7 Days: Barney Frank on Regulation and McCain

7 Days: Barney Frank on Regulation and McCain
EXCERPTS FROM AIR AMERICA'S 7 DAYS, JULY 19, w/ FRANK

GREEN Q: Is the mortgage-housing-banking crisis just the story of an economic bubble that's bursting, which happens every so often, or has this Administration's actions or inactions helped create this crisis?

FRANK: "Oh it's absolutely what you just said...Here is the fundamental point. Until maybe twenty years ago most mortgage loans were made by a regulated bank or credit union -- you got the loan from that entity and you paid them back. Then the financial geniuses came up with securitization. Now that has a lot of advantages because it can make your money move quicker. But basically what it says is, 'I will lend you the money, but I will than sell the right to collect from you to other people. And since I no longer am dependent on your repayment because I already made my money by selling your loan, it turns out people are less careful about it.'

It's really been a test of regulation...and conscious decision brought by Alan Greenspan, who is the arch de-regulator. Because in 1994, not coincidently the last time the Democrats had a congressional majority before this year, a bill was passed that was called the Home Owner Equity Protection Act, that said to the Federal Reserve, 'Look, we know have loans being made by non-regulated entities so please pass some rules. We give you the statutory authority to pass the rules to contain their activity and make it more responsible'. Alan Greenspan said, 'oh no, that's interfering with the market, I can't do that.' He didn't do it; that's where the crisis came. Fed Chair Ben Bernanke, to his credit, on Monday of this week finally used that authority, but if Greenspan had done 10 years ago what Bernanke did on Monday, we wouldn't be in nearly as bad as a situation."

GREEN Q: What do you expect will happen this week on the Treasury Department's proposal to extend credit to Freddie Mac and Fanny Mae to give confidence to investors and avoid the precipice of bankruptcy?

FRANK: "I hope will happen is that we will give the Treasury some authority to act, but it won't be necessary because it's one of these situations where it's more of a confidence issue. At the same time, however, in the same bill we'll do what some of us have been trying to do for a while, which is to greatly increase the regulatory supervision over Fannie Mae and Freddie Mac... We are going to give a regulator power over Freddie Mac and Fannie Mae the way regulators have powers over banks."

GREEN Q: But if a guarantee or even money is coming from taxpayers, shouldn't the government be paid back before shareholders?

FRANK: If the federal government does extend some money because we think there is a mortgage market crisis, then they have to make sure they pay us back." GREEN: What happens if the Bush administration objects to placing conditions on the authority to provide guarantees or loan? FRANK: "We're going to pass this. Then they're going to have the choice of either signing it or vetoing it. There's another piece to it: we've got a lot of problems out in the communities because there is property that's been foreclosed that used to pay taxes and now eats taxes, because it becomes a real problems for the cities. We're going to put into this bill $4 billion to be distributed to the cities, based on where there's been a lot of foreclosed property, so they can buy it up, get it back on the rolls, make it available for affordable housing or city employees.... The President said that's veto bait. We're going to frankly challenge him on it. I think in the end he won't veto it."

GREEN Q: In the historic tug-of-rope between free market Republicans and pro-regulation Democrats, could this be a moment that exposes the emptiness of free-market Republicans and boosts the arguments of pro-regulation Democrats? FRANK: "You're absolutely right; it is almost comparable to the Depression. Look, a few years ago, a Republican appointee to the Securities Exchange Commission, Bill Donaldson, ordered hedge funds to simply register with the SEC. What a commotion! Oh, this was the end of the Earth! And the industry was actually able, in court, to overturn the order. The new SEC chair said 'Well, we're not going to do that again.' When I became Chairman a year and a half ago, it was 'you better deregulate or we're all going to Europe.' Last week, Secretary of the Treasury Paulson and Federal Reserve Chairman Bernanke, two Bush appointees, came before the committee I chair and said 'you know what, we better charter those hedge funds.' There is now a consensus that we have to give the Federal Reserve a great deal more authority over investment banks and hedge funds. So yes, this is a recession caused by structural problems that are the result of inadequate regulation. First, they allowed a lot of mortgage loans to be made that shouldn't have been made. Second, they allowed these various financial institutions that are unsupervised to sell each other these mortgage loans so that the poison was spread throughout the financial system."

