04/18/2008 05:12 am ET Updated May 25, 2011

McCain Econ Advisor Phil Gramm: Recession Starter

Wondering about the bespectacled old white guy on the campaign plane with Senator John McCain? Former Texas senator Phil Gramm is McCain's economic brain, doing much of the policy thinking in regard to that subject for the Republican presidential nominee, who admits that finance and the economy are weaknesses he needs to master.

If most of the public has forgotten Gramm, Wall Street hasn't. As chair of the Senate Banking Committee in 2000, Gramm attached a complex, 262-page amendment to an omnibus appropriations bill moving toward passage as Congress was moving toward Christmas recess. Written by Wall Street investment-bank lawyers, the Commodity Futures Modernization Act had no hearing before any committee and was unread by almost every member of Congress. It mandated sweeping deregulation of investment banks, declaring off-limits to regulators most over the counter derivatives, credit derivatives, credit defaults, and swaps.

In 2000 those terms were known only to a small circle of investment bankers and brokers who created and traded the complex financial instruments they describe. They are familiar today because the unregulated trading of them had a great deal to do with the near-death experience of the Bear Stearns investment bank, which was only avoided when the Federal Reserve provided JPMorgan Chase with $30 billion in backing to acquire Bear Stearns and avoid the international financial disaster that would have followed the bankruptcy of a large investment bank.

The current economic crisis is not the first one made possible by Phil Gramm's commodity futures act.

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