Frank: A Life in Politics from the Great Society to Same-Sex Marriage (41 page)

The very next day,
The Wall Street Journal
also celebrated subprime loans for expanding homeownership. Noting that “80% … are being repaid on time, and another 10% are only 30 days behind,” the paper angrily complained that “Mr. Frank’s legislation will ensure that far fewer of these loans are issued in the future.” (After the crisis,
The Journal
’s passion for “marginal borrowers” cooled rapidly, decisively, and strategically. Its statements were airbrushed out of history.)

Resisting such arguments, Bachus stuck by his position and worked with us to successfully pass the bill. After he did so, the right-wing members of our committee went to the House leadership, not just to complain of Bachus’s treasonous cooperation with us in increasing regulation but also to seek his replacement as ranking member. He survived, but only by accepting close supervision by his party’s leadership. It became obvious to us over the next three years that he had been required to bring “minders” onto the minority staff who reported as much if not more to the Republican leadership than to him.

With this bill, unlike the GSE bill, we had little expectation of Senate approval. That would require sixty votes—and there was little chance that enough Republicans would defy
The Wall Street Journal
’s pronouncement of conservative orthodoxy to accomplish this. But the bill’s House passage did have an effect. In 2008, the Federal Reserve, under Ben Bernanke’s management, did some—not all—of what we were asking it to do. We would also include our subprime restrictions in the financial reform bill we passed after the crisis.

In the face of this record, I confess to some frustration that the “it was all the government’s fault” line retains any credibility at all. Much of the reason it does is the prevailing deep skepticism about the public sector. Many people are eager to believe a story in which a government effort to help the poor is the source of the problem. The best example of this phenomenon at work is the book
Reckless Endangerment
, by Gretchen Morgenson and Joshua Rosner, which places particular emphasis on my own supposed misdeeds as a supporter of the GSEs. While they do express some criticism of the private sector, it is the government and the Democratic Party that emerge as the main villains in their telling.

Their account is highly partisan. While they do mention that Newt Gingrich, as Speaker, was somewhat supportive of Freddie Mac, incredibly, they make no reference to the $750,000 Freddie later paid him to lobby. The distortions continue when they state that “it wasn’t until 2010, when Frank found himself in a relatively spirited contest for his congressional seat, that he spoke out with regret about his support for Fannie Mae. In August, Frank conceded that not every American should be a homeowner.” Of course I expressed regret for my excessive optimism and my lateness in seeing the need for reform—but the fact is I’d been supporting efforts to rein in the GSEs since 2005. As to homeownership, the idea that I had previously been an advocate for universal homeownership reflects an impressive ability to ignore decades of history.

In their afterword, Morgenson and Rosner muddle the record further when they fault the Obama administration for failing to pass new legislation addressing Fannie and Freddie in 2011. The fact that the Republicans were by then in control of the House of Representatives never gets mentioned. In all of these instances, we can see how ideological necessity becomes the mother of historical invention.

Most important, when they argue that Fannie Mae and Freddie Mac were at the center of the crisis, and were in fact its most important cause, Morgenson and Rosner are advancing a minority view. Peter Wallison, a Republican member of the Financial Crisis Inquiry Commission, did conclude that “I believe that the sine qua non of the financial crisis was U.S. government housing policy.” But three of his four fellow Republican members of the Commission disagreed. So did the widely respected bipartisan analyst Mark Zandi. Alan Blinder, who though a noted Democrat is also widely respected for his objectivity, writes, “Many other financial experts with whom I have discussed this matter see Fannie and Freddie as supporting actors, far from the star of the show. So do I.” In
The Shifts and the Shocks,
Martin Wolf echoes Blinder when he writes, “It is certainly possible to accept that enthusiastic government promotion of home ownership, and in particular, the GSEs, played some role. But the view that this was the principal cause is entirely unconvincing … The view that the GSEs played a central role in encouraging the private sector to enter into the subprime housing mania is false.” Wolf concludes that “the role of regulation was principally one of omission: policymakers assumed the system was far more stable, responsible, indeed honest, than it was.”

The most important reason it makes no sense to blame Fannie Mae and Freddie Mac for causing the crisis is that neither institution ever made a bad loan. Their role was to securitize the loans that had been made by others. If they are at fault, it must be because they were somehow able to coerce lenders into making bad loans that they could then securitize. But in fact, they had no power over the loan originators. More important, they were neither the earliest entities to engage in large-scale securitization, nor were they the ones who securitized the worst of the loans. Of course, Fannie Mae and Freddie Mac did end up contributing to the problem—as many of us recognized early on in the crisis. That is why we made clamping down on the GSEs the Financial Services Committee’s first item of business under my chairmanship.

If the GSEs were truly the key cause of the crash, then once they were put into conservatorship, the problem should have been solved. But in fact, every relevant official in even the Bush administration believed that further financial reform was needed. Only a right-wing fringe persists in thinking otherwise.

*

At the same time as we tried to curtail the GSEs, we were also engaged in two other important legislative efforts. Preventing abuses by credit card companies was one of the highest priorities of consumer advocacy organizations. Contrary to the fashionable view that it makes no difference which party controls what, they knew that a Democratic majority was a prerequisite for progress on this issue, and I was determined to live up to their expectations. Carolyn Maloney, a senior committee member, had kept that fight alive during Republican rule. Passing a tough credit card bill in 2009 was a gratifying example of how one member’s persistence can pay off.

While opposition to the bill came from the Republicans, there was one important issue on which Democrats disagreed. Some of the most liberal members, both on and off the committee, wanted to impose caps on the interest rates that card issuers could charge. I opposed these caps, successfully.

Conservatives are typically mistaken when they portray liberals as opponents of capitalism and equate our support for reasonable regulation with opposition to the free market. But I acknowledge that some of my ideological allies fall into the trap of using rhetoric that seems to validate that accusation. Those on the left who decry private individuals or businesses on the grounds that they do things “just to make a profit” are as mistaken as conservatives who insist that “government is the problem.” Our system requires recognition of the contribution each of these sectors makes to our society. Our private wealth is generated by the incentive to increase one’s prosperity. Our job as liberals is not to obliterate that healthy motivation, but to contain it, by reasonable rules and by modifying its tendency, if totally unrestrained, to produce excessive, dysfunctional inequality.

Imposing rate caps on credit card companies seemed to me an unnecessary intrusion into the workings of the market. But we did ban one practice of the card issuers. That was the so-called universal default, according to which companies
retroactively
raised interest rates on debt that consumers had already incurred, not because they were in arrears on their payments but because they had been involved in a dispute over debt with a third party. No free-market principle justified forcing consumers who had never missed a payment to the card issuers to pay higher rates for purchases.

At the same time, our bill did not prevent issuers from raising rates
prospectively.
We did require that customers receive forty-five days’ notice before such increases took effect. But that measure was a recognition of the role of the market, not a rejection of it, since it would enable consumers to shop for better rates.

The credit card bill went nowhere in the Senate due to the narrowness of the Democratic majority there. But it did become law after the 2008 election brought more Democrats to that body. The most authoritative study of its impact, by the Pew Charitable Trust, reports that it created a “new equilibrium,” where rates flattened, penalties declined, and certain deceptive practices disappeared.

*

Our other major effort was less successful and would mark the beginning of my greatest legislative frustration. By 2007, foreclosures on home mortgages were exploding. Home prices were dropping rapidly. It was not only people who had received inappropriate mortgages who were losing their homes. Like many others, I had failed to anticipate the collapse of inflated home prices across the country.

