The alternative press has led the way on the story of Phil Gramm and the policy roots of the financial crisis, beating the mainstream business and other media rather badly about the face and neck.
Why this would be so is a subject for group psychologists, anthropologists, social workers, ethnographers, drug counselors, and media critics like us, and certainly another day. But with an election around the corner, we would suggest only that it is as much a mistake for journalists as it is for voters to assume that past policy decisions are unrelated to our current predicament.
So, let’s accentuate the positive and offer an Audit Credit to Mother Jones for more excellent reporting on the ever-widening ripples from the deregulation of the American financial system, which allowed, as it invariably does, the bad money to drive out the good.
James K. Galbraith examines the bubble effects of this deregulation, looking beyond the obvious one in housing, already burst, to the other ones in energy and food. As his colleague David Corn did last summer, Galbraith lays considerable responsibility for financial deregulation at the feet of former Senator Phil Gramm. But, unlike Corn’s also Credit-worthy piece, Galbraith shifts his focus to a specific result of that deregulation: the speculation that has resulted in high commodities prices.
Galbraith’s analysis is nuanced. He does not blame high energy and food prices solely on speculation, but he does expose as a myth the idea that high prices are the result of tight supply and high demand alone. He states bluntly:
Yes, Virginia, speculators can affect the price—if they are large and relentless enough to dominate a market, and especially if they can store the commodity and keep it off the market as the price rises.
Here is where deregulation comes in, because it has given speculators their outsized power. Deregulation has meant that speculation is not a fringe activity, but has rather become a mainstream investment strategy. Here is Galbraith:
Thus today, when officials like Treasury Secretary Henry Paulson say that speculation is not a factor in the commodity markets, they’re not counting hedge funds and investment banks as speculators—even though that’s what they really are.
Galbraith is hardly the only one to raise the issue of speculation and high oil prices, but he distinguishes himself by looking at the larger picture: energy speculation as one facet of broader, and disastrous, deregulation.
In Galbraith’s and Corn’s pieces, Mother Jones makes it clear that if you are looking for someone to thank for this situation, you wouldn’t be wrong to send your regards to Phil Gramm.
Gramm threw his weight behind the Commodity Futures Modernization Act of 2000, which, among other things, paved the way for a boom in those nasty credit default swaps that are coming back to haunt us all. Writes Galbraith:
This, combined with other deregulatory moves by the CFTC [Commodity Futures Trading Commission], broadened the ‘swaps loophole,’ an enormous backdoor into the commodities markets, basically permitting speculators making bets off the commodities exchanges to be treated as ‘commercial interests’—like say, farmers—and hence avoid the scrutiny (including limits on the size of their bets) normally applied to financial players.
And, as is better known, Gramm also co-sponsored 1999 legislation—backed by the Clinton Administration—that collapsed the distinction between investment and commercial banks.
For a view of where both pieces of legislation fit into the financial crisis, take a look at this clear timeline that appeared in Mother Jones last summer.
In the interest of credit where credit is due, we note that Mother Jones, while notable for its force and persistence, was not the first publication to have looked closely at Gramm’s history. Credit also goes to The Texas Observer, where a rigorous article by Patricia Kilday Hart, from last May, pinpoints Gramm as an architect of the financial crisis. Here is Hart on the circumstances of the 2000 legislation:
In the early evening of Friday, December 15, 2000, with Christmas break only hours away, the U.S. Senate rushed to pass an essential, 11,000-page government reauthorization bill. In what one legal textbook would later call ‘a stunning departure from normal legislative practice,’ the Senate tacked on a complex, 262-page amendment at the urging of Texas Sen. Phil Gramm.
There was little debate on the floor. According to the Congressional Record, Gramm promised that the amendment—also known as the Commodity Futures Modernization Act—along with other landmark legislation he had authored, would usher in a new era for the U.S. financial services industry.
And did it ever.