Critiquing Phil Gramm's explanation of the financial crisis

Ron Paul, Phil Gramm's primary opponent for the Senate, was 1 of only 4 to vote against (in a House of 425 members) the Commodity Futures Modernization Act. And opposed the changes in Glass-Steagall in 1999 and put the following prescient statement in the congressional record:

-The growth in money and credit has outpaced both savings and economic growth. These inflationary pressures have been concentrated in asset prices, not consumer price inflation--keeping monetary policy too easy. This increase in asset prices has fueled domestic borrowing and spending.
-Government policy and the increase in securitization are largely responsible for this bubble. In addition to loose monetary policies by the Federal Reserve, government-sponsored enterprises Fannie Mae and Freddie Mac have contributed to the problem/. The fourfold increases in their balance sheets from 1997 to 1998 boosted new home borrowings to more than $1.5 trillion in 1998, two-thirds of which were refinances which put an extra $15,000 in the pockets of consumers on average--and reduce risk for individual institutions while increasing risk for the system as a whole.
-The rapidity and severity of changes in economic conditions can affect prospects for individual institutions more greatly than that of the overall economy. The Long Term Capital Management hedge fund is a prime example. New companies start and others fail every day. What is troubling with the hedge fund bailout was the governmental response and the increase in moral hazard.
-This increased indication of the government's eagerness to bail out highly-leveraged, risky and largely unregulated financial institutions bodes ill for the post S. 900 future as far as limiting taxpayer liability is concerned. LTCM isn't even registered in the United States but the Cayman Islands!
-...My main reasons for voting against this bill are the expansion of the taxpayer liability and the introduction of even more regulations. The entire multi-hundred page S. 900 that reregulates rather than deregulates the financial sector could be replaced with a simple one-page bill.

Pretty amazing stuff but alas the Republican Party leadership chose to support Phil Gramm...a recent Democrat carpetbagger...over Ron Paul for Senate. While the jury's still out on the effects of these two pieces of legislation...perhaps even those on the left would have preferred a principled free marketeer rather than someone like Phil Gramm that thought any deregulation that benefited specific corporations was a good thing.

Ron Paul 2012!

Great post, Justin. I must say, though, that despite his endearing look and genuine interest now in figuring out what went wrong, Gramm used to be pretty insufferable on the Senate floor.

I tend to agree with what he said. I think that he leaves out:
1) The high level of fraud, negligence, fiduciary mismanagement, and collusion, involved in this crisis.
2) The fact that many investors are not free market adherents. Rather, they believe in active government help and guarantees when they need it.The actions of the government, from Chrysler to the S & L Crisis to LTCM to the Fed's actions, have led investors to believe in implicit government guarantees, and not rely on the free market, where that doesn't involve government aid.
3) The power of lobbying. The ability to manage the government, and not the other way around.
To give him the benefit of the doubt, all of us have trouble seeing ourselves for what we are. Gramm apparently doesn't realize that we have a Hybrid System of government, in which businesses are always pushing government for help and aid.
As well, he just can't acknowledge the incompetence of the Bush administration.

strip away all the pretty words and it boils down to greed. i'm a branch manager in a large regional bank. we are paid a bonus for generating mortgages. our mortgage officers are paid to generate mortgages. our area managers and their bosses are paid to generate mortgages. two years ago we all feasted on the fees being generated by cramming borrowers into products that fit for the moment, with the implication that, as home prices increased, they would be back to refi and generate more fees. home values would increase forever and fees would increase forever. now, my bank carries $4.5B in non-performing loans and writes off loans at the pace of $500 million per quarter. no one can imagine failure, but it looms over us. we drank at the trough of easy money and now we are thirsty. as a banker, i fear for the existence of my industry.

