Frank's Regulatory Declaration

On Wednesday night on The Rachel Maddow Show (YouTube clip here), Rep. Barney Frank had this to say in response to a question from Rachel about whether today’s shaming session with the bankers is all that is needed or if rules were coming down the pike:

And this I can guarantee you, we will very soon be adopting a set of regulations.  We’re gonna be doing, essentially now, what Franklin Roosevelt had to do in the New Deal, what Theodore Roosevelt and Woodrow Wilson had to do around the turn of the last century.  There’s a whole lot of new financial activity that’s gone on that’s caused some damage; it’s done some good — but it’s gone on without rules. And the one thing I am most confident about is, uh, we know how to stop this from happening again: banning the bad suprime loans, restricting the excessive kinds of leverage that they’ve had.  Yeah, this is a very high priority for us.  And I think by the summer, we’re gonna have a set of rules in place.  It’s gonna be comparable, I think, to what FDR did with the New Deal, with the Securities and Exchange Commission and other rules.  We will not depend on their goodwill.  We will put some tough rules in place.

As Doug Berman would say, there’s a whole lot of there there.

First, the promise of regulations is not news, but the summer timeline is the first I’ve heard of that.

Second, the scope, in Frank’s mind, is unlimited.  Important to know from the start what the House Financial Services Committee chairman thinks about the scope of this project.

Third, it was interesting to hear Frank say that the “new financial activity” has “done some good.”  It has, obviously, but I thought it important — in terms of having smart regulations result from the current turmoil — that he keep that simple fact in the conversation, even if only as a side note.

Fourth, I’m not all too pleased to hear him say that “we know how to stop this from happening again.”  I’m not so sure we do.  Yes, we know how to stop this precise crisis, but those solutions are not nearly of the scope that he had earlier discussed.  Regulators and lawmakers should be thinking about how to stop or discourage this type of crisis.  If we already knew how to stop this from happening again, why would so many economists (and regulators and lawmakers) be discussing and debating many varying potential responses to the crisis?  If this project is as big in scope as he said it would be, then we’ll have to look beyond this crisis to underlying conditions that allowed it to happen and then address those.  I hope was a function of the simplification and searching for answers that happens in a TV interview and not Frank’s true and complete belief on the matter.

Fifth, does Frank really intend to “ban[]the bad subprime loans”?  And could he do so even if he wanted?  I don’t think it could mean he wants to ban all subprime loans.  But, if not, how do we decide which subprime loans are the “bad” ones?  Sure, there are some easy areas, like no-doc loans, to attack.  But eventually you start hitting grey areas, where some loans are good and some are bad.  (I’m sure some of the no-doc loans even turned out not to be a “bad” loan.)  So, the line-drawing will be very tough on that front, and it seems that you risk oversolving and eliminating some good but non-traditional loans.  I just don’t think it’s possible to ban only the bad subprime loans, and it downplays the tough choices that such regulation would entail to say otherwise.

Sixth, the leverage issue is clearly a problem and actually makes me think that Frank’s “we know how to stop this” line was more aspirational than a factual statement.  Restricting excessive leverage is more of a big-picture proposal that moves this back into the big-scope zone that I think is more appropriate (and helpful).

Seventh, I liked his “trust, but verify”-esque conclusion.  We needn’t depend on their goodwill if the proper safegaurds are in place.

Overall, I like the idea of having one of the smartest members of Congress running this show.  I just hope that he takes a note from Obama’s Election Night speech and Inaugural Address and begins to get people comfortable with the idea that this can be big in scope — but that the reason why it is big in scope is because the problem is big, complex and involves tough choices.

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