Phil Gramm: I Didn't Cause the Subprime Crisis

The McCain adviser dismisses charges that repeal of Glass-Steagall led to Wall Street's current woes.

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Is McCain campaign economic adviser Phil Gramm, the former U.S. senator from Texas, partially to blame for the subprime crisis engulfing Wall Street? Some Democrats and liberals have been trying to make that case. It was the Gramm-Leach-Bliley Act that in 1999 repealed the Depression-era Glass-Steagall Act and allowed banks, securities companies, and insurance companies to directly compete with one another and led to the creation of financial conglomerates like Citigroup. I was chatting this morning with Gramm by telephone for a separate economic story I am working on, and I took the opportunity to ask him about the accusation. Here is a bit from that fascinating interview, the rest of which I will post later:

What do you make of Treasury Secretary Henry Paulson's proposal this morning for changing how the financial industry is regulated?

I've looked at it. Senator McCain has a group of advisers looking at it. I better wait until a consensus is reached on that.

On a related point, there has been harping of late on the repeal of Glass-Steagall in 1999. Was that a good idea in retrospect?

I see no evidence whatsoever that the subprime problem was in any way caused by making our financial structure more competitive by allowing banks and securities companies and insurance companies to compete against each other. I have seen no evidence whatsoever to substantiate that claim. The subprime problem came from an extraordinary run-up in housing values beginning in 2000 as we were in a recession and the Federal Reserve cut interest rates; it was a very unusual recession in that investment had collapsed but home building and consumption were strong, so the monetary policy that was aimed at stimulating the economy [also] stimulated an industry that was in boom condition. Housing prices rose faster than at any time except right after World War II, when wage and price controls came off, and that created this speculative demand.

And secondly, America's policy to try to encourage home ownership by making down payments lower and lower and lower until they were practically zero in many cases gave the whole thing a hair trigger. None of that has anything to do with banks and securities companies and insurance companies competing with each, nor did it have anything to do with the syndication of mortgages, which were old hat by that point. So I think that what always happens in these cases is that it depends on what your agenda is, as to what you want the cause of the problem to be.

My take: With all the Wall Street folks advising and donating money to the three remaining presidential campaigns, it is hard to see how any of these sorts of charges will stick. I mean, both Hillary Clinton and Barack Obama have been receiving advice from former Treasury Secretary Robert Rubin, who is also current chairman of troubled Citigroup.