09/17/2008 05:12 am ET Updated May 25, 2011

Would You Really Buy a Mortgage From John McCain?

He's back! In Aspen last week, John McCain gazed into Phil Gramm's eyes and said, "Thank you Phil, for all your friendship and support." For years, Gramm has been the economics lobe of McCain's brain -- and it seems he is still mighty proud of the fact. This is shocking -- not because Gramm called Americans a nation of "whiners," but because more than any other politician, he caused the Enron implosion and the credit crunch.

McCain has said: "The issue of economics is not something I've understood as well as I should... To be honest, I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated." This is a man who can't tell his Sunni from his Shia, and who opposed the Northern Ireland peace process as a capitulation to terrorism. And he admits he knows even less about the economy than that. On one occasion, he let his irritation with the subject slip by referring to it as "the credit cunt."

But when he is forced to talk about the economy, McCain has always given the same answer: "I rely on the circle I have developed over many years -- people like Phil Gramm." He has Herbert Hoovered-up his slivers of economic theory from this man -- but who is Gramm? Until he briefly sputtered into the headlines over his "whiners" gaffe, few had cared to look.

Phil Gramm is an ornery old ex-Texas senator who seems to have swooped out of the most scathing H L Mencken sketch. He became McCain's "best friend in politics" -- and started speaking to him every day - when they linked arms to stop Hillary Clinton's 1993 push to extend healthcare to poor Americans. He calls for "ruthlessly" slashing government spending -- but only focuses on spending on the poor. When he was told paying for healthcare plunged many 80-year-olds into poverty, he said: "Most of us don't have the luxury of living to be 80 years-old, so it's hard for me to feel sorry for them."

Later, one of those very 80-year-olds approached him because she was terrified she wouldn't be able to pay her medical bills. Gramm laughed and told her to find herself a rich husband. He chuckled: "People say I don't have a heart. I do. I keep it in a quart jar on my desk."

This chuckle-headed ideological fanaticism nearly brought the global economy down with it -- twice. How? Gramm says government regulation of the economy is "akin to communism," and must be destroyed. His first great step towards this goal came in the 1990s, when he championed and pushed through the law that exempted Enron from both government regulation and public disclosure, on the grounds these were "unacceptable fetters on the free market." Enron was his biggest campaign contributor, and employed his wife to the tune of a million bucks.

So thanks to Gramm, nobody was watching over Enron anymore. As a result, they embarked on a massive program of fraud and pillage. After taking over the electricity market in California, they deliberately engineered blackouts in entire cities to drive up the price for power. In a surreal move, Gramm blamed "environmental extremists" -- the nearest bogeyman to hand -- even after it was proven Enron execs had paid the power plants to "get creative" in turning out the lights.

Gramm learned from the Enron scandal -- to go further and push harder. He turned his attention (and his fund-raising) to the mortgage companies. Since the 1930s, there had been an unwritten deal in US politics: the government would rescue the banks if they grew sick, but in return the banks had to take the sensible medicine of regulation. Gramm thought this was "crazy": why would banks ever need to be rescued in a free market?

So -- as the brilliant Mother Jones magazine exposed -- in 2000, while everybody was riveted by the Gore vs Bush stand-off in Florida, Gramm slipped into a vast 3,000-page bill his own creation. It was 268 pages radically deregulating the banking system. A legal textbook later called this "a stunning departure from normal legislative practice"; few lawmakers noticed it was there when they voted. Suddenly, the roles that had been reserved in the US for regulated banks were handed over to a vast network of unregulated financial institutions called the "shadow banking system." They began to offer wildly unsustainable mortgages to the poor at supersonic interest rates. Through accountancy-acrobatics, they then bundled these risky loans into exotic packages of derivative commodities, hoping nobody would notice.

All this was only legal because of Gramm's legislative footwork. He swiftly moved on from the Senate to a megabucks job at UBS, one of the banks raking in billions from his changes.

Within a few years, the entire system began to collapse without the support beams of state regulation. Sub-prime mortgages predictably fell apart, with 2 million Americans -- mostly black and Hispanic -- facing repossession. The state has had to step in with a much heavier hand than before - and even that will not prevent a recession now.

The billionaire Warren Buffet pointed out that Phil Gramm has twice tossed "financial weapons of mass destruction" into the US economy. Yet instead of shunning him, McCain made Gramm the co-chair of his presidential campaign, and hinted he might make him Treasury Secretary. McCain -- the supposed scourge of buying influence - was even happy for Gramm to be simultaneously a paid lobbyist for the mortgage industry and helping to write his speeches about the mortgage crisis. The Gramm-grip on McCain's policies shows: incredibly, the wannabe-president responded to the credit crunch caused by deregulation by calling for even more deregulation.

The biggest question in US politics should be: would you buy a mortgage from this man? But it's a sign of how shallow the media coverage is that Gramm's ideological fanaticism passed almost without comment; he only became an issue when he made a silly verbal gaffe, claiming America is only in a "mental recession". (In CEO-Land, this is true: they are walking away with $100m bonuses from their failures.) Only then did McCain distance himself.

It seems that for this putative President, causing two major economic crises is fine - but speaking about them crudely is a step too far, to be punished by a few weeks in exile. Now the punishment period is over, and McCain is publicly Gramming-up for the cameras again. If you liked the credit crunch, you'll love McCainomics.

To read an archive of Johann Hari's columns for the London Independent, go here.