John McCain spent the day doing something you’d rather not do when you’re running for president in the midst of an economic downturn: trying hard to distance himself from his top economic advisor, former Texas Senator Phil Gramm.
McCain had no choice. In one of a series of deeply dissonant gaffes from the McCain squad this week, Gramm argued that the only recession out there was in people’s heads (“this is a mental recession”) and that everyone should just stop whining. We’ve lost jobs for six months in a row (down over 400,000), paychecks are getting whacked by rising unemployment and soaring gas prices, the federal government is contemplating a takeover of Fannie and Freddie, as financial markets carve out new lows everyday, and this guy — not just any guy, but the top economist for the Republican candidate for president — tells us it’s all in our heads.
The thing is, I find all of this quite reassuring. I know Phil Gramm is a huge economic danger zone, so when he reveals his true colors to the point where McCain has to disavow him, it’s a good day. What scares me is when he’s quiet. It’s in the dead of night, under the cover of deregulatory darkness, where Gramm has successfully struck his most damaging blows.
Driven by that lethal combination of ideological market fundamentalism, or, if you prefer, YOYO economics (“you’re on your own), and the desire to help rich friends in the banking industry, Gramm crafted legislation that helped get us where we are today. Most notably, in 1999, he sponsored the Gramm-Leach-Bliley Act, which essentially took down the regulatory walls between commercial and non-commercial lenders (the latter being investment banks like Bear Stearns or mortgage brokers like Countrywide, to pull a few names out of the air).
Before that, most lending was from commercial banks, subject to Federal Reserve oversight and a variety of common sense rules regarding capital reserve ratios and underwriting standards. Now, most lending is from non-commercial entities, which would not necessarily be a problem if they were subject to similar oversight.
But skirting regulation was the whole point. As Jonathan Weisman pointed out, during that debate, Gramm promulgated: “We are here today to repeal Glass-Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers. We have learned that we promote economic growth and we promote stability by having competition and freedom.”
Now, it’s clear to many observers, including the Bush Treasury Department, that the stability Gramm mention has eluded us and we need some new rules to preclude the very excesses that he helped to unleash. But how much do you think Phil has learned from these events?
Just check out this quote from this obsequious interview with Gramm by Steve Moore of the Wall St. Journal’s editorial page, itself a cauldron of crazed economics. When Moore “delicately” broaches the subject of Gramm’s bill in today’s crisis, he responds, “There’s every evidence that the markets were made more stable by the diversification. J.P. Morgan could not have bought Bear Stearns and prevented a meltdown without Gramm-Leach-Bliley.”
It’s kind of like saying, “don’t you get it? If I hadn’t gotten rid of the cops, then one street gang couldn’t have beat up the other street gang.” The fact that Morgan had to bail out Bear is a bad thing, Phil. Shareholders and employees lost millions in equity and the deal has exposed the taxpayer to huge potential liabilities.
I could go on. There’s the famous Enron loophole, which exempted electronic energy trades from regulatory oversight. Most recently, there’s Phil Gramm playing corporate executive as vice-chairman at the investment bank UBS, whose exposure to the subprime slime is proving terribly costly. Who says there’s no poetic justice in economics? (I do—he’ll surely bail out with a golden parachute leaving investors holding the empty bag.)
At any rate, on a day spent fretting over the latest in this series of self-inflicted economic wounds — the potential meltdown of Fannie Mae and Freddie Mac — it was gratifying to see Gramm’s economic ignorance exposed.
But let’s not lose sight of the ball here. I see two takeaway points. First, anyone can say foolish things about the economy. It takes some real skill to screw it up as much as Gramm has. Second, John McCain surveyed the lay of the economic land, looked at the record, and chose this man to be his top economic advisor. Case closed.