We drafted a proposal to facilitate foreclosure relief. But there was one central problem we could not solve: Reducing foreclosures required reducing mortgage payments, but who would bear the cost of that? The easiest answer—public funds—was politically impossible. After all, even at the peak of the foreclosure wave, most homeowners were meeting their mortgage obligations, and many of them were vocally opposed to seeing their tax dollars go to reduce other people’s mortgage payments. There was some validity to their objection. It is true that many of those who faced the loss of their homes had been victims of unscrupulous lenders, but others had willingly paid very high prices for conventional mortgages. In an undeniable number of cases, they had cashed in on the price spiral, taking out second mortgages to increase their own cash while adding to their indebtedness.

There was one possible solution that would avoid the need for public money. Before I got to the House, Congress had amended bankruptcy law to exclude primary residences from bankruptcy protections. Oddly, it was possible to discharge debts owed on your second and third homes, but you could not safeguard the home in which you lived. House Democrats did pass a bill to amend this by allowing homeowners to reduce their mortgage debts in exactly the same way bankruptcy proceedings allowed them to reduce other debts—but it lost in the Senate. Some of my liberal colleagues blamed the big banks for this loss. But their influence is exaggerated. As I knew from our tough battle to get the bill through the House, the most effective opposition came from the thousands of community bank and credit union presidents in constituencies all over the country.

Surveying government efforts to deal with the foreclosure problem is analogous in one way to surveying English history. Both feature one constant. The English at any given point can be seen mistreating the Irish. Our government can similarly be observed not doing much to reduce foreclosures. (This story is very well told by Alan Blinder, former vice chairman of the Federal Reserve, in his fine book
After the Music Stopped.
)

*

By the summer of 2008, the Senate was ready at last to act on the Fannie and Freddie reform bill we’d passed the previous year. A compromise package passed overwhelmingly, 72 to 13. The House margin was still comfortable, 272 to 152, but the no votes included most of the Republicans. Six years later, Mel Watt, who’d become the director of the Federal Housing Finance Agency with my strong support, recognized that Fannie and Freddie were sufficiently profitable at last to begin contributing to the low-income housing trust fund. As of January 1, 2015, the fund was operating—and I consider this to be one of the biggest achievements of my career.

The large vote against the reform bill in the House reflected the widening, increasingly angry gap between Paulson and the very conservative bloc that dominated the House Republican Conference. The House Republicans, especially on the Financial Services Committee, believed strongly in unrestricted free enterprise. They did not see the need for government to deal with the consequences of the failure of large financial institutions or to provide some means of protecting thirty-year fixed-rate mortgages. No lender will issue a thirty-year fixed-rate mortgage at a reasonable rate without some protection against future increases in interest rates. Paulson and I and others agreed that the structure of Fannie and Freddie needed replacing, but we didn’t want to do it in a way that would jeopardize the thirty-year fixed-rate mortgage.

As a result, I became the primary congressional defender of George Bush’s secretary of the treasury and the most prominent opponent of the House Republicans. (I share Paulson’s appreciation of the full support he received from President Bush in the face of fierce Republican criticism.)

As the economy deteriorated, my friendly relationship with Paulson carried over to our increasingly frequent conversations about his efforts to put out fires in the financial sector. The biggest flare-up came in mid-March of that year, when he and Fed Chairman Bernanke orchestrated the purchase of the failing Bear Stearns by JPMorgan Chase. The free-market fundamentalists on our committee reacted with rage to what they saw as a complete abrogation of the basic principles of capitalism, and they launched a full-throated attack on its authors. They demanded that I immediately convene a public hearing at which they could excoriate Paulson and Bernanke.

I refused. Of course the administration’s decision raised policy questions that were matters for our committee to consider—but not instantly, and not in isolation. With the financial world already unsettled by the collapse of a major institution, it was not the time for dozens of my colleagues to add to the turmoil. And I agreed with Paulson that the most relevant question for legislators to address now was not the specifics of that spectacular transaction but how we could establish procedures to handle such crises in the future. Pointing out that the hastily cobbled together ad hoc response to the Bear Stearns failure was hardly an ideal policy model was easy. Stoking public anger by unfairly impugning the motives of Paulson and Bernanke was damaging.