Gramm and the subprime crisis
Apparently some on the left are trying to blame Phil Gramm for the subprime lending crisis and the ensuing credit crunch. The theory is that somehow the Gramm-Leach-Bliley Act, which repealed most of the Depression era firewall between investment and commercial banking somehow created the runup in mortgage lending and home values.
In an interview with James Pethokoukis, Gramm responds with a great explanation of what actually caused this crisis (hint: it was 100% government action):
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.
He stops short of patting himself on the back, so I will. Gramm-Leach-Bliley is actually part of the solution. When Bear Stearns, an investment bank, was on the verge of failure, threatening to completely lock up Wall Street’s clearing of securities trades, the Federal Reserve and the Treasury Department turned to J.P.Morgan, a commercial bank, to buy out the condemned company. Under Glass-Steagall, that simply wouldn’t have been an option. The act of Congress that saved the day two weeks ago was passed 9 years ago and it had Phil Gramm’s name on it.
Side note: One more point seriously in John McCain’s favor. When a candidate admits he doesn’t fully understand economics and brings on people like Phil Gramm to fill in the blanks for him, that’s head and shoulders above those other two who clearly don’t understand economics either and don’t care to learn.