Getting our Phil: smearing Phil Gramm

National Review, June 30, 2008 by Ramesh Ponnuru

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PHIL GRAMM can't say he wasn't warned. The former Texas senator, now the co-chairman of John McCain's presidential campaign, was a principal subject of a front-page Washington Post story on April 2. "Democratic opponents are already plotting attacks" on Gramm, reported Jonathan Weisman.

In the following two months, hit pieces on Gramm have appeared in The Nation, Salon, Mother Jones, The Huffington Post, and many other left-wing publications. For opposing regulation when he was a senator, Gramm is being blamed for contributing to Enron's fraud, the high price of gas, and the mortgage meltdown. Keith Olbermann, the MSNBC ranter, even links him to 9/11. He has taken to referring to "John McCain's Phil Gramm scandal."

The attack on Gramm serves three goals for the Left. It discredits Gramm, McCain, and deregulation all at once. Gramm has been one of the most effective conservative legislators of his generation. He led the fight for Ronald Reagan's first, and most conservative, budget, and led the fight against the Clintons' health-care plan a decade later. Forcing McCain to dump Gramm would be payback for decades of conservative victories. Merely sullying his name might keep a President McCain from nominating him to be secretary of the Treasury.

But a full review of the facts exonerates Gramm.

The Enron exemption. The litany of charges against Gramm begins with his wife, Wendy. Like him, she is an economist. In the first Bush administration, she ran the Commodity Futures Trading Commission. According to the liberal storyline, while there she pushed through a measure to deregulate certain types of energy trades, left office, and joined the audit board of Enron. In 2000, Senator Gramm surreptitiously codified this exemption into law. Enron was as a result free to commit fraud, enriching the Gramms.

Gramm's critics uniformly omit the rest of the story. The trades in question had never been regulated. In 1990, a court decision left it unclear whether they fell under the CFTC's regulatory authority. The House voted 395-27 to instruct the CFTC to exempt these trades. The accompanying Senate bill was sponsored by liberal Vermont Democrat Patrick Leahy. After the bill passed, Rep. John Dingell--a Democrat and no free-market zealot--urged Wendy Gramm to put the exemption into effect quickly. The commission started working on the issue. But the exemption actually went through after Wendy Gramm had been replaced by a Democrat.

In 2000, Congress took up a bill on futures regulation that reaffirmed the exemption. Committees of the House and the Senate held hearings on the legislation. The Clinton administration came out in support of the bill. Gramm put a hold on the legislation because of other issues, even as the head of Enron, Gramm's friend Ken Lay, was writing congressmen urging swift action. Once Gramm's issues were resolved, the bill passed Congress by overwhelming margins. By that time, its Senate co-sponsors included not only Gramm but Iowa's populist Democrat Tom Harkin. But even if Congress had not passed the bill, the CFTC would have reaffirmed the exemption itself. It was planning to do so until the bill's passage made it unnecessary.

To summarize: The law recognized the "Enron exemption" before the Gramms acted; they reaffirmed existing law rather than removing existing regulations; and the exemption would have stayed in the law even if the Gramms had never been born.

The bank wars. The second charge concerns a deregulatory measure for which Gramm really does have primary responsibility. Since the Great Depression, the federal government had enforced a separation between commercial and investment banking. By the 1990s, most observers thought that the rule no longer made sense given the way financial markets had evolved. Gramm led the effort to get rid of it. Congress overwhelmingly passed, and President Clinton signed, a bill bearing his name that did so. It is also true that after Gramm left the Senate, he took a job at UBS, a firm that took advantage of the rules change.

Now Gramm is being blamed for the trouble in the financial markets. A blogger at The Huffington Post wrote that Gramm had torn down "a financial structure that served us well ... and left a war zone." Senator Obama has embraced the theory that banking deregulation contributed to the current mess, although he has refrained from hyperbole.

In truth, Gramm's legislation probably made the current trouble less severe. As The Economist recently concluded, "the more focused institutions, on both the investment-banking and retail-banking wings of the industry, were the ones that got into most trouble." It cited a Boston Consulting Group analysis that found that "the more diversified players performed better in this crisis than the less diversified ones." Gramm frequently points out that without his legislation, it would have been illegal for J. P. Morgan to rescue Bear Stearns.

Robert Litan, a Clinton administration official, goes so far as to say that the housing sector would be doing better if Gramm had gotten more of his way. Gramm thought the Community Reinvestment Act put too much pressure on banks to lend to people with bad credit. Which is not to say Gramm had perfect foresight: Nobody pushed for the regulation of mortgage brokers that most observers now favor.