Donald Luskin

by I Am John Galt

  Meanwhile, Barney Frank was reveling in the home ownership rate as it skyrocketed to a historic high, approaching 70 percent of all households. Here was Frank’s lifelong vision coming to fruition. “It seems to me,” said Wesley Mouch in Atlas Shrugged, “that the end justifies the means.” But did Frank even understand what means he was employing?

  Frank didn’t see that by forcing home ownership above 60 percent, you are, by definition, pushing loans on the bottom 40 percent of income earners who probably can’t afford to repay them (or even to cover the expenses of home ownership, such as taxes and insurance). In 1995 this represented 20 million households earning less than $27,000 annually. Many earned much less. Is it reasonable to lend the median home value of $120,000 to a family bringing in just a few hundred dollars a week and expect anything less than disaster?

  Frank didn’t see, because he didn’t even look. As Wesley Mouch’s fellow bureaucrat Eugene Lawson put it in Atlas Shrugged, “We must not let our vulgar difficulties disrupt our feeling that it’s a noble plan motivated solely by the public welfare. It’s for the good of the people. People need it. Need comes first, so we don’t have to consider anything else.”

  But consider this: With a combination of low rates and easy money available to nearly all comers, buyers began bidding up properties across the nation, exacerbating the affordability gap even further. As prices rose, the GSEs lowered their standards further and bought even more mortgages to achieve their politically forced housing goals. This renewed buying in turn fed the already out-of-control process like a financial Chernobyl. By the end of 2003, Fannie alone held $2.2 trillion in mortgage debt, nearly one in three mortgages in the country. It was a sum larger than the entire housing loan market just 20 years before.

  Warning flags began to pop up, followed by signal flares, then alarm bells. Undaunted, Frank ignored the facts, belittled his critics, and pushed for even more. Despite a complete lack of experience in any area outside of politics, he felt he knew better than everyone else on almost any subject he touched upon. “Expertise is sometimes more overrated than the dollar,” he once said, delivering another intimidating but logically screwy epigram in a debate.40

  In 2003, proposals were already being bandied about to increase oversight on the GSEs. When asked by Mortgage Banking magazine in November about the odds of mortgage regulatory reform passing his committee by the end of the year, he responded, “Virtually 100 percent negative,” adding, “[We] have a lot of other things to deal with.”41 These “other things” included increasing the FHA limits and “doing something about down-payment assistance for low-income people for homeownership.”42

  He went on to defend his opposition to the proposal by the U.S. Treasury—now in Republican hands—to rein in the GSEs by saying that “it interferes with housing. Virtually every entity we deal with in the United States that cares about housing—whether it’s low-income housing advocacy groups, community development groups, Realtors, the home builders—they are all opposed to the Treasury proposal as one that would interfere with housing.”43 Since when are Realtors, home builders, and special-interest groups representative of “every entity” in the United States that has an interest in housing? What about 160 million taxpaying households, the majority of whom were doing just fine without Frank’s wealth reallocation programs? Isn’t invoking the beneficiaries of a housing bubble to justify the government subsidy spigot like citing defense contractors against reducing the size of our military? Apparently, what constitutes “interference” to Barney Frank is what others call laissez-faire capitalism. “Hands off” means not interrupting the flow of money from the producers to the parasites through Barney’s hands.

  The twisted defense of socialistic policies and denial of economic reality wouldn’t stop there. In October 2004, Gretchen Morgenson ran an article in the New York Times quoting analyst Josh Rosner, presaging with deadly accuracy the results of Fannie’s relaxed underwriting standards. “The move to push homeownership on people that historically would not have had the finances or credit to qualify could conceivably and ultimately turn Fannie Mae’s American dream of homeownership into the American nightmare of homeownership where people are trapped in their homes,” Mr. Rosner said. “If incomes don’t rise or home values don’t keep rising, or if interest rates rose considerably, you could quickly end up with significantly more people underwater with their mortgages and unable to pay.”44

  Later that same week in a subcommittee hearing on Fannie Mae, Frank acknowledged that he had read that very article but then dismissed it with a pabulum of blather. “There was an article by Gretchen Morgenson in the New York Times on Sunday that said the problem is that they have done too much to bring housing to people who really cannot afford it and should not be given this chance to own the housing. Her article said the problem here has been they have overextended by lending money to people who were below the economic level that should be there,” Frank stated for the record. “I think what we need to do is to go forward as we were ready to do with a tougher safety and soundness regulator, but in ways that do not impinge on Fannie’s and Freddie’s ability to do a better job than they have been doing with affordable housing and to continue to do the job they have been doing with regard to housing in general.”45

  But national integrity of the financial system was not Barney’s goal. Later in the same hearing Fannie’s chief regulator, Armando Falcon, director of the Office of Federal Housing Enterprise Oversight, seemed desperate to warn the subcommittee of a serious and looming financial crisis before it was too late. During questioning, Frank cut off the witness and refused to hear about the safety and soundness issues that might restrict his ability to continue funneling federal support to an ever-increasing spiral of socially altruistic housing inflation.

