Barney Frank demonstrated today that he is still so out of touch that there is no use in hoping for any useful financial reform from the Massachusetts Congressman.
In a blog post on his Congressional website, Frank wrote that he “going forward, as we restructure housing finance, we will make sure that there are no implicit guarantees, hints, suggestions, or winks and nods. We will be explicit about what is and is not an obligation of the federal government.”
That sounds great. Unfortunately, we’ve been hearing similar things from Frank for years. Back in 2003 he said:
So let me make it clear, I am a strong supporter of the role that Fannie Mae and Freddie Mac play in housing, but nobody who invests in them should come looking to me for a nickel–nor anybody else in the Federal Government. And if investors take some comfort and want to lend them a little money and less interest rates, because they like this set of affiliations, good, because housing will benefit. But there is no guarantee, there is no explicit guarantee, there is no implicit guarantee, there is no wink-and-nod guarantee. Invest, and you are on your own.
But it turned out that he was wrong. Lenders to Fannie and Freddie were not on their own. The government did come in and bail them out. The creditors were right about the likelihood that a guarantee existed. Frank was wrong.
Why on earth would anyone find Frank more plausible now? He goes further to undermine his credibility when he says he supports giving the Treasury the flexibility to bailout Fannie and Freddie if necessary for the sake of stabilizing the financial system. The problem with that is that Frank is saying that he’d support a bailout in almost any possible situation when they would be at risk a defaulting on their debt. What’s more, any default on the debt of Fannie and Freddie would likely destabilize the financial system.
So Frank opposes a guarantee of Fannie and Freddie debt in every single case except where it might actually be called upon.
This kind of double talk inevitably leads to the creation of an implicit guarantee. And that implicit guarantee makes Fannie and Freddie able to raise debt capital cheaply despite their unsafe business practices, which then feeds into the creation of more systemic risk. The more systemic risk they create, the more likely they are to be bailed out.
The fact that Frank is still blind to this is the clearest indicator there is that he has learned nothing from our crisis.
Update: Here’s Barney Frank on CNBC
- 0:10 – Fannie and Freddie “implicit guarantee,” was a self fulfilling prophesy.
- 1:50 – Looks forward to a whole new ‘system’ of housing finance.
- 4:00 – If you bought before 2008, you do not have the implicit guarantee.