Barney Frank for the Higgy

April 3, 2014

(Guest Post by Matthew Ladner)

I will never forget where I was when I heard him say it: I was driving through a high-desert forest near Prescott Arizona.  The nation was in the midst of a full financial meltdown. I had the radio on, and one of the Sunday Morning Talk shows playing, Face the Nation if I recall correctly.  That’s when I heard Representative Barney Frank, Chairman of the House Financial Services committee state without the slightest hint of shame:

The private sector got us into this mess. The government has to get us out of it.

I nearly ran my vehicle into a tree.

I could pain you dear readers with a blow by blow of just how completely culpable federal policy in general and Mr. Franks in particular were in the meltdown. Others however have performed that task. A delightfully short summary however was to be found in the comments section of a Vanity Fair article by Joseph Stiglitz. Dr. Stiglitz had written a long article for the magazine whose purpose was to absolve Freddie and Fannie and other elements of federal housing policy from blame for the financial crisis.  One comment put the matter succinctly:

Let me get this straight: the creation of the sub-prime mortgage market had nothing to do with the sub-prime mortgage financial meltdown?

Now don’t get me wrong- there are private sector villains in this sordid tale (did for instance the credit rating agencies sign a pact with the Devil to survive what ought to have surely been a death-blow to their credibility?) but these private actors respond predictably to bad incentives created by federal policy.  A few decades of nudging banks in the direction of making dodgy loans coupled with creating entities dedicated to buying them up eventually turned ya-hoo mortgage brokers into funny money printers.  Can anyone truly be shocked that people making huge fees off absurd loans that they could quickly offload onto someone else’s balance sheet failed to resist the temptation to do so?

It would be delightful if the federal government could distort the mortgage market for decades in the interest of creating a more just society without creating unintended consequences.  It would also be delightful if we could bottle the tears of unicorns as a cure for cancer, depression and baldness.  The law of unintended consequences is a terribly powerful force. The beginning of policy wisdom is to fear its awful power.  Central planners tend to assume rational technocratic adjustments being made to policies and seem shocked, shocked when they wake up and find that pesky politics has taken over.

The “Break in Case of Emergency” glass box in Congressman Franks mind contained a piece of paper that read “If it hits the fan, pretend the government had nothing to do with it and call for more government.”  That makes him worthy of a Higgy in my estimation.

 

3 Comments | William Higginbotham Inhumanitarian Award | Tagged: | Permalink
Posted by matthewladner

O’Reilly Goes Bananas on Barney

October 3, 2008

(Guest Post by Matthew Ladner)

Ok- so I don’t like Bill O’Reilly, don’t watch his show, etc.

I also think that he should have made a more substantive case against Frank. Anybody who buys stock based on what some Congressman says on CNBC, after all, is asking for trouble, especially if it is Barney Frank.

Having said that, Frank’s story he tries to get out about doing something about the Freddies as soon as he became chairman is simply revisionist spin.

3 Comments | economics | Tagged: , , , | Permalink
Posted by matthewladner

Legends of the Fall

September 30, 2008

(Guest Post by Matthew Ladner)

If I live to be 120 years old, I won’t live to see a statement so brazenly and knowingly mistaken as the one uttered by Congressman Barney Frank (D-MA) regarding the current financial crisis: “The private sector got us into this mess. The government has to get us out of it.”

 

Say the statement out loud. Swish the sour taste in your mouth. This statement is the precise opposite of the truth. As chairman of the House Financial Services committee, Frank knows better.

 

It was in fact the public sector that got us into the subprime mess: specifically, government sponsored entities Fannie Mae and Freddie Mac. These “Government Sponsored Entities” engaged in social engineering in the housing market by buying up reckless mortgages. Perversely, lenders now had no incentive to consider the credit worthiness of borrowers, as they could quickly off-load even absurd mortgages to the GSE’s.

 

On September 30th, 1999 the New York Times reported on Congressional efforts to expand subprime lending. “Fannie Mae, the nation’s biggest underwriter of home mortgages, has been under increasing pressure from the Clinton administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain phenomenal growth in profits,” the Times reported.

 

“Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,” Franklin Raines, former Clinton administration official and Fannie Mae chairman told the Times. “Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.”

 

Raines made this statement as a justification for Fannie Mae easing the credit requirements on loans purchased from lenders. In other words, Fannie blew even harder into the housing bubble. “By expanding the types of loans it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than stellar credit ratings,” the New York Times reported.

 

See video on unsuccessful efforts to rein in Freddie and Fannie from 2004-2005 here:

 

 

Sadly in all of this, the housing market social engineers were unable to suspend the law of unintended consequences. Bartenders became would be real estate moguls, and the lenders played along collecting fees secure in the knowledge that when it all went south, they wouldn’t be left holding the bag. Speculative bubbles thrive on someone making a quick buck, drawing others into trying to do the same. Freddie and Fannie fueled the bonfire of stupidity.

 

The ultimate blame lies not with the lenders, but rather with those who created the perverse incentives.

 

Sadly, similar economic myths have been promoted in the past, and still afflict us to this day. As a university student, I was fed the story of how the Great Depression proved the ultimate failure of free-markets, and how the administration of Franklin Roosevelt heroically saved the nation from crisis.

 

This version of history is also very much at odds with the truth. Research by Milton Friedman and others has firmly established that the Stock Market Crash of 1929 played only a limited role in creating and sustaining the Great Depression. Rather, a series of policy errors by Congress, the Hoover Administration (creating a global trade war), the Federal Reserve (tightening monetary policy during a contraction) and the Roosevelt Administration (too many errors to list) created a prolonged downturn.

 

The United States had suffered plenty of stock market crashes, and economic downturns. What stands out about the Great Depression is not that it happened, but rather that it lasted so long due to a series of tragic missteps.

 

This too provides a lesson for today: the main thing we should fear are not bank failures or stock market declines, but rather the rushed and foolish actions of politicians. The only thing we have to fear is not fear itself, but rather fear and reckless government mistakes.

 

Congressman Frank, who defended Freddie and Fannie from attempt to rein them in after scandals emerged, was even so brazen as to dismissively put this crisis “back to Ronald Reagan, when at his inauguration he said, ‘Government is not the answer to our problems; government is the problem.’”

 

Sorry Congressman: Reagan got it exactly right and you have it precisely wrong.

20 Comments | economics | Tagged: , | Permalink
Posted by matthewladner

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