  Mr. Frank: But I have seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as a kind of a general shibboleth, when it does not seem to be the issue.

  Mr. Falcon: No, I think our report absolutely does implicate safety and soundness.

  Mr. Frank: Is the safety and soundness at risk now?

  Mr. Falcon: Are they at risk of becoming insolvent right now? No. We have an agreement with the board in place that will address these problems, provide an adequate capital cushion. We think we—

  Mr. Frank: That is the answer. The rest is just rhetoric.

  According to Fannie’s annual report, “Determining our loan loss reserves is complex and requires judgment by management about the effect of matters that are inherently uncertain.”46 Even while Frank was busy bludgeoning the prophetic whistle-blowers in his committee hearing, those reserves totaled just $745 million on guaranteed loans of over $2.3 trillion. Put another way, Fannie reserved just 30 cents of every $1,000 to pay for any potential losses due to borrower defaults on loans it guaranteed—just 0.03 percent. Private-sector banks typically hold 8 percent, or $80 per thousand.47 Residential mortgage delinquencies and outright foreclosure would later top 14 percent, or nearly 500 times higher than accounted for by Fannie’s reserves.48 To borrow Frank’s own bombast, “on what planet” is this sound judgment?

  The chairman of the subcommittee, Republican Michael Oxley, did hear the warning and in April 2005 introduced H.R. 1461, the Federal Housing Finance Reform Act of 2005. The bill would have effectively removed the GSEs from HUD control and placed them under a new, stronger regulator with the ability to raise capital reserve requirements to ensure safety and soundness, to establish loan limits, and to reduce affordable housing goals. Additional amendments were offered by Republicans to further impose capital strictures on the GSEs, and to dispose of assets or liabilities that pose a risk to the financial system. The amendments were defeated.

  The bill itself passed the House, with Barney Frank voting “Nay” on additional regulation. It eventually died in the Senate, where Republicans held the majority but lacked the 60 votes necessary to push the bill past the Wesl
ey Mouch think-alikes Chuck Schumer and Christopher Dodd.

  Frank again went on record with some of the most delusional statements of the decade. In front of Congress on June 26, 2005, he made the case for further home ownership subsidies, donning his ephod as an oracle of housing economics.

  Homes that are occupied may see an ebb and flow in the price at a certain percentage level, but you will not see the collapse that you see when people talk about a bubble. So those of us on our committee in particular will continue to push for homeownership. Obviously, the market will take care of a large number of people, but it will not take care of everybody. And if we are going to expand homeownership, there will have to be a sensible set of public policies, such as reducing the down payment in the FHA. . . . There are also a variety of advocacy groups that work with us so that we can make homeownership available to people who might not on their own in a market situation be able to afford it.49

  Yes, by all means, Comrade Frank, let’s make home ownership available to those who can’t afford it. Let’s reduce the already insignificant 3 percent FHA down payment to zero to make sure we can get even more penniless, financially incapable citizens participating in our socialist vision of free assets for the people at the expense of the rich. Then, when it all blows up, we’ll brand the victims as reckless perpetrators of the collapse even as we evict them from their homes, shatter their already fragile credit scores, and put them through the humiliation of bankruptcy or outright financial ruin.

  Then, even after housing prices had peaked in late 2005, driven up by government interference in the free market, even as defaults were on the rise and the country’s financial system was teetering on the edge of collapse, Frank spoke out in support of H.R. 5121, the Expanding American Homeownership Act of 2006. The bill would further degrade the FHA’s already low standards to chase the dragon’s tail of home values. It eliminated the measly 3 percent down payment as unaffordable, and raised the government guarantees from 87 percent to 100 percent of the already inflated median home value. Incredibly, he insisted the bill would profit the nation. “This is a money maker bill. This is a bill that expands housing, but it will make money for the Treasury.”50

  With a complete misunderstanding of how free markets manage risk, Frank made the ultimate plunge into collectivism.

  We do, in this bill, extend FHA’s authority to lend to people who have lower credit scores, people who are bigger risks. And when that happens, you have to worry about higher defaults. I did not think we, the Federal Government, should be in the position of saying that, as we lend to people who are bigger risks, we should take that risk pool and make those people who are higher risks who meet their obligations pay for the people who are higher risks who don’t . . . it is not fair, and we the Federal Government should not set the principle that one low-income person or 10 low-income people who meet their responsibilities are the ones who have to make up for the low-income person who isn’t able to.51

  Democratic California congresswoman Maxine Waters said about the bill’s passage that “it certainly could not have happened without my ranking member, Mr. Frank, who has the ability to see things in legislation that no one else sees.”52 Apparently he sees nonexistent profits and views risk through a kaleidoscope created by Karl Marx. In Frank’s world, smokers would be charged the same life insurance premium as nonsmokers, while Treasury bonds, stock mutual funds, and slot machines would all pay the same return.

