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Barney Frank

Recently, I found myself in a very interesting discussion with an intelligent and thoughtful friend of mine that began with an analysis of what ails our financial system and how it can be fixed, and then shifted to a deconstruction of the housing finance crisis that nearly cratered the global banking system in 2008.

My friend believed that our best chance of repairing things lie with the prospect of appealing to those in the highest levels of power in the investment and finance business and getting them to look past their mandate of optimizing the risk/return that they are charged with pursuing to become more aware of the ripple-effect impacts that their decisions had upon the world.  My friend expressed a deep level of doubt that change could ever be effected through the political process.

I felt quite differently.  I explained to my friend that it would be near impossible to ask the investment world to forego returns in the name of global altruism.  I told him that, contrary to what most people believe, the large majority of investable funds in the world comes from the retirement savings of the 99%’ers, and not the accumulated wealth of the 1%’ers.  Getting Bill Gates and his peer group to fall on a sword and forego 2-4% in annual returns by avoiding investments that harmed the world would do absolutely nothing for the world because their collective wealth represents a drop-in-the-bucket of global investable funds.  I told him that in order to make a change from the investment side, one would have to appeal to the investment professionals at pension funds and sovereign wealth funds who are managing most of the world’s wealth. This, I explained, is likely not only impossible but perhaps wrong to ask for.  The money manager might feel sympathetic personally.  He might wish the world would not be so dependent upon fossil fuels, or that it would not allow the use GMO’s, or that there would be no global exploitation of workers.  However, wouldn’t it be wrong of him to ask his pension constituents to pay a price for his views, perhaps a very steep price in their retirement years?

No, for me the only way to deal with this is through government.  The private sector is not set up at all to do this.  In fact, while re-visiting the experience of the 2008 housing crisis it dawned upon both us that there is actually reason for some optimism that our system of government is constructed in a manner that can address these societal needs.  The fact that it failed to do so leading up to 2008 ought not be taken as a condemnation of its capacity.

Revisiting that crisis we saw that there were a number of groups that had to play certain roles in order for the crisis to unfold as it did.  First, Wall Street banks had to be innovative and desirous of greater profits. Check!  They saw that there was a large group of prospective homeowners who could not qualify for mortgages, and they created financial structures that might deliver that capital to them.  Then, there were homebuilders who wanted to build more homes to sell to them new homeowners.  Present and accounted for!  Of course, we can’t forget the construction workers’ unions who would be getting more work, and the many companies that would benefit from increased home sales including makers of raw materials like concrete, home improvement companies, architects, landscapers, plumbers, etc, etc.  All of these players understandably became cheerleaders for the idea of easier access to mortgage capital and the resulting expanded homeownership.  The leaders of FNMA and FHLMC were sure to agree too, as the idea greatly expanded their own personal fiefs and wealth, while at the same time, at least on the surface, strived to achieve the goal of making homeownership more broadly achievable – which seemed like a noble goal.  So far everyone involved played their roles exactly as they should have.  While it is always tempting after a crisis to invent conspiracy theories and to identify villains, it became apparent to us that neither of these made sense here (or for that matter in most crises).

For us, the heartening part of the analysis came from looking at the government’s role.   In order for the players on the private side to accomplish their goals, it required the approvals of those in government, who stood to gain nothing personally from any changes and whose responsibilities lie with protecting our society. In this particular crisis, this role fell largely upon the shoulders of former Congressman Barney Frank, who chaired the House Financial Services Committee that oversaw FNMA, FHLMC, and finance in America. Mr. Frank was a career politician, literally never holding a job in the private sector.  According to his filings, Mr. Frank has never been a wealthy man.  As of 2012, Frank's last year in Congress, he estimated his net worth to be between $840,000 and $1,34,000.  Not terrible for sure, but compared to politicians of his level in most other nations in the world, quite modest indeed.  This is critically important, because unlike everyone else involved in the building of the housing monster, all of whom strived mightily for personal gain, Mr. Frank and his fellow politicians were acting in a manner that they believed was in the best interests of America.

Now, it turns out that Mr. Frank and his colleagues were very wrong, but hindsight is always 20/20 and it isn’t hard to see how he might have erred.  I’m sure he looked at the many people who had been denied mortgage credit and thus homeownership for so long and felt excitement at the prospect of helping them derive greater joy in their lives.  He must have also looked at the many working class jobs that would be created by the new demand for homes and found that prospect highly enticing.  And, I am sure that all the would-be winners from this plan lobbied his office mightily, pointing out clearly with deep economic analysis that supported just how huge a housing boom would be for the U.S. economy.  In finance industry circles, where I’ve spent most of my career, it became fashionable to paint Mr. Frank as a villain.  Surely his decisions proved devastatingly bad, however, his intentions could quite plausibly have been beautiful.

The purpose here is not to judge Mr. Frank, but to praise our system of government that produces a Barney Frank. Barney Frank wasn’t bought or corrupted by the prospect of mega-wealth, as would have been the case in so many other countries.  Here in America, would-be profiteers had to convince an honest broker, Mr. Frank, in order to get their ball rolling.  The fact that Mr. Frank’s analysis proved wrong and that this opened the floodgates to massive systemic losses ought not obscure the virtues of our political system that places an honest broker in the way of profiteers.  I believe that we cannot easily ask the private system in America, calibrated to extract profits, to change itself without considering the massive risks and unexpected consequences that such change might bring about.  But maybe all we need is to have some people in Congress with both a good heart and the ability to see the broader financial system better.  Maybe if that is the story we tell about what happened in the mid-2000’s then our country would be able to learn a valuable lesson and to grow stronger from this crisis.  Maybe, if the story were told as such, would-be politicians would be required to articulate a higher level of understanding and competence before earning our support.

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