Thursday, February 19, 2009

Barney Frank On the Stimulus and Bail-Out

A functional economy is important for the success of green energy and actions to limit emissions of greenhouse gases into the atmosphere. This is because the economy must be functional if the necessarily resources are to be mobilized in the required direction. Below are my notes of Barney Frank's talk on 2/19/2009. I planned to post some video and audio of the event. It depended on uploading speeds for blogspot, and unfortunately, blogspot flunked all tests for this effort.

7:30 Barney Frank arrives at Scituate High School and walks directly up to a chair and table on the stage, to the strong applause of those assembled. In the notes below, some parts are very detailed because the details were particularly important. Others are not included. For example, there were a lot of lines that led to laughter. Only some are noted.

Intro by Kevin McCarthy, Chair of South Shore Democratic Caucus.

[Two reporters from the Patriot Ledger are present, one whose deadline is at 10 p.m., an hour after the event closes. Captain Lou @ WATD-FM is in favor of the fishermen and does not believe that is a shortage of fish in the fisheries. He is one of three of us in the press section, and he plans to pose his questions to the Congressman after the formal program.]

My notes on the initial speech by Barney Frank:

We are in a period of American history that will be addressed by the history books. Comparable to the New Deal. There are also foreign policy issues, although not of the same magnitude as those that led to World War II.

Partisanship is a good thing as long as it does not become too extreme. Partisanship is means to make the debate more rational. Newt Gingrich tried to change what partisanship is. But Tip O’Neill and Ronald Reagan were friends in the evening. To Gingrich the opposing party were traitors, corrupt rather than honorable people who disagree. Tom Delay continued this. This notion of partisanship should be done away with but not replaced by mere amorphousness. There are very strong differences between the parties today, particularly in economics. [We need to let the partisanship display the differences between the parties, the way they tackle issues, and their results.]

We set up the bank bailout and were told [by the Bush administration] that we could not place restrictions (see also So we offered them half of the $700B and told them they could not get the other half unless we were satisfied with the way they used the first half. So when it came time for the second half, I told Paulsen that we were not satisfied and that he would not get the second half. Now the Obama administration will be working with the second half, and I think we are going to see the real differences between the parties.

There have been three periods in American history when innovative economic systems have emerged offering a greater degree of efficiency. The problem is that there are no rules to govern such new activity. Late 19th century offered oil, steel. What Roosevelt and Wilson did was to say these were good things, but there need to be rules such as anti-trust. The stock market was the next development and led to the corrections of the New Deal. If there are no rules, the lowest common denominator will win. The next period was “securitization.” This has enabled making bad decisions and then having means to spread it around. In the traditional way, when you get a mortgage, the bank gets its return when you pay it back. And because the bank took all the risk, it frisked you pretty well to make sure you would pay it back. And the banks were regulated, because the government is on the hook if you mess up, and that system has worked pretty well. And then the financial system was working pretty well and there were pools of money available that were not from deposits in banks, so loans became available from other institutions.

And then there was the Community Reinvestment Act in 1977. This affected only banks, not other kinds of institutions. So community banks are justifiably angry when they hear that banks are being blamed, because if only banks had been giving out these loans, we would not have had the subprime crisis, because they didn't make bad loans. Most of the loans that went bad were made by institutions outside the banking system, not covered by the Community Reinvestment Act. So then you ask: What is the point of selling loans to people who can't pay you back? Very simple. You sell the right to be paid back. That is called securitization, which is similar to the stock market. It does a lot of good, but it also does a lot of bad unless you regulate it.

The Conservative view it that it’s the government’s fault. You made the banks loan to poor people. But community banks were not the only ones that had trouble. Most loans that were made to people who could not pay back were from entities not covered by the legislation that called for loans to the poor.

So what is the advantage? You sell the right to be paid back. This is securitization and it spreads risk. If you make a loan and then sell the right to be paid back, then you can make more loans. But you have to be paid back for it to work, so there is also a potential problem here. Most people are much more careful with their own money than with others’ money. So the loan makers were not careful in making loans when they would not have to collect. And then people would sell them and buy them outside the regulated system. This is the problem.

If you think about it, it used to be that advisors would tell you that if you want to be adventurous, you can invest in stock, but if you want to play it safe, you would invest in bonds. But now, it is the reverse because of the new instruments including derivatives.

Securitization is good, but it needs to be regulated. There has been a whole set of activity going on entirely outside of regulation. Democrats believed that you should regulate this area. Alan Greenspan admitted that he had been fundamentally wrong not to regulate when he had the option to do so. In 1994, the last time that the Democrats controlled Congress, we passed legislation that was signed by Bill Clinton. It said that we were concerned about the many mortgages that were being let out by non-bank institutions. Would you please stop these loans from happening. Alan Greenspan said, and it is well established that he did , "No I won't do that. That's regulation and the market knows better than I do." His successor, Ben Bernanke, has issued rules using exactly the same authority and legislation governing his actions.

