When Rep. Barney Frank took over as chair of the House Financial Services Committee in 2007, he offered a "grand bargain" between business and liberal Democrats. But few captains of industry and finance rushed to take him up on it.
Yet the subprime mortgage debacle and turmoil in the financial markets have put the 14-term Massachusetts Democrat into the inner circle of those trying to resolve the crisis.
"We are at a very important potential inflection point in American public policy," said Representative Frank, speaking at a Monitor breakfast on Thursday. "Today there is a consensus that underregulation is not just a factor, but the single biggest cause of the fix we are in today. There are not effective constraints against irresponsible risk-taking built into the market."
He says that the legacy of the Reagan years – and carrying into the Clinton years – was the assumption that the No. 1 goal of government is growth, and that if you achieved growth, you didn't need to worry about much else, including soaring inequality.
But the business community, Frank says, is learning that there's a political price to pay for the resentment of many Americans who see the current system as fundamentally unfair. He adds that voters will punish lawmakers who support new free-trade agreements or immigration reform.
"In this century, 5 percent of the American people have seen a rise in their real incomes; 95 percent have either stagnated or dropped," he added. "The refusal of the business community to deal with this is the reason that Lou Dobbs is the most prominent economic spokesman in America."
To deal with a fairness gap, Frank wants Congress to strengthen unions, raise the minimum wage, expand access to health insurance, let the Bush tax cuts expire, and significantly increase aid to higher education, especially to community colleges.
The United States is the only industrialized economy that still links healthcare to employment, he says: Lose a job, and workers also probably lose health insurance for themselves and their family. "If you could help people with healthcare, you would reduce a great deal of the resistance to trade," he added. "Once there is legislation that will enhance the economic position of working people, we can go ahead with trade policy."
But the immediate priority for the Financial Services Committee is to complete work on a housing stimulus package. This week, the panel is marking up sweeping legislation to ease the subprime mortgage crisis. On Wednesday, the committee approved a $15 billion loan-and-grant program that would give money to cities and states to purchase foreclosed homes. On Thursday and continuing into next week, the panel is wrapping up legislation to give the Federal Housing Administration authority to guarantee up to $300 billion in refinanced loans, if the lenders agree to write down the loss on outstanding principal. It is Frank's signature contribution to resolving the housing crisis.
While the Bush administration is not backing this version of FHA reform, Frank says that the president may find enough to support in a comprehensive housing package, which is expected to be on the floor of the House in May. If President Bush opts to veto this legislation, "the result would be a longer, deeper recession," Frank added.
After FHA reform, the next priority for the committee will be to take a fresh look at regulation of the financial-services industry. "We need a risk regulator for the noncommercial banks," he said. Commercial banks are highly regulated, but investment banks, hedge funds, and other new entities sitting on large pools of money are not.
"Somebody has got to have the right to regulate the investment banks the way we do commercial banks," he said.