Gramm says Glass-Steagall repeal couldn't have been the problem, because continental Europe has never had a Glass-Steagall-like separation of banks and investment firms, and yet they didn't have a mortgage mess (although of course some of their banks have gotten caught up in our mortgage mess). I'm sympathetic to this argument. In fact, I've made it myself.
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really? European banks have never had "a mortgage mess" or a "financial system crisis"?. Or is Gramm trying to blame the whole crisis on the 'mortgage bubble'? Lets keep in mind that the precipitating event here was the fall of an investment house, not a mortgage brokerage -- and that the mortgage bubble was a by product of deregulation.
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More to the point, both you and Gramm seem to ignore the far more likely 'root causes'-- centralization of banking, the creation of a ‘private' mortgage bundling industry and its derivatives, and (most crucially) the "information age" increased speed at which financial industry transactions and analysis can now take place. When "banking" started, all sums were done by hand. Eventually, 'adding machines' speeded up the process, but not by much. The popularization of computers, especially the invention of the 'spreadsheet', made calculating the financial impact of extremely complex scenarios instantaneous. As a result, trading is now done without any consideration of 'the long term', and the entire rationale behind market-based capitalism has imploded.
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But the SEC and bank regulators didn't choose to regulate credit default swaps. Just-departed SEC chairman Chris Cox said in the fall that the law didn't give him the authority to do so. Gramm said he thought Cox was wrong about that. I dunno. Cox is the lawyer. He oughtta know.
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I'd go with Gramm on this one, actually, to the extent that as a Bushco appointee, Cox would want to find a a “lack of authorization to regulate” in the law, whereas someone more inclined toward regulation would find that it allows it. But its disingenuous in the extreme for Gramm to pretend that he favored the SEC regulating CDSs.
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Gramm: “They have proven to be a better predictor of underlying creditworthiness than the rating agencies. They have never lost liquidity
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um,is this true? (IIRC, what they lost was any ‘reasonable' value in the market. Sure, they remained ‘liquid' in the sense that they could be traded at ‘fire sale' prices, but that's not liquidity in real terms, is it?)
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And in the case of the CFMA, while the way the bill was passed in a special session near the end of 2000 was not a textbook case of open government at work, it was again a topic that had been discussed pretty exhaustively ever since the CFTC's Brooksley Born had tried to get herself into the business of swaps regulation after the collapse of Long-Term Capital Management in 1998
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c'mon, just because something is ‘discussed' by interested parties doesn't mean it wasn't a special interest bill snuck through congress, which is precisely what it was – something introduced at the very end of 2000 by the GOP congress as part of an omnibus budget bill for which there were no committee hearings or debate in Congress. Gramm has to take full responsibility for this, and no excuses should be allowed.
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Not because Greenspan's an idiot, but because it was a different sort of recession than all the other post World War II recessions (a bubble deflation as opposed to an inventory cycle) and so the standard Fed response of cutting interest rates wasn't the right move because much of the economy wasn't in a recession.
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this goes back to my argument that the recession itself was a product of Bush's ill-timed declaration that a recession was inevitable. But Gramm is dead wrong about the inventories part – the lack of demand (thanx to people's fear of a recession in the middle of the Christmas buying season) created excess inventory and (as a result) excess productive capacity. Greenspan's error was in dropping rates when there was no demand for more money to increase capacity, and dropping them way too much, leaving the Fed no room to maneuver when an interest rate drop would (at least in theory) jump start new investment.
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The decades-long push from Washington to increase home ownership metastasized into a de facto government mandate to make bad loans.
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in fact, there is no evidence that the community reinvestment act played any significant role in the meltdown – banks chose to participate in predatory lending practices (usually indirectly, but backing predatory lenders), and this problem was noted as far back as 2002 (http://lsr.nellco.org/cgi/viewcontent.cgi?article=1029&context=uconn/ucwps ). Indeed, the Bush administration regulatory community loosened restrictions on banks and other financial institutions with regard to the CRA in 2005. (see http://financialservices.house.gov/pr04132005.html and http://www.fdic.gov/news/news/financial/2006/fil06033.html )
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As for Freddy and Fanny, both changed their policies with regard to subprime lending as the result of “market” forces. Basically, much of the role carved out for Freddy and Fanny (mortgage bundling) was being taken over by the private sector because Freddy and Fanny's standards were too high – that meant less fees for these corporations, which meant less return on investment for stockholders. (see http://www.nytimes.com/2008/10/05/business/05fannie.html).
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Ultimately, it was the deregulatory fever promoted by people like Gramm that created this crisis – it turned money into a commodity for fast-buck artists to exploit. For Gramm to pretend that “markets” still work, and that the problem lies with the real estate industry alone, is pure BS.

What pluk said?
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And the primary regulatory failure was??? Ding. Ding, ding, ding!
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You guessed it! Inadequate controls on leverage.
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And here is why? Let's do an experiment shall we? Sit two people down at a table in Vegas. Give one $200 to play Texas and have the other bring $200 out of his own bank account. Wash, rinse and repeat. My own $200 says that human nature being what it is...the individual without any skin in the game (this assumes a rational odds-based player) will have a statistically significant greater propensity to take riskier bets. And why not, it's not your money!
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It is quite simple really. You can deregulate but make folks use their own money. The Myth of the Rational Market is no myth. Just like you can have no-limit poker in Vegas....but everybody brings cash to play the game.

WALL STREET NEVER CHANGES

"Wall Street never changes. The pockets change, the suckers change, the stocks change, but Wall Street never changes because human nature never changes." Jesse Livermore

The noxious news spewing from the marble cesspools of Wall Street continues to get more incredible by the day. In less than a year American's have witnessed a historic melt down in the financial markets, the humbling of the Wall Street Investment banks, a mega housing bust, a mega Ponzi scheme, the mother of all government funded bailouts, compensation greed and excess run amuck, mega regulatory ineptitude, mega layoffs and record unemployment...the list goes on and on.

Those Wall Street scions who figured at the center of this this fiasco have inflicted immeasurable pain and suffering on ordinary Americans. They have sabotaged the engine that drives the American economy and jeopardized the global preeminence of the United States.

Now we are witnessing the complete breakdown of civility amongst these modern day robber baron thieves and their bagmen. The shameless public display of "cover your ass" by the likes of Gramm, Cox, Thain, Lewis, Fuld, Greenspan and company is too nauseating to behold. This week's cat fight between John "Complain" and Ken "Screwless" is the latest example. All who are implicated in this sorry mother of all financial meltdowns refuse to take responsibility.

Comically some expect us to take pity on people like Dick (the "Gorila") Fuld or the thousands of financial spinners the pied pipers of greed led into the financial vortex.

Wait with bated breath for the culprits to be held duly accountable. In the meantime, it is the duty of every right thinking American to hold these scoundrels up to public scorn and ridicule. They deserve to be verbally tarred and feathered. All who exercise their right of free speech by holding these conniving rascals up to the light and exposing them as the despicable Ivy League con men that they are to be congratulated for fulfilling their civic duty.

In 1902, Franklin Keyes, a prominent Wall Street lawyer once said: Wall Street speculation "fosters a ring of idle gamblers, parasites upon society, who prey upon the fortunes of the honest and industrious; such people are a menace to the legitimate business interests of the country and an element of danger to the republic."

Some things never change.

WilliamBanzai7