Arizona Sen. John McCain’s statement last week touting the fundamentals of the U.S. economy as “strong” might have come from the mouth of his longtime economic guru Phil Gramm.
As the former head of the Senate Banking Committee, Gramm was a champion of deregulation, leading the effort in 1999 to repeal a Depression-era banking regulation law that some economists say contributed to the subprime mortgage crisis.
The law opened the door to the merger of investment and commercial banks, securities firms and insurance companies, leading to a wave of consolidations – among them Swiss bank UBS’s purchase of brokerage house Paine Weber. (Two years later, Gramm, of Texas, landed a lucrative job as a vice chairman of UBS’s new investment banking arm.)
In 2000, Gramm carried the deregulation banner again as one of five co-sponsors of the Commodity Futures Modernization Act - a 262-page amendment slipped into a spending bill just before Congress adjourned for Christmas. It barred regulation of financial instruments called credit default swaps, which distanced the originator of the loan from its ultimate collector - and which played a key role eight years later in the near-collapse of insurance giant AIG.
Writing last year in American Prospect, economist Robert Kuttner tied the gyrations in financial markets to the loss of government oversight:
The subprime mess, the huge risks taken by hedge funds, and the conflicts of interest that led to Enron and kindred scandals, are all the consequences of serial bouts of financial deregulation. Since the 1970s, in the name of free-market efficiency, Congress and presidents of both parties repealed key protections put in place by the New Deal. But the main effect has been to engineer windfall profits for financial insiders, replace real productive innovation with financial engineering, shift wealth from families to corporations, and put the entire American economy at ever greater risk.
Indeed, the amendments rushed through in late 2000 also included the so-called “Enron Loophole,” which exempted most over-the-counter energy trades from government oversight.
For Gramm, a Texas Republican, the Houston-based Enron was a top priority. Before its spectacular crash, the company was a major contributor to his campaigns. Gramm’s wife, Wendy, became a director of Enron in 1992, earning between $915,000 and $1.85 million in salary, attendance fees, stock option sales and dividends from 1993 to 2001, according to an analysis by Public Citizen.
Since leaving Congress, Gramm has focused his energies on Swiss bank UBS, among other things, lobbying Congress and the executive branch about mortgage and banking issues. The former economics professor at Texas A&M University has also tutored his longtime friend McCain, now the GOP presidential nominee, on the finer points of free-market economics.
In a Feb. 18 story, Fortune Magazine called Gramm “McCain’s Econ Brain.”
McCain’s chief economic adviser - and perhaps his closest political friend - is the ultimate pure play in free market faith. . . If McCain follows Gramm’s counsel, and most of his current positions are vintage Gramm indeed, his policies as president would represent not just a sharp departure from the Bush years, but an assault on government growth that Republicans have boasted about, but failed to achieve, for decades.
Gramm lost his official title as the McCain campaign’s co-chairman and economic adviser this summer after he excoriated Americans as “a nation of whiners” in an interview with the Washington Times.
But he is said to remain an important behind-the-scenes player. Just last week, he penned an op-ed column in the Wall Street Journal headlined, “If You Like Michigan’s Economy, You’ll Love Obama’s.” And he continues to be mentioned as a possible Treasury secretary in a McCain administration.
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