I just watched this Barney Frank on The Big Think…and wow, what a travesty. Much like if you’re building a house, and you have a staff of people who don’t really know what they’re doing…Frank, quite frankly (ha ha), doesn’t even BEGIN to understand finance…and he is chair of the House Financial Services Committee!!! I’m not saying that I’m an all-knowing financial guru, but come on…he doesn’t even get the politics right.
Anyway, Frank makes a HUGE mistake when answering Russ Roberts’ question:
Q: How can Fannie and Freddie be structured to avoid the moral hazard problem and a too-cozy relationship with regulators? (Russ Roberts, Café Hayek)
Barney Frank: Yes, in 2004 the Bush Administration significantly increased those housing goals and particularly ordered Freddie and Fannie to start buying up a lot of low income individual mortgages, and I opposed it at the time.
In 2004, eh? Lets see (this is from memory, so correct me if I’m wrong)…starting in, was it 1993? Fannie and Freddy were mandated to hold 30% of their portfolio in non-liquid assets whose underlying was below the median income level of their area. That rose to 42% in 1997, and 50% in 2002…up to 55% in 2007. Nothing happened in 2004. Which leads me into my next point:
Update: Upon further investigation, it seems that the SEC changed it’s rules, you can view the changehere. However, this has little to do with Roberts’ point.
Barney Frank: And the Clinton Administration was better than the Bush Administration. When the Bush Administration came in, they appointed people who didn’t believe in regulation. So it was not that the banks captured them, it’s that they volunteered to become parts of that operation.
That’s not what the New York Times remembers:
WASHINGTON, Sept. 10— The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.
Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.
The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.
Of course, Frank ex post denies ever being in favor of low-income home ownership…he just meant low income rental. That is, you know…better than ownership. (If you don’t understand the link, New York was plagued by arson in the 1970s due to rent controls…Bronx was particularly hard-hit).
So why, Mr. Frank, are we in this mess?
Unfortunately, the economy was deteriorating, I think as a consequence of their refusal to regulate the financial industry, and President Obama inherited one of the worst recessions in history, the worst since the Great Depression, and it is much harder to do things in a very depressed economy with revenues tied up and people hurting than it was in a good economy. So by the policies that led to this terrible recession that Obama inherited, things became more difficult. [emphasis mine]
This is de facto claiming that the problems in financial institutions caused what we now see (10% unemployment, NGDP trend falling 8%,etc). Now look at this chart (keep in mind, the subprime crisis started in 2006):
Obviously NGDP plummets in late 2008…but it was the housing crisis, right? Not the drastic fall in NGDP…even though AIG and Citi were only in trouble on paper because they had contracts that were indexed to…NGDP (or more likely the TIPS spread).
Furthermore, Frank repeats the erroneous claim that this has been the “worst recession since the Great Depression”…sorry, Barney…we’re not,in any way, even on the same planet as the Great Depression (1982 saw 10.8% unemployment…and the only reason I use unemployment is because I know that is what Frank is looking at when he makes ridiculous claims). Also, he has a pity party for the economy Obama inherited…what about FDR? Who inherited unemployment far higher, a much more “real” banking crisis, and turned industrial production around in A MONTH to the fastest growth rate in history.
Frank is one of the loudest voices in Congress drilling the “dual mandate” into the Fed Chariman’s skull. The fact is, the two targets cannot be hit at the same time. Though interestingly enough, Frank is both causing problems AND providing cover for the Fed, AT THE SAME TIME every time he opens his mouth about it.
Barney Frank’s solution is to centralize power, and move it further away from knowledge. Frank thinks we can see bubbles, we can see systemic risk and act on it in real time. At one point, I did believe this…but no longer. I sincerely hope that the people of Massachusetts remove Barney Frank from his seat as soon as possible, before he causes even more harm.