GREEN Q: Isn't the Fed in a quandary whether to raise interest rates to slow inflation or lower them to spur growth - are we getting dangerously close to a new stagflation?

FRANK: "In Europe, when you raise interest rates and slow down the economy, there's a social safety net. Nobody loses his or her healthcare. There's a decent unemployment situation. People don't have to drop out of school. And the problem we have in America is there is no good safety net. So the social consequences of slowing do wn the economy to deal with inflation are much harsher here than they are in Europe. That's the point I made to Bernanke. If the business community wants a Fed that's flexible enough to be able to deal with this, then they have to collaborate in having a safety net, so that the social consequences of that won't be so disastrous."

GREEN Q: Legalization of same-sex marriages began in your Massachusetts. How worried are you that the November referendum in the super-state of California will set the course of this issue for years to come?

FRANK: "You know, if that referendum were going to be a year from November, I'd be confident it was going to win. What we've seen with same-sex marriage or other anti-discrimination measures is that some people are nervous about them until they happen, and then they get used to them pretty quick. I am cautiously optimistic about California, but it's an effort that people really have to support.... In Massachusetts, after four years of same-sex marriages, it's become a very boring issue, except to the people who are in same-sex marriages (and probably life being what it is, maybe to a few of them)." GREEN: Has there been a flood of straight couples getting divorced because the sanctity of marriage was violated by same sex couples? FRANK: "No, our divorce rate continues to be very low. Frankly, if you're a straight person in Massachusetts, this has had no impact on you, unless you live next door to a couple of lesbians and you'd have to buy them a present."

GREEN Q: What's better, being widely regarded the wittiest Congressman, or the influential one in the middle of this huge policy discussion?

FRANK: "Well, this is more rewarding, in the sense that this is why I got into public policy. Along with responding to the crisis, we're enacting into law some of the major goals of low-income housing advocates, for housing trust funds and for improving the way that housing programs work together. That is much more satisfying in the deep sense. But it's a hell of a lot of work, and I used to have more fun." GREEN: Well, ideally you can be both funny and influential.

Huffington, Conason and Green
GREEN Q: Arianna, as the only one of us with a masters in economics, what's your view of the desirability of the federal government to intervene to rescue Freddy Mac and Fannie Mae because, underwriting half the $12 trillion in home mortgages in this country, they're "too big to fail"?

HUFFINGTON: "This is really a big philosophical discussion we should be having in the country, because it has everything to do with what we think about the free market. Barney was willing to basically provide support for big gigantic companies because otherwise, the argument goes, the whole country would suffer if we don't. But we see that again and again, not just for institutions like Freddie Mac, but also with Bear Stearns, also with IndyMac. At what point do you step in and provide tax-payer resources, even though it's the banks that have taken the risk and many have profited along the way? Many who shorted Bear Stearns, for example, have been profiting, or who shorted IndyMac. And it's kind of interesting how, all that bleeding heart compassion and big government programs that the right objects to when it comes to individuals, they are very very glad to give when it comes to big institutions."

GREEN Q: I called it lemon socialism 30 years ago. But how far does it go -- while these mortgage firms are federally chartered though privately owned, should such a bail-out occur for, say, a GM if it keeps going south? This week that socialist McCain said maybe.

CONASON: "Well, first of all, in many of these cases, the government has had a tremendous role in them from the very beginning. GM, for example, is a diversified company that relies on its access to credit through the federal government, through GMAC; it has depended on defense contracts, and for that matter, on the US government building highways and subsidizing the oil industry. So you know, there's a false line, or at least a blurry line here."

GREEN Q: Is the economy so awful and Bush-McCain so identified with its problems that it's politically enough for Obama to say or imply that they screwed it up and we need a new team to fix it?

CONASON: "I think he starts out in a very good position, but there does have to be a program. There does have to be an explanation of what he would do, what the Democrats propose to do in order to get the economy growing again, and get it growing in the right way. Be cause I think a lot of people feel very skeptical right now, almost despairing about what anyone can do. You know, the ratings of the Democratic Congress are not that high right now, either. So the idea that, well, 'we're not the m, and that's all we have to say,' is wrong."

GREEN Q: In the back-and-forth this past week on Iraq, Obama gave a very convincing, penetrating, logical speech while McCain just repeated pet, pat phrases about "We've won!" and "I know how to win wars!" Are you worried that Obama's high-minded analysis could politically lose out to McCain's repeated bluntness?

HUFFINGTON: "Unfortunately, yes, unless Obama is much stronger than he has been on these issues. I mean, like right now, he should be making it very clear that on issue after issue, McCain has been adopting his positions. On Afghanistan, McCain's basically come around to saying we need more tro ops there. On Iran, he basically had to stand by while the US State Department is sending representatives in talks on its nuclear program, talks which he had condemned. So I think Obama needs to be underlining all those points, because the media are not going to do it for him. The media are still letting McCain get away with so much. I mean, just look at the week McCain has had; just imagine if it had been Obama who had screwed up with Czechoslovakia, or flip-flopped on gay adoption, or any of the other things that John McCain and the McCain campaign did. Imagine if Michele Obama had said that you need a small plane to go around Arizona!"

"Barney Frank and the putrefaction of American liberalism
By Bill Van Auken
Jul 19, 2008, 07:41




Chairing a hearing of the House Financial Services Committee Wednesday, Representative Barney Frank (Democrat of Massachusetts) let slip one of the most revealing remarks made in response to Federal Reserve Chairman Ben Bernanke's testimony on America's deepening economic crisis.

"No one expects equality, equality is not a good thing, you can't have an economy that works if everything's equal," said Frank. "But too much inequality also has negative consequences."

Frank made the comment after noting that, given a continuation of the present rate of layoffs and downsizing, the US economy will lose a million jobs this year. He also drew attention to a section in the Federal Reserve Board's own monetary policy report which noted that real wages are falling significantly as a result of spiraling prices, while labor productivity is rising.

In other words, the income of working people is being eroded even as they face intensified exploitation.

The latest Labor Department figures show that real wages fell by 0.9 percent in June alone, a rate that would slash workers' incomes by nearly 11 percent over the course of a year.

Frank, who has chaired the Financial Services panel since the Democrats took the leadership of the House in 2007 and was previously its ranking Democratic member, was speaking not as an outraged advocate for workers, but rather as an advisor to the bankers and corporate CEOs whose interests he serves.

The message was clear: inequality is good because it is the source of great wealth for the ruling class, but social polarization beyond a certain level threatens the entire system with social eruptions.

The outlook of the fourteen-term Massachusetts lawmaker, often referred to as one of the most liberal members of the US House of Representatives, reflects the putrefaction of American liberalism.

The point that Frank was making in his remarks was not new. He has repeated the same theme again and again over the last several years, making it something of a political mantra in addressing audiences of financiers, businessmen and corporate executives.

In a speech at the National Press Club shortly after taking the chairmanship of the key financial oversight committee, Frank declared: "Inequality is not necessarily a bad thing. It's necessary in the capitalist system, and I'm a capitalist. But we do not have to have a government that reinforces it."

Talking to an audience of Boston business leaders a few months earlier, he sounded the same theme: "I'm a capitalist, and that means I'm for inequality. But you reach a point where you get more inequality than is healthy."

And in an opinion column drafted for BusinessWeek magazine in February 2006 he wrote: "Inequality is not a bad thing in a free market economy; indeed, it's essential if we're to benefit from the incentives and efficiencies that make the market so effective a producer of wealth."

If Barney Frank is a capitalist, as he proudly proclaims, he has become one thanks to his political career in the Democratic Party. His most recent financial disclosure forms indicate a net worth in financial assets of well over $1 million, with an extensive portfolio of investments.

