Thursday, February 19, 2009

Is Senator Phil Gramm to Blame for the Financial Crisis?

Time Magazine's website posted an interactive article where readers can vote on which of 25 people are the most to blame for the Financial Crisis. Senator Phil Gramm is one of the choices and is currently in the lead for the most blameworthy.

The article nominates him because he co-authored the Gramm-Leach-Blilely Act which repealed the Glass-Steagall Act. The latter Act "separated commercial banks from Wall Street" and intended to make commercial banks more careful with it's depositor's money. Further, the Time's article cites Gramm for legislating against letting the Commodity Futures Trading Commission "regulate over-the-counter derivatives like credit-default swaps" which brought down AIG.

But is this criticism fair? Congress passed this legislation nearly 10 years ago. It allowed American banks to compete with foreign banks that did not have Glass-Steagall walls. And it worked. Can we pin the Financial Crisis on him because he moved for deregulation? Should he have foreseen this perfect storm? Could he have even anticipated it? Or is he just a fall guy?

The Financial Crisis might not have happened if Glass-Steagall was still around, but what would have happened if it remained in place? To my knowledge no one has introduced legislation to bring back Glass-Steagall. As for credit default swaps, should the CTFC regulate them now or has the market learned its lesson?

Going forward, pinning the blame on someone does not solve any problems. More regulation may be necessary, but I am concerned that there will be too much of it.


  1. Drew Kelly said...

    Coincidentally, Senator Gramm wrote an opinion piece in the WSJ today on what he thinks is to blame for the crisis: