 2007 speech shows a side of Hillary Clinton that should terrify Wall Street

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Hillary Clinton faces deep distrust on the subject of financial regulation from some segments of the liberal community, both because her husband's administration presided over some substantial financial deregulation in the 1990s and because as a senator from New York she often represented Wall Street's interests on Capitol Hill.

But at times, Clinton has revealed a side that falls much closer to Elizabeth Warren than to Barack Obama. Where the incumbent sees the financial sector as performing a fundamentally useful role in the American economy that needs to be tempered by regulation, Clinton has spoken of the financial sector as perniciously distorting the overall direction of the economy, a much more profound indictment than one narrowly focused on financial stability.

This was on display when Rachel Maddow pressed her at a recent candidates' forum in South Carolina about her ties to Wall Street. In response, Clinton cited a number of more progressive elements in her record. And she also referenced a speech she gave about eight years ago that, again, evinces a deep-rooted skepticism about the underlying business model of the financial sector.

"I went to the NASDAQ in December of 2007," she said, "and basically said, 'You guys have got to stop it, what you are doing is not only a disaster for homeowners because of the mortgage foreclosures and the way that they had manipulated the mortgage market, but it's going to have dire consequences for our country.'"

It's true that Clinton, as a senator, was generally on the Wall Street–friendly side of the Democratic Party. On the other hand, as an Illinois senator, Barack Obama was a coal booster, and as a Texas senator Lyndon Johnson was an ardent segregationist. It's worth looking closely at the speech for a window into a very different side of Clinton's worldview.

What Hillary Clinton's NASDAQ speech said

Clinton refers to this speech often when talking about Wall Street to liberals, and it's worth actually reading. It's not unusual for spouses to disagree about certain political issues (I personally have no idea what my wife thinks about financial regulation), and it's certainly not unusual for politicians to ally with home state industries only to abandon them when they shift to a larger stage. And the speech offers an interesting window into Clinton's thinking about the role of finance in society at a time when it wasn't necessarily a big issue politically.

It's worth giving the speech a read because it's a very interesting historical document that, among other things, offers a glimpse at Clinton's thinking about the role of finance in society at a time when this wasn't necessarily a big issue politically. A lot of the specific policy context has been overtaken by events, but the basic idea was that Clinton wanted Wall Street banks to bear some of the burden of providing financial relief to families facing foreclosure. A lot of that has actually come to pass over the past five years, usually through deferred prosecution agreements in which banks charged with misconduct pay fees to avoid facing trial.

Clinton puts forward a very different moral and conceptual framework. Here's the key passage, with some emphasis added:

Now, who's exactly to blame for the housing crisis? Well, that's always a question that the press and people ask and I think there's plenty of blame to go around.

Responsibility belongs to mortgage lenders and brokers, who irresponsibly lowered underwriting standards, pushed risky mortgages, and hid the details in the fine print.

Responsibility belongs to the Administration and to regulators, who failed to provide adequate oversight, and who failed to respond to the chorus of reports that millions of families were being taken advantage of.

Responsibility belongs to the rating agencies, who woefully underestimated the risks involved in mortgage securities.

And certainly borrowers share responsibility as well. Homebuyers who paid extra fees to avoid documenting their income should have known they were getting in over their heads. Speculators who were busy buying two, three, four houses to sell for a quick buck don't deserve our sympathy.

But finally, responsibility also belongs to Wall Street, which not only enabled but often encouraged reckless mortgage lending. Mortgage lenders didn't have balance sheets big enough to write millions of loans on their own. So Wall Street originated and packaged the loans that common sense warned might very well have ended in collapse and foreclosure. Some people might say Wall Street only helped to distribute risk. I believe Wall Street shifted risk away from people who knew what was going on onto the people who did not.

Wall Street may not have created the foreclosure crisis, but Wall Street certainly had a hand in making it worse.

The striking thing about this accusation is that what she's saying Wall Street did clearly isn't illegal. But by the same token, it also clearly isn't a question of a few bad apples or rogue traders. She's saying that the legal aspects of the financial system were fundamentally broken and not accomplishing what a financial system should do. Even though the policy context was relatively narrow, it's a profound indictment.

One way that Clinton is more Warren than Obama

Notably, Clinton's criticism of the financial system sounds much closer to the kind of thing you are likely to hear Elizabeth Warren say nowadays — that its fundamental business model was flawed, both morally and economically — than to the kind of narrower focus on financial stability that you would hear from Barack Obama or Tim Geithner.

This matters because it shapes how you think about the potential downsides of excessive regulation.

Everyone agrees, more or less, that the automobile industry needs to be regulated to prevent excessive pollution. But everyone also agrees that the basic business model of making cars and then selling them to people is a valuable contribution to society. Under the circumstances, it's reasonable to worry that regulators might go too far and stymie useful innovation.

But Clinton didn't say that some banks went too far in pursuit of doing something fundamentally valid. She said the banks were trying to do something fundamentally invalid. Instead of shifting risks onto the shoulders of those who could best afford to bear them, they were shifting risks onto the shoulders of people who didn't understand what they were getting into. When that becomes your view of an industry, then suddenly the balance of risks in terms of tough regulation looks very different.