Chapter 6
The Central Planner
Barney Frank as Wesley Mouch, the politician who meddled in the economy and almost destroyed it
“Fact is,” said Mr. Weatherby primly, in a statistical tone of voice, “that in the twelve-month period ending on the first of this year, the rate of business failures has doubled, as compared with the preceding twelve-month period. Since the first of this year, it has trebled.”
“Be sure they think it’s their own fault,” said Dr. Ferris casually.
“Huh?” said Wesley Mouch, his eyes darting to Ferris.
“Whatever you do, don’t apologize,” said Dr. Ferris. “Make them feel guilty.”
“I’m not apologizing!” snapped Mouch. “I’m not to blame. I need wider powers.”
—Atlas Shrugged
Who is Wesley Mouch?
Wesley Mouch is one of the key antagonists in Atlas Shrugged, a government regulator who destroys the economy while attempting to control it. But he’s no super-villain—he is not portrayed as consciously evil, or even as especially ambitious. He is only a bumbler who ends up almost by accident with extraordinary powers over the economy, which he finds cannot be exercised without unleashing unintended consequences.
Mouch first achieves political power as a pay-off; he is a lobbyist in the employ of industrialist Henry Rearden, one of the central heroes of Atlas Shrugged, whom he betrays by not warning him of impending regulatory legislation. But that is the only overtly corrupt or ambitious act Mouch carries out. After that he is shown as a buffoon who nevertheless acquires more and more powers—in a vicious cycle in which additional powers are granted at each stage of the economy’s collapse, which his own regulatory powers caused in the first place.
As Top Coordinator of the Bureau of Economic Planning and National Resources, Mouch wields tremendous power. Yet it was only mistakenly “concluded that Wesley Mouch was a man of superlative skill and cunning, since millions aspired to power, but he was the one who had achieved it.” He was, in fact, only “the zero at the meeting point of forces unleashed in destruction against each other.”
Through Mouch, Ayn Rand shows that while virtue is powerful and requires relentless competence by the virtuous, evil—even very effective evil—is small and impotent. Unlike all the other main characters in Atlas Shrugged, heroes or villains, we never hear from Mouch an exposition of his guiding philosophy. It seems he doesn’t have one, suggesting that in Rand’s view the absence of a philosophy is a form of depravity.
In a December 2006 article from the Congressional Quarterly Weekly entitled “A Roof over Every Head,” Congressman Barney Frank of the 4th District in Massachusetts is quoted proclaiming, “The problem is that the market is producing too much inequality.” The solution? Use government leverage to provide affordable housing as one way to bridge the widening gulf of U.S. income disparity. A new approach to housing policy can be a hallmark of the Democrats’ efforts to redistribute wealth, he says.1
And redistribute he would. By the time Frank was through, his lifetime quest for ever-increasing political power to promote social equality and universal home ownership would bring a nation to its knees, triggering a banking collapse unparalleled since the Great Depression and plunging millions of productive Americans into unemployment, foreclosure, and financial ruin.
How does one get to have enough control over the economy in order to destroy it? Was Barney Frank smarter, harder working, more honest? No—in the moral universe of Ayn Rand, smart, hardworking, and honest people don’t want to control the economy in the first place. They just want to control themselves.
Frank, like Wesley Mouch, the government central planner who destroys the economy in Atlas Shrugged, isn’t stupid. But of all the not-stupid people in the world, the ones who become economic czars share other key traits. They are people who know they couldn’t make it in the private sector, so they turn to politics. They are corrupt, in the sense that they are willing to bend and break even the tainted rules by which the game of politics is played. They are ruthless, willing to let the world go to ruin as long as they can be in control of it. And they are shameless and unapologetic, blaming everybody but themselves when it does.
Barney Frank was named chairman of the House Financial Services Committee in 2006 not through any special expertise or background in the banking sector, but due to the cockroach-like survivability of an entrenched lifelong government bureaucrat. With the exception of some half-stints in academia, Frank has spent his entire career on the government payroll. He has never created a job. He has never had to earn a living on the strength of his contribution to the economy. He has never been responsible for capital investment decisions where he bore personal financial risk. He’s never worked on a trading desk or in a bank, brokerage, or corporate finance division. He’s never even rung the register at a fast-food restaurant.
Several other congressmen were ahead of Frank in the political pecking order for the high-profile leadership position. But when then-Representative Chuck Schumer, the Democrat of New York, moved from the House to the Senate, Bruce Vento died of cancer, and John LaFalce didn’t seek reelection, Frank suddenly found himself enthroned on the committee that oversees insurance, banking, the securities industry, and affordable housing. He said that the role made him “feel like a kid in a candy store,” and remarked that “I have more power than knowledge.”2 If only that remark had represented self-awareness rather than a lame attempt at self-deprecating humor, perhaps Frank wouldn’t have presided over the worst financial collapse in modern history.
Like Rand’s Wesley Mouch, Frank crafted a lifelong career out of patronage and pull, using political power to distort the economy through endless rules and regulations while ignoring their real impact on the nation. Oblivious to the end, he would not only shift blame and shirk responsibility for the destruction he wrought, but would rationalize it as not doing enough—and then clamor for even more power.
Those who have encountered Frank throughout his life invariably come away with certain indelible impressions. The first is that he’s smart and verbally acute—if not always intelligible in his fast-talking, marble-mouthed New Jersey accent. His comments are witty, acerbic, and sharp-tongued. He has been known to flay a hearing witness or election challenger with slashing verbal parries, dissect an argument with disarming tongue-in-cheek wordplay, and deflect criticism with blunt-edged insults. “On what planet do you spend most of your time?” Frank tersely cudgeled a constituent at a town hall meeting for the Obama-sponsored health care bill. “Trying to have a conversation with you would be like trying to argue with a dining room table. I have no interest in doing it.”3
Colleagues from both sides of the aisle give great deference to his debating skills. He can speak extemporaneously on wide-ranging subjects of law and complex bills without reference to notes. His remarks are peppered with clever quips, and his creative positioning of issues makes his arguments both devastating and funny. His aphorisms have made him a bit of a media go-to for irreverent commentary on the public record, like a modern-day legislative Yogi Berra. Even as a junior state rep from Massachusetts, the New York Times favored his quotes over more prominent but linguistically guarded figures. “This bill is the legislative equivalent of crack,” Frank said in a 1986 debate on a bill funding increased border protection from drug traffickers. “It yields a short-term high but does long-term damage to the system and it’s expensive to boot.”4
While winning verbal jousts and painting colorful metaphors may provide entertