Phil Gramm, CDSs and Our Economy

One of the more interesting things I read this morning was a piece over at BloggingStocks about investment vehicles known as credit default swaps (CDSs). These little investments, along with CDOs, are among the reasons that we are having a major meltdown on the stock market this morning.

Here’s why: CDOs and CDSs are major reasons that mortgage lenders started going crazy with approving borrowers. These investment vehicles made it very easy for banks to package their loans into securities and transfer the risk elsewhere. Loan officers get the commission, investors get the risk.

Nice.

And one of the architects of the CDS craze is Phil Gramm, who helped draft legislation as a member of the Senate that allowed these vehicles  (which Warren Buffett calls “weapons of financial destruction”) to take widespread root and avoid serious scrutiny. For those of you political junkies who think that the name Phil Gramm sounds vaguely familiar, here’s why: He’s John McCain’s former top economic advisor. (He resigned after calling the economic troubles a “mental recession” and saying the U.S. is a nation of “whiners.”)

Obviously, Phil Gramm is not solely responsible for the current conditions. There is plenty of blame to go around. But he clearly thought that CDSs were good economic policy. BloggingStocks pretty much summed up my feelings perfectly with this particular observation:

One thing is clear. If you think America is a nation of whiners and this is a mental recession, I strongly urge you to vote for McCain. But if you take a look at how much you are paying at the gas pump, how much of your retirement will be wiped out in the months ahead, and how you will pay all those bills as the unemployment rate climbs higher, it might be worth considering whether you can afford to elect a man who relies on Phil Gramm for economic advice.