Phil Gramm and the causes of the economic crisis

Returning to a theme I've been walking around lately, lets consider again the reasons we're in this mess.

Previous posts have established that conservative pundits want to blame Bill Clinton and Jimmy Carter for this mess. They say that excessive government involvement in the Free Market, say in the form of "forcing" companies to offer loans to bad borrowers, is the issue.

Of course this is a blatant mis-characterization of the situation. I'll write off the Carter business since A) Reagan pretty well erased him and his policies and B) This housing/economic disaster did not happen until a good 30 years after Carter got into office. So that if he is a cause it would be exceedingly difficult to make out just how and to what extent. As to the Clinton years, well people who know me can tell you I'm no F.O.B. I found his governing style annoying at best and counter-productive. But during the end of the Clinton presidency there was no bigger force for Deregulation than Senator Phil Gramm, PhD in economics and the Republican point-man on all things economic.

Gramm was the architect for passing anti-government legislation, for de-regulating. He was instrumental in making sure that banks could invest and lend in more and more risky ways. That is, Gramm made it possible for banks to offer risky mortgages and for investors to create complicated financial instruments based off of these mortgages.

The banks did this not because of "government intervention" but because, acting on the profit motive, they saw a way to make alot of money - so long as housing prices continued to rise and people didn't default on their mortgages. People wouldn't default, of course, because of their own profit motive; owning a house is a great investment.

Instead, what happened was the government chose to get out of the market and let it work on its own. And as markets will do, it took off in unexpected ways. That is, the ideology that says all actors in the market are equally knowledgeable and will act properly according to the profit motive was given the lie.

Thanks to Phil Gramm, there were no government fail-safes to protect anyone. And long story short, here we are.


Now, I'm not an anti-market guy. I'm an Adam Smith guy. And Adam Smith, were he alive today would likely wonder out loud how the hell Phil Gramm ever got a PhD in economics. But he'd be even more dumb-founded at the notion that the "invisible hand" he talked so much about could have been so utterly misunderstood and misapplied.

I promise to in the near future expand on that thought, to deliver in a concise manner the actual recommendations of Adam Smith as to how a capitalist system can work. And what the pitfalls are that must be avoided.


If you are interested in a close-up on Phil Gramm, I highly recommend you check out this November article on him in the New York Times.