Then the second thing happened. There was a decision to foster home ownership among many more Americans. My role in this has been asserted, but let's discuss a little. I was one of the few politicians who was saying that helping lower income people to get mortgages is a bad idea, because putting people in a position with homes they cannot manage and loans they cannot pay off is not a good thing. One of the big fights I have had with the Bush Administration is "How do you get lower income people to buy homes." I believe that for many people, decent rental housing is the way to go. I had this argument with the Secretary of HUD for the Bush Administration. He said he was going to cut people off Section 8 for rental assistance after five years. He asked if I would support that, and I said "No." He said, "Why." I said, "What happens to them after five years. I'll support you in cutting them off if you'll support them in not being poor after five years." [extended laughter] So I said "What will happen to these families after five years if we don't help them?" He said, "We will help them become home owners." The problem came in 2004 when the Bush Administration ordered Fannie Mae and Freddie Mac to increase the number of mortgages they bought from people below the median income. Greatly increasing home ownership was going to be their social contribution. When they did that, we became worried, and in 2004-5 a group of us in the House, mostly Democrats but one Republican, frustrated by Alan Greenspan's refusal to use the authority given to him by Congress, tried to pass a law to prevent these subprime mortgages that were being granted. We were in the midst of negotiations when Tom Delay sent word to the chairman of the committee that I served on as a minority member, "Stop it. We're Repubicans. We don't do that." In 2007 when the Democrats won the majority and I became Chairman of the committee, we passed legislation. So the Republicans argue that in 1995 through 2006 when they controlled Congress, I stopped them. [laughter] Unfortunately, after we passed that legislation in the House, the Senate was only 51-49. In summary we had a refusal by the Conservatives to regulate the sub-prime instruments, and then we had a refusal by the Conservatives to regulate the financial instruments which packaged up those instruments and sold them all over the world. We are now in a difficult situation that we hope to get out of. I do believe the Economic Recovery Plan will be helpful. What President Obama did yesterday will be helpful.

We need to do things that make for transparency and foster trust. The person who is elected President in 2012 will be required to check with the analysis of the Congressional Budget Office to find out how much of the $700B has been recovered. If all of it has been recovered, fine. If not, then he is mandated by law to make a proposal to Congress as to how to get the shortfall back by taxes and fees from the financial industry, the industry that benefitted. Unless there are greater changes than I anticipate, I guarantee you that the Congress that is in power in 2013 will not say, "Oh no Mr. President. These nice people don't need to pay that. Let's have the American taxpayers pay that instead."

There are three things the Obama Administration is doing. We know how to make sure this does not happen again. The first is by regulation, sensible regulation. The right kind of regulation is pro-market. Investors bought all this securitized junk. When people touch the hot stove, they refuse to touch it again, and sometimes they refuse also to touch the refrigerator, the sink, the table, and a lot of other things. [laughter] We need to get people back from refusing to touch the stove again after being burned. Prevent loans from being given out to people who should not be getting loans. 2nd, when it comes to securitization, you cannot sell 100% of the right to be paid. Must keep 15% to 20% of the risk. We want these institutions to keep what some people call “skin” in the game. This is like in the insurance industry with respect to reinsurance. 3rd we will regulate the extent to which people can get themselves in debt. It will cover all types of businesses. If you regulate by type of business, pretty soon there will be a new type of business invented that is outside regulation. The idea is to prevent institutions to get so in debt that you could default leading to extensive collateral damage. One example of this is credit default swaps, which are really a form of insurance. I issue a credit default swap to you guaranteeing that your collateralized debt obligation derivative won't default. Usually, by the way, if you want to insure somebody, you have to have an insurable interest. You can't just go out and insure some stranger's life. [laughter] And you have to be able to show the regulator that you have the ability to pay off your insurance claims by some combination of your own capital and reinsurance. In the past the assumption was that these things would never default. It's kind of like you decided to go into the life insurance business issuing policies on vampires [laughter] and then the vampires started dying [more laughter]. That by the way, is why doing something about foreclosure is so important, because as the assets value deteriorates, a lot of people are in position to make payments that they cannot pay. We do want to slow that down. I should add, it was never the case that we should have stopped house prices from dropping in an orderly way. Housing prices had gotten to be too high. It's like, I'd like to lose 20 pounds, but not by Sunday. [laughter]

So we know what to do going forward. It was not deregulation but non-regulation that caused our problems. It is just like to twenties, and then Roosevelt established regulations for stocks.

Don’t be protectionist is what some people say. The average American is justifiably so angry at the unfairness of the way that the economy has worked: during the good times almost all the wealth went to a small handful of people. Trade helps the overall economy, but it does it in an uneven way. People with high end jobs make most of the money when there is trade. Warren Buffet: we have class warfare in America. My class is winning. [laughter] We need to maintain a safety net. What will reduce the resistance to free trade? I'll give you the most important thing. We need a system where people do not lose their healthcare when they loose their jobs. Stop fighting unions, which now turn out to have been a very useful thing. Put money into things like the community college system where people to develop skills for jobs.

And finally, some will ask where do you get the money for all of this? I was in Congress in September 10, 2001. I guarantee you that there was no money in the budget for a war in Iraq. Since that time we have found over $700B for a war in Iraq, and even though Obama is going to wind it down, it will get close to a trillion for now. When it comes time to find the money for better health care, education, and these things, I am going to go to the guy in Congress who found $700B for the War in Iraq, and $700B for the bail-out if he can find some. This is a very rich society. If we set our minds correctly to priorities, we can treat ourselves better than we have been treating ourselves.

Barney Frank talks on February 19, 2009 in constituent town meeting about the bank bailout. It starts with discussion of the actions of Bush's Secretary of the Treasury in giving $350B to large banks, and the reaction to that.

on banks and non-banks:

on credit card practices:

These three videos provide a pretty good taste of what the event was like. They complement the text above.

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