His relations with Wall Street's largest banks and finance houses have stood him in good stead. According to the Center for Responsive Politics, he pulled in $1.8 million in campaign contributions in the run-up to the 2006 election. He is well on his way to substantially topping that figure in the present campaign season, recording $1.2 million in contributions by the end of March. Securities and Investment firms were responsible for $164,600 of that money, real estate interests for $156,401, law firms for $130,768, insurance companies for $117,674 and commercial banks for $74,350.

In return, he has dutifully defended these massive financial interests, acting as a key architect of the government bailout of Bear Stearns earlier this year and now the plan to prop up the mortgage finance giants Fannie Mae and Freddie Mac with unlimited cash from the federal Treasury.

But even given these financial-political relations, Frank's blunt defense of inequality is a significant testimony to the state of the Democratic Party and American liberalism.

"Equality is not a good thing." Such a statement stands in diametrical opposition to a long and central tradition in American political thought that?-however much it was violated in practice by chattel slavery and the workings of the capitalist system?-held equality to indeed be a "good thing."

For Thomas Jefferson and the other founders of the American republic, inspired by the revolutionary spirit of the Enlightenment, the equality of man was not just a "good thing" but, as Jefferson wrote in the Declaration of Independence, a self-evident truth.

Abraham Lincoln went further, taking equality not only as a self-evident truth, but as a proposition that had to be proven in bloody struggle, a transcendental goal to be realized by American society in a "new birth of freedom."

In the depths of a Great Depression, Franklin Delano Roosevelt delivered his "rendezvous with destiny" speech to the 1936 Democratic convention, again invoking these profound political traditions, while flaying the "economic royalists" of Wall Street as the reincarnation of King George III.

"For too many of us the political equality we once had won was meaningless in the face of economic inequality," Roosevelt said. "A small group had concentrated into their own hands an almost complete control over other people's property, other people's money, other people's labor?-other people's lives. For too many of us life was no longer free; liberty no longer real; men could no longer follow the pursuit of happiness."

Roosevelt spoke as a highly class-conscious representative of the American capitalist class, who sought to save the system from the threat of social revolution by implementing social reforms and imposing certain restrictions on the predations of his own class. That was in a period when, even in the midst of the greatest collapse of capitalism to that point in history, American capitalism retained immense financial reserves and benefited from the most advanced and powerful industrial base in the world. The decayed state of American capitalism today, with its massive deficits and shrunken industry, is a far cry from that of Roosevelt's day. This immense decline in the objective position of American capitalism is the most important factor in the repudiation by American liberalism of any reform agenda.

The inequality outlined by Roosevelt more than 70 years ago has today become even more extreme. It has indeed proven a "good thing" for those at top of the economic ladder, who have amassed obscene fortunes through a vast transfer of wealth from American working people, the overwhelming majority of society.

The share of the national income monopolized by the top 1 percent is now higher than at any time since 1928, not only before Roosevelt, but before Herbert Hoover. Since the end of the 1970s, the top 1 percent has seen its income rise on average by nearly 240 percent, while the majority of the population has seen its real income stagnate or decline.

Yet neither Frank nor any other leading Democrat is sounding an alarm against today's "economic royalists" or "malefactors of great wealth." Instead, they present themselves unabashedly as their representatives and defenders.

Frank's embrace of inequality as a positive good under conditions in which millions are being thrown out of foreclosed homes, seeing their incomes ravaged by soaring gas and food prices and facing the threat of employment is the end product of a protracted and deep decay of American liberalism.

The immense growth of social inequality is at the root of this process. It is to the top 1 percent that Frank and the other leading Democrats are politically oriented. They speak for the privileged social layers?-of which they are a part?-which have seen their personal wealth balloon at the expense of society as a whole.

The ideal of equality?-openly repudiated by the Democrats?-is today inseparable from the fight of working people to defend their living standards and basic rights against the attacks being carried out by the corporations and the government. This struggle can be advanced only through an irreparable break from the Democratic Party and the building of a new independent political movement of the working class fighting for the socialist reorganization of society.


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