The Press and Phil Gramm

The alternative press leads on the policy roots of the credit crisis

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.

In a reminder that the core circle of Gramm critics is a somewhat select bunch, the Texas Observer quotes both Galbraith and former government regulator Michael Greenberger, another name that appears prominently in what there is of Gramm coverage. (We’ve flagged an interview with him further down.)

But we can also see the widening influence of these ideas in pieces like this one from last July. Dave Davies, of the Philadelphia Daily News, chose to spend his “few minutes with McCain” asking about

the fact that his campaign co-chair and economic advisor, former Texas Sen. Phil Gramm, was co-sponsor of the 1999 law that allowed commercial banks to get into investment banking. And the fact that Gramm was a prime architect of a 2000 bill that kept regulators’ hands off ‘credit default swaps.’

McCain’s answers are unenlightening. But what is important is that this local reporter asked the question. What inspired him? Well, he didn’t mention any publication by name, but he appeared to give Mother Jones and The Texas Observer a nod when he explained, “Liberal writers raised this issue a month ago.”

The fact is, both the Mother Jones pieces and the Texas Observer piece are part of a small but important batch of articles appearing over the past several months that examine Gramm’s place in financial deregulation, and the resulting effects of that deregulation on the economy. Mother Jones and the Observer stand out for their depth and focus, but other pieces that at least place Gramm in context include an excellent April 2008 interview on Fresh Air with Greenberger, and a March 2008 New York Times piece that focuses on deregulation more broadly but does mention the former senator.

As a side note, press criticism of Gramm has not gone unnoticed in Washington. On Sept. 17, Vermont’s Bernie Sanders demonstrated that politicians—or at least their aides—do scan the press. He went to the trouble of reading to Congress a Sept. 15 post by blogger Peter Cohan criticizing Gramm’s deregulatory schemes, and he also mentioned The Texas Observer. In addition, Democrats have compiled an information sheet on Gramm that is based in substantial part on press coverage.

In other words, information is out there for those with the motivation to look for it.

The effect of these articles in the political arena remains to be seen. But it is worth noting that the current crisis is not the first time the press has focused on Gramm and deregulation.

To bring in recent history: Gramm and his wife, Wendy, did get some high-profile attention—from an eagle-eyed Public Citizen, then The New York Times, The Chicago Tribune (“Sen. Gramm and Wife Deregulated Enron, Benefited from Ties,” Jan. 18, 2002, Robert Manor), The Washington Post (“For Gramms, Enron Is Hard to Escape,” Jan. 25, 2002, Dan Morgan and Kathleen Day)—several years ago, after the Enron debacle and California energy crisis, for their roles in energy deregulation. But, as will happen, the hubbub died down.

Before it did, some reporters—in the NYT and the WSJ (“Out of Reach: The Enron Debacle Spotlights Huge Void In Financial Regulation,” Michael Schroeder and Greg Ip, Dec. 13, 2001), for example—widened their view, to address the problem of deregulation beyond the energy market. But the job of piecing together Gramm’s role in broader financial deregulation would largely fall to later reporters. Like Hart in The Texas Observer and Galbraith and Corn in Mother Jones.

All this is to say that while Gramm’s role in deregulation has not received the attention it deserves, neither has it gone away. Rather, it forms an undercurrent to the press’s effort to present the larger story of financial collapse.

And lastly, we come full circle: Another place the story has popped up again in recent days is on Mother Jones’s website, where David Corn returned to the topic September 15. He elaborated on suspicions about an ongoing connection between Gramm and McCain:

Gramm is responsible for the rise of the wild and wooly $62 trillion swaps market. And he was chairman of the McCain campaign and a top economic adviser for McCain—until he dismissed Americans worried about the economy as ‘whiners.’ After that comment, McCain dumped Gramm. But was Gramm truly excommunicated from McCain land?

This is pretty much a rhetorical question. And to back up his point, Corn goes on to offer evidence that Gramm appears to be “back in the good graces of the McCain campaign.”

All the more reason why the press needs to keep Gramm in its sights.

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Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.