Barney Frank: Happy ending possible despite economic mess
House Financial Services Committee Chairman Barney Frank says he sees a “happy ending” to the nation’s economic woes within several years, has “a lot of confidence” in the Obama administration economic team, and argues that most of the money being spent to revive US banks “is going to be repaid.”Skip to next paragraph
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Both real and psychological problems
“We are in a terrible mess,” Rep. Frank, a key Congressional voice on economic policy, said Friday at a Monitor-sponsored breakfast for reporters. But, he argued, “it will have a happy ending in the sense that this is a very productive country.” Frank said one reason for his optimism is, “because I think our problems are at this point both real and psychological and I am hoping the psychology will begin to abate.”
Government policy will change as a result of the nation going through tough economic times, Frank said. There will be “a renewed appreciation for the importance of the government setting rules,” he said. “You will get a new, systemic-risk regulatory regime.”
Stock market as nervous hysteric
When Treasury Secretary Timothy Geithner rolled out the Obama administration’s Financial Stability Plan to attack the credit crisis on Tuesday, the stock market sold off sharply. “Over any considerable period, the market is a pretty good allocator of resources,” Frank said. “On any given day, it is a nervous hysteric not to be paid attention to.”
Confidence in the Obama team
Despite the market’s reaction, “I have a lot of confidence in Geithner and [Lawrence] Summers,” who heads Obama’s National Economic Council, Frank said. He agrees with critics who said Geithner's speech on the Financial Stability Plan was light on specifics. But when Geithner releases more details next week, “I think the details on the [home mortgage] foreclosure part are going to be good," Frank said. And on the issue of troubled bank assets, "there is no right answer to that and I think he will do something good,” Frank said.
In assessing remedies for the nation’s financial ills, Frank cautioned that, “solutions can not be qualitatively more elegant than the problem they are working on. That, I think, is the metric that has to be kept in mind. ”
While the Federal Reserve has provided $1.95 trillion to troubled banks and other financial institutions, “Almost all of that is coming back,” Frank said. “I think we should make a distinction between hundreds of billions spent on the TARP [Troubled Assets Relief Program] and the hundreds and hundreds of billions spent on the war in Iraq which isn’t coming back. I am struck by the selectivity with which we worry about expenditures.”
Bank behavior modification
Although banks may pay the government back, “they wont get another penny until they have won back some public confidence,” he said. The conditions that must be met before Congress will provide more funds, Frank said, include “first of all compensation restraints and no airplanes and no stadia, etc. It means substantial reduction in [home mortgage] foreclosures ... and it means money being available for relending.”
The government’s response to the housing crisis has been affected by personal factors, Frank said. Sheila Bair, who chairs the Federal Deposit Insurance Corporation (FDIC) was an outspoken advocate of modifying mortgage loans to reduce first lien mortgage payments to as low as 31 percent of monthly income.
“One of the reasons I think there was so much resistance on the part of the [Bush] administration to doing anything about foreclosure was Sheila got out front,” Frank said. “And I think she [angered] the old boys. I said to them, you know what, you guys are up in a tree house with a sign 'no girls allowed' and it is hurting us.”