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.