I spoke with House Financial Services Committee Chairman Barney Frank, a Democrat from Massachusetts, on Thursday about the issues he'll be working on in 2009. (Note: This interview took place before Treasury Secretary Hank Paulson said that lawmakers would need to release the rest of the $700 billion bailout funds.)
Here's what Frank had to say:
What issues will the House Financial Services Committee be working on next year?
"Well, obviously financial regulation. The first thing off the bat is the whole systemic risk issue. Hank Paulson has talked about it. Ben Bernanke has talked about it with Rahm Emanuel and Tim Geithner, and with Paul Volcker. We are in a terrible deleveraging crisis now, and while we deal with that, it is important that we prevent over-leveraging in the future."
Specifically, how would you do that?
"Some rules have got to be put on institutions other than banks to keep them from getting too leveraged. And then also some tighter rules on banks: off-balance-sheet [entities], credit default swaps. Do you require people who securitize to keep a certain percentage at home? Do you have capital requirements on anybody who is involved? So that's the No. 1 thing.
"No. 2, and this is critical: One entity does systemic risk, another does investor protection. And that's got to be a much strengthened SEC. The Madoff thing has obviously got everybody upset. But you don't want the same entity to be the systemic risk regulator and the investor protector because the investor protection might be subsumed. On the table there is a proposal for a financial products safety commission. So that's the second thing, investor protection and market integrity.
"Next is housing. And one of the problems that we got into was we did way too much home ownership and way too little rental housing. And [we need to start] getting the federal government back in the business of rental housing. And passing legislation to restrict bad subprime loans will be high on our priority list. Third, for me, is getting more involved with the international institutions: The World Bank and the [International Monetary Fund]. We want to make sure that we do poverty fighting in an effective way without imposing too much of a conservative ideology. Debt relief, for instance, is something that I think we are going to be talking about. And then there will be some consumer protection areas: credit cards and some other bank practices."
What about the TARP (Treasury Asset Relief Program)? Will you be looking to add anything to that when treasury requests the second installment of $350 billion?
"We'll do that early on. We've been talking to the Senate, I've talked to the speaker. I do think the second $350 billion is useful. I believe that they will wait until January [to request the funds]. What I hope is that by early January an agreement is reached between the outgoing administration and the incoming administration to trigger the second $350 billion, but with commitments—some maybe written into law—that some of it goes for foreclosure relief [and] that we adopt rules that make the banks relend what they have gotten. And this notion that you can have 4.5 percent mortgages going forward, we'd like to see if that can work. And then the consumer credit facility that would include auto loans and student loans. I hope we can work out a deal, a three-way deal, Congress, Obama, and Paulson, so that that money gets released even before Obama gets into office."
Why has the Bush administration resisted calls to do more to prevent foreclosures?
"I am puzzled by it. I do not know."
How would you respond to those that hold Fannie and Freddie and the Community Reinvestment Act responsible for causing the crisis?
"The CRA, there is no argument for whatsoever. By the way, no bank regulator thinks that. The CRA only covers banks. If only institutions covered by the CRA had made mortgage loans, we wouldn't be in a crisis right now. All these bad loans were made disproportionately by nonbanks.
"As for Fannie and Freddie; yes, they were involved, but they didn't cause it. Fannie and Freddie never made a loan, they bought loans made by other people. It's impossible for them to be the major problem—they never originated the loans. Now, in 2004 the Bush administration ordered them to significantly step up the number of loans they bought from people of below the median income. I objected. I think a lot of this comes back to this idea of pushing people into homeownership when it was inappropriate, as opposed to rental. But Fannie and Freddie, they were no more the cause of this than Lehman Brothers or Bear Stearns—they were all hurt by it. But the cause was the origination of the loans in the first place."
What were the biggest failures in the Bush administration's response to the crisis?
"Well, it goes back to Greenspan refusing even under Clinton to use the authority we gave him to ban subprime loans. Then it was the administration pushing homeownership inappropriately, like [through] Fannie and Freddie."
Going forward, is there any reason to think that homeownership would be any less of a centerpiece of policy?
"Yes, because people understand that putting poor people into homes they can't afford is not a good thing. And because the Democrats will get back into rental housing—because decent rental housing is an alternative."
What advice would you have for the Obama administration in terms of dealing with the crisis?
"I think you need first of all to get the banks to relend. You've got to use the TARP money sensibly, including pushing the banks into relending. You have to have a massive stimulus, half a trillion or more. And you have to reduce foreclosures."