  The Money Pit

  In 2008, we experienced the full consequences of Frank’s collectivist power trip. Bear Stearns failed in March, triggering the collapse of Frank’s house of cards. On July 1, Bank of America completed its purchase of Countrywide Financial, one of the largest mortgage lenders on the planet, under severe financial distress from its headlong dash into subprime loans. On July 11, the Federal Deposit Insurance Corporation (FDIC) put IndyMac Bank—a 1997 spin-off from Countrywide—into receivership.

  On July 14, a still delusional Frank—the very man supposedly most in the know on the status of the agencies he oversaw on behalf of the American people—said in a CNBC interview, “I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under.”53

  On September 8, Fannie Mae and Freddie Mac were placed under conservatorship, a legal status akin to Chapter 11 bankruptcy, sparking a global financial panic. As financial fissures opened worldwide, the Wall Street Journal declared it “the worst financial crisis since the Great Depression.”54

  When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans either were on their books or were in mortgage-backed securities they had guaranteed.55 An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80 percent of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.56

  On September 14, Lehman Brothers collapsed and Merrill Lynch was sold in panic to Bank of America. On September 18, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with Barney Frank and other legislators to propose a $700 billion emergency bailout fund to buy toxic assets from financial institutions. Bernanke told them, “If we don’t do this, we may not have an economy on Monday.”57

  On September 25, Washington Mutual was seized by the FDIC and its banking assets were sold to JPMorgan Chase for $1.9 billion. Washington Mutual was the biggest bank failure ever in all U.S. history, scuttled by $77 billion in subprime mortgages and billions more in other toxic home loans.58 Over the next few weeks the stock market would lose over one-third of its value.

  After Paulsen and Bernanke’s $700 billion Troubled Asset Relief Program (TARP) was approved by Congress, Paulson decided not to buy toxic assets at all as had originally been pitched.59 Instead, he’d buy equity stakes directly in U.S. banks to make the government a direct owner in private enterprise—a move amounting to a partial socialist-style nationalization.

  At the climax of Atlas Shrugged when the economy is crashing—economically and physically—Wesley Mouch and the other bureaucrats whose policies had caused it all huddled together in abject fear, thinking only John Galt could save them now. “ ‘He . . . has . . . to . . . save . . . us,’ said Mouch slowly, as if straining the last of his mind into blankness and delivering an ultimatum to reality. ‘He has to . . . save the system.’ ”

  At the climax of the banking crisis of 2008, it was all in Henry Paulson’s hands. Barney Frank personally called the Treasury secretary and didn’t exactly beg him to save the system—just one little part of it: a TARP cash infusion for the Boston-based OneUnited Bank.

  On November 25, 2008, following Frank’s intervention, the Treasury Department awarded $12,063,000 in bailout funds to OneUnited, which is located in Frank’s district.60

  “I Need Wider Powers”

  Did Barney Frank admit that his policies to expand home ownership had nearly destroyed the housing market, the mortgage market, the banking system, and the whole world economy? No—and here is the most chilling parallel between the real Barney Frank and the fictional Wesley Mouch.

  As the economy is collapsing in Atlas Shrugged, a fellow bureaucrat—an especially cynical one—advises Mouch, “Whatever you do, don’t apologize. . . . Make them feel guilty.” Mouch takes the advice, just as Barney Frank did. “I’m not apologizing! . . . I’m not to blame. I need wider powers.”

  How did Frank make them feel guilty? Frank’s biographer sums up Frank’s position this way: “Lenders’ ability to package mortgage loans into securities (lend money and sell the loans to passive investors) took away from lenders the incentive to be more careful in making loans.”61

&n
bsp; How did Frank prove he’s not to blame? In an interview with Aaron Task in July 2009, Frank denied all responsibility by saying, “I wasn’t in a position to do anything . . . even when it did come up as an issue, I was critical of giving loans to people who couldn’t afford them. I wanted to help them out with housing, but with rental housing.”62

  Did he really call for broader powers, even when it was his powers that nearly destroyed the world economy? In a speech to young Democrats in June 2010, he said, “You can reach out to your fellow young people and make it clear to them, that when [sic] they may not be satisfied with everything we’ve done—we’re not satisfied with everything we’ve done. The way to cure that is to give us more authority.”63

  Yes, he really said that. It’s almost as though he was trying to walk in Wesley Mouch’s footsteps. Don’t let anyone tell you that life doesn’t imitate art.

  Did Frank get those wider powers that Wesley Mouch wanted? Yes, at least in a way. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is a massively complex law of 848 pages that creates sweeping new regulatory powers for the federal government over every aspect of the American financial industry, from banking and credit cards to derivatives and monetary policy.

  Frank’s name is on the bill, which assures that he will go down in history as a noble regulatory reformer, rather than what he actually was: an ignoble regulatory deformer, who used the power of government to destroy rather than to protect.

  But maybe the American people aren’t as easily gulled as Frank has always expected. Bill or no bill, Frank personally no longer has the power he once enjoyed. In 2010 the Democrats lost majority control of the House of Representatives, which means that Frank is no longer chairman of the Financial Services Committee.