Sunday, July 13, 2008

Phil Gramm, fear and your financial future

Now that we're largely inured to the disaster that is "the war in Iraq," and now that we no longer expect a terrorist attack any minute, there is a new bogey man in town. Be afraid, be very afraid of total economic collapse and complete loss of the pampered American way of life as we know it. Be afraid that you may lose your job and house at any moment. Be afraid that you will have no retirement and will not be able to put your kids through college. Fear is the theme. Fear is the meme.

Check out some headlines from this week:
"Worst fears ease, for now, on mortgage giants"
"Stocks, dollars slide on latests credit crisis fear"
"Fear is driving Wall Street"
"So much for optimism"
"Feds fear Fannie, Freddie meltdown"
"Better than feared economic data still pretty bad"

As long as you're scared, maybe in this election year you won't notice who's behind the mess we're in. According to journalist David Corn, Phil Gramm, one of John McCain's closest advisers, bears some responsibility. Corn contends that the roots of today's problems come from " a sly backroom legislative maneuver mounted by Phil Gramm, who was Republican chairman of the Senate Banking Committee in the '90s." According to Corn, Gram helped deregulate financial speculation in the form of "swaps" with language quietly slipped into the Commodity Futures Modernization Act. Swaps are tools that let banks hedge their bets by insuring loss. And as a rolling loan gathers no loss, swaps that insure against loss need to keep rolling too. Trouble comes when the music stops in the game of musical debt. Whoever is left holding the massive amounts of bad debt loses.

But this completely overlooks Gramm's magnum opus, the Gramm-Leach-Bliley Act from 1999. This law repealed the depression-era Glass-Steagall Act, which prohibited a bank from offering investment, commercial banking, and insurance services. This is the real culprit behind our financial mess. Gramm's law freed up Citibank to merge with Traveler's and become Citigroup. Gramm's modernization of financial services actually facilitated greed and speculation run amok.

Want to be afraid? Imagine this guy as treasury secretary.

The markets will correct. Long-term investors with diversified portfolios will be fine. Don't be distracted by the fear meme. It is there to keep you from noticing who's on first during this presidential campaign.