The Fall of the House of Frank

By Ben Voth

The imminent retirement of Barney Frank from the House of Representatives is an important rhetorical marker for one of the most significant financial disasters in U.S. history.  The housing bubble and ultimate collapse was substantially informed, justified, and rationalized by the public arguments of Congressman Barney Frank.  The conventional punditry of our nation, allied with a reactionary "occupation" movement in the streets, has constituted itself as a Greek chorus of support.  They echo the idea that private banks have robbed Americans into destitution and that government must, in the classic Keynesian tale, come to our perpetual rescue in the form of regulation, taxation, and government guarantees.  Frank's departure offers an inflection point to re-examine this cherished myth of the reactionary left.

Frank's congressional website highlights frequently asked questions from constituents regarding his supervision of the federal government's financial arm for supporting mortgages, Fannie Mae and Freddie Mac.  In 2003, Frank publicly argued that those institutions were not in danger of causing an economic crisis.  Frank would ultimately go as far as blaming anyone who dared question the wisdom of federal housing policy as the true culprits in any impending financial harm.

In the mythmaking of the reactionary left, private banks created risky financial instruments predicated on the U.S. mortgage industry that were so intrinsically corrupt that it led to an inevitable collapse in the housing market in 2008.  Private banks that were bailed out in TARP were collectively engaged in negligence and fraud that led to our present economic demise.  The staggering loss of $6 trillion in housing values damaged the entire global economy.

Noticeably absent from this commentary and storytelling is a sense of the federal government's key role in creating the crisis.  Fannie Mae and Freddie Mac were the largest financiers of mortgages in the United States.  Preceding the crisis, congressional regulator Franklin Raines made public statements that there "was no risk" to investing in American mortgages.  The deregulated view of Fannie Mae and Freddie Mac combined with the regulator's statements that there was no risk in this area of financial investment was the equivalent of telling chronic gamblers that the casino will cover all bets.  Not only did congressional regulators such as Barney Frank fail to constrain the federal agencies inflating the housing bubble, but they actively criticized in public those trying to prevent a crisis through increased regulation, and they worked to inculcate the view that there were no undue risks in the American housing market.

Congressman Frank provides his own convoluted review of this crisis on his congressional homepage.  In his account, the Bush administration took the inexplicable view of opposing regulation from 2001 to 2007 and then endorsed regulation in 2007, when Frank took leadership of the important housing issues relating to Fannie Mae and Freddie Mac.  According to Frank, the regulations passed in 2007 by himself and President Bush were "too late."  Outside the reactionary left's mythmaking offered by Congressman Frank, the Bush administration repeatedly called for heightened congressional oversight and regulation of Fannie Mae and Freddie Mac throughout both terms of the Bush presidencies.  In reality, the Bush proposals to treat GSEs like Fannie Mae and Freddie Mac the same as private banks in the regulatory world, were termed "inane" in 2005 by Congressman Frank.  The reforms passed by Frank came in 2008 -- after the industry had collapsed -- despite Frank's 2005 assurance that Fannie Mae and Freddie Mac were "fundamentally sound."  The GSEs purchased considerable political sway in fall of 2006 to prevent the regulatory leveling sought by the Bush administration.  Democratic senators such as Chris Dodd and Barack Obama received considerable financial support from the GSEs in a landslide sweep for Democrats in Congress that functionally guaranteed that the GSEs would fend off future regulatory reforms pushed by the president.

Confronting this argumentative mythology is important.  One reason for this is the confusing paradox posed by the 2008 financial crisis.  In the telling of the reactionary left, this is a story of deregulation and its natural fruits.  That telling justifies the inherently regulatory stature of the left.  As is often the case, the story is half-true.  GSEs such as Fannie Mae and Freddie Mac were permitted to engage in lending practices at higher risk levels than their private counterparts because they essentially had the power of the federal Treasury printing presses behind them.  This advantage was so acute, systemic, and well-understood by 2006 and 2007 that the global banking industry was highly invested in an American housing market that was "guaranteed to be without risk."  This absurd contention was doomed to collapse at some point.  Private banks were engaged in a rational enterprise of investing in a market "guaranteed" to grow and produce positive returns.

A second reason for confronting this argumentative myth is the potential to perpetuate further crises using the paradoxical regulatory model of the reactionary left.  The government exempts itself from the regulations it places on its private citizens.  This is why the Congress will always have a superior health care system while it wrecks the one for its citizens.  That is why the Congress can engage in fruitful insider trading like that practiced by former House Speaker Nancy Pelosi while it rails its regulatory wrath against Wall Street.  That is why we are headed for another boom/bust cycle in the student loan market that is financed in a manner highly similar to the former American housing market.

The proper writing of Barney Frank's political epitaph is not important only as a matter of history.  It is important as a moral enterprise in trying to allow history to teach us how not to repeat the errors of the past.  The American public have an intuition that they have been abused by their political handlers.  The surrounding punditry class continues to form the Greek chorus of support for half-truth stories of how we went from 4.7% unemployment in January of 2007 and falling deficits to 9-percent unemployment and ever-soaring trillions of debt in January of 2012.  The retirement and a proper sense of the fiscal legacy of Barney Frank is an opportunity to restore some measure of sanity to America's economic house and possibly avoid a repeat of these mistakes.