Barney Frank Details Fed. Financial Intervention
SCOTT SIMON, Host:
Among the members of Congress who were meeting with Secretary Paulson this weekend is Representative Barney Frank who's chairman of the House Financial Services Committee. Mr. Frank, you must be a very busy man. Thanks for making the time for us.
BARNEY FRANK: Oh, you're welcome. Actually, at this point we are - to be honest, my staff and the staff of the Senate Bank Committee are a lot busier than I, but we are paying some attention.
SIMON: Well, thank you very much. We're reading reports in the morning papers today about this meeting this week with Secretary Paulson, Chairman Bernanke, and congressional leaders. What did they say that apparently put the fear of failure if not God Almighty into everybody?
FRANK: Well, first let me say that they were talking about something that I had myself been talking about previously. So it was not an enormous mind changer for me. What they acknowledged was something that was clear, unfortunately, that the specific interventions they had been making with very good intention - I should begin by saying I have a great deal of respect for and confidence in both Chairman Bernanke and Secretary Paulson - those weren't working. You know, they were a series of interventions, obviously Bear Stearns and Fannie Mae and Freddie Mac. Then they tried nonintervention with Lehman Brothers, thinking that might help kind of instill some discipline. Then they had to get back in in a very big way in AIG. And after an $85 billion commitment from the Federal Reserve to AIG's debtors - creditors rather - did not do what they hoped to do, which was to calm the markets in addition to the specifics, it just became clear that something more systemic was required.
And I had frankly felt that way for a couple of weeks. And that's what they told us, namely that we are at a point where the lack of confidence in the market and the negative impact that you were getting from the interconnectedness - this is a financial situation in which we had a lot of leverage, i.e., owing a lot more than you got. I mean, leverage is a fancy word for getting way in over your head, which works well as long as you can keep swimming. But when things start going bad, the deleveraging means that you are being asked to come up with more than you've got. And if you can't come up with what you owe other people, then they can't come up with what they owe other people. And then people start defaulting, and people start losing their jobs, and people start going out of business.
That's essentially what they told us - that we're at that point - and that the only thing that could be done would be for the federal government to step in. I think the reason is this - and we should be clear where this starts. There has been a philosophy in Washington for, oh, certainly since Ronald Reagan it's been dominant. Even when the Democrats were in, that philosophy was still very strong. Don't regulate the markets. Let capital find its own level, and it will serve us all well. And for a while that worked very nicely. But what happened was they just got in over their heads, and people made bad decisions, unwise decisions. And we find ourselves now in a situation where, in the absence of any sensible regulation, these innovations have produced the situation in which the market has dammed itself up with bad debt, with more than they can handle.
And only the federal government can step in, I think, at this point, with our resources and our capacity to wait this out and take some of that bad debt off the hands of the whole system, not just Wall Street but the whole economy, so it can get functioning again. Now, the one saving grace is it is almost certainly the case that the psychology is so depressed that a lot of these assets are worth more ultimately than you could get for them now. And again the federal government is the only entity that can take the step of buying them up now, holding them, and then selling them on a more gradual basis a couple of years from now, or more, and recover most if not all of what we'll put in.
SIMON: Mr. Frank, I'm afraid we've absolutely run out of time, but we'll follow up on this with you in subsequent conversations. Thanks so much.
FRANK: You're welcome.
SIMON: Barney Frank of Massachusetts.