There is another key advisor for Senator John McCain who has a most interesting and somewhat disturbing track record. Senator McCain has admitted he knows little – if anything – about the economy and that’s pretty scary considering the awful shape of our nation’s economy. So the obvious question is: who is his number one economic advisor? It has been reported that former Senator Phil Gramm is McCain’s economic brain, doing much of the policy thinking in regard to that subject for the Republican presidential nominee. For those who are familiar with Senator Gramm’s background, that’s even more reason to be concerned. It’s one thing to have a man who wants to be president admitting that finance and the economy are his weaknesses, but it’s quite another for him to depend on the former Texas Senator for advice and counsel on our nation’s economic policies.
Most of the American people have forgotten about Gramm’s tenure in the Senate. As chair of the Senate Banking Committee in 2000, then-Senator Gramm attached a complex, 262-page amendment to an omnibus appropriations bill moving to final passage as Congress was headed toward its Christmas recess. Written by Wall Street investment-bank lawyers, “The Commodity Futures Modernization Act” didn’t even have a congressional hearing before any committee. Neither did any member of Congress have an opportunity to read it, I am told. The Gramm Amendment mandated sweeping deregulation of investment banks, declaring off-limits to regulators most over-the-counter derivatives, credit derivatives, credit defaults, and swaps. Those terms meant little to the vast majority of American citizens prior to all of the problems that put our nation’s economy into a steep nose-dive.
In fact, in 2000 those terms were known only to a small circle of investment bankers and brokers who created and traded the complex financial instruments the terms describe. The terms are familiar today because their unregulated trading had a great deal to do with the near-death experience of the Bear Stearns investment bank, which was only avoided when the Federal Reserve shelled out $30 billion for JPMorgan Chase in backing to acquire Bear Stearns and avoid the international financial disaster that would have followed the bankruptcy of a large investment bank.
Maybe a little background on Phil Gramm would help us understand more about this man who advises a potential president. I first became aware of Gramm and his wife, Wendy, when we were looking into the Enron debacle a few years back. The current economic crisis is not the first one made possible by Phil Gramm’s commodity futures act. Interestingly, the former Senator’s wife served on the Commodity Futures Trading Commission from 1983 to 1993. As a commissioner, she helped develop many of the trading rules her husband turned into law in 2000. When Dr. Wendy Gramm left the Commission, she actually joined the corporate board of Enron. I understand she owned a considerable amount of stock in the company. The gas-pipeline company at that time was reinventing itself as a commodities trading combine. Enron’s on-line commodities trading got a major boost as the result of a specific provision in Senator Gramm’s commodities futures act.
As we reported several issues back, the “Enron exception” that Senator Gramm included in the act protected all on-line derivatives from federal regulation, even when they were designed to defraud investors. Some felt that was a potential conflict of interest since the Senator was helping to pass a law that would benefit his spouse, who was being paid by a corporation that would reap enormous benefits from passage of the legislation. I’m not sure, however, whether Dr. Gramm had actually gone over to Enron when the bill became law. However, the possible conflict of interest was reported in some news outlets, but to my knowledge no inquiry of any sort was ever made.
Of course, we all know what happened to Enron. Tens of thousands of Enron employees and investors saw their pensions disappear when the company collapsed. Compare that to Bear Stearns, whose shareholders have been put in a similar position; shares worth $145 two weeks before the company’s collapse were acquired by JPMorgan for $2 a share as I recall.
Fortune magazine describes John McCain’s economic policy as “vintage Gramm.” The Senator’s recent argument against government relief for homeowners facing foreclosure recalls Phil Gramm’s killing of a deregulation bill in 2000 that he had otherwise supported—because it would have provided reduced-rate mortgages for low-income government employees. The former Texas senator is now being mentioned as the next Secretary of the Treasury if John McCain is elected president. Dr. Wendy Gramm currently chairs the Regulatory Studies Program at the Mercatus Center, a free-market think tank housed at George Mason University. She too might be a candidate for some type of appointment. Based on their history, I don’t believe either Gramm should be calling shots that would shape economic policy for a McCain Administration.
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