Image has not been found. URL: /wp-content/uploads/2008/10/frank2.jpgBarney Frank, chairman of the House Financial Services Committee. (WDCpix)
They came together quickly in February to pass a short-term stimulus bill. They united again this month around a plan to bail out Wall Street. But as Democrats and Republicans begin deliberations over long-term reforms for the financial-services industry, both sides seem to be prepping for what will likely be a heated partisan debate.
In a House Financial Services Committee hearing Tuesday, lawmakers seemed to agree that the federal rules governing banks should be altered after the worst financial meltdown since the Great Depression. But they are far from reaching a consensus on what form those changes should take. Members instead sparred over the causes of the global financial crisis, the government’s role in free markets and what is the essence of American-style capitalism.
If these are the deliberations that will prevent the next economic collapse, the country might be in trouble.
Illustration by: Matt Mahurin
At the heart of the debate is a thorny question: Do markets work best when left unhindered, or when regulations add protections to the financial system? While many Republicans bucked their conservative instincts to approve an enormous government intervention in the U.S. financial system in response to Wall Street’s meltdown, there is evidence they won’t be so supportive when the time comes to reform the finance industry more permanently.
For the most part, the disagreements at Tuesday’s hearing followed the traditional arc of partisan ideology. From many Democrats came this message: The nation’s big banks and investment firms, left to their own devices, had gone on a greed-fueled spree with other people’s money. They demanded stricter regulations in the future.
Some Republicans blamed Freddie Mac’s and Fannie Mae’s poor lending decisions, as well as the workings of the Community Reinvestment Act, which encourages banks to lend to low-income communities. GOP members said Democrats were responsible for both.
Alice M. Rivlin, former director of the Congressional Budget Office and now a scholar at the Brookings Institution, said the congressional fight over government regulation is sure to be difficult.
“Getting financial-market regulation right is a difficult and painstaking job,” Rivlin said. “It’s not a job for the lazy, the faint-hearted or the ideologically rigid. Applicants for this job should check their slogans at the door.”
Lawmakers on Tuesday didn’t immediately take Rivlin’s advice.
Rep. Scott Garrett (R-N.J.), for example, after calling for bipartisan cooperation on regulation, spent the next few minutes accusing Democrats of failing to rein in Freddie and Fannie earlier in the decade. “It was this lack of regulation that played a large part in getting us to where we are today,” Garrett said.
Rep. Barney Frank (D-Mass.), chairman of the Financial Services Committee, quickly returned the fire, reminding Garrett that the Republicans controlled both chambers of Congress at the time.
“The number of occasions on which either Newt Gingrich or Tom DeLay consulted me about the specifics of legislation,” Frank said, referring to former House GOP leaders, “are far fewer than the gentleman from New Jersey seems to think.”
There were other, more ideological differences. Rep. Tom Price (R-Ga.) decried the extent to which Washington has intervened in the economy, pointing to the $700-billion financial-services bailout and the administration’s decision to use some of that cash to recapitalize banks in exchange for owning shares in them.
“These actions are, in their totality, I fear, an assault on American principles and on capitalism itself,” Price said. “It’s a marked turn toward a nefarious ideal that problems can be solved by centralized decision-making here in Washington.”
Price’s views seem to predict that Republicans have no intention of backing down when the debate over finance-industry regulations begins in full next year.
The ideological jousting occurs at a time when lawmakers juggle the dual responsibilities of treating the financial meltdown in the short term and considering new rules to govern the industry over the long haul. Witnesses testifying at Tuesday’s hearing — the first step toward new regulations — offered plenty of potential reforms.
Rivlin recommended tighter restrictions on mortgage lenders — including mandatory down-payment rules and proof that the borrower can pay the loan. Joel Seligman, an expert on securities law and president of the University of Rochester, suggested that a congressional committee to oversee the new regulations be created. Joseph E. Stiglitz, Nobel Prize-winning economist and professor at Columbia University, urged the creation of a new financial products safety commission.
All witnesses agreed that no sweeping changes will be possible without bipartisan cooperation. “Too many attempts to rethink regulation of financial markets in recent years have been derailed by ideologues shouting that regulation is always bad or, alternatively, that we just need more of it,” Rivlin said. “This less-vs.-more argument is not helpful. We don’t need more or less regulation. We need smarter regulation.”
Committee chairman Frank was under no illusion that the coming reform efforts will be easy. “We’re here talking about some of the most important basic principles of government,” he said, “about how in a free-enterprise economy you do or don’t regulate … It is as important a set of economic decisions I think this country will be making since the Depression.”
Some experts testifying pointed out that laws matter little if regulators don’t enforce them. One whipping boy at Tuesday’s hearing was Alan Greenspan, former chairman of the Federal Reserve and famous for his faith in free markets. “We had regulators who didn’t believe in regulations,” said Stiglitz.
Ben Bernanke, Greenspan’s successor, has done a better job reining in subprime lenders, Stiglitz added, “but it was like closing the barn door after the horse was out.”
Tuesday’s hearing came at a tough time for the economy. Low consumer confidence has led to the longest retail-sales decline in 17 years. Foreclosure rates in many communities continue to rise, while home prices continue to fall. At least 15 states face budget shortfalls and are likely to cut spending on social services to balance their books. And despite passage of the $700-billion bailout package, investors remain wary of stock markets. After rising over the past few days, the Dow Jones Industrial Average fell 232 points Tuesday.
Amid the gloom, Frank, known more for his pragmatism than optimism, found at least one reason to be hopeful about the coming regulatory deliberations: The economic slowdown, he said, means that Congress can take its time to craft its reforms. “Nobody,” Frank said, “is doing any good things or bad things right now, so that the notion that we have to rush, I think, has been alleviated by the fact that not much is happening. And that gives us time to do this right.”
For the legislative branch, that’s probably a blessing in disguise. As Rep. Randy Neugebauer (R-Texas) dryly noted, “One thing we know about Congress is we don’t necessarily do our best work in a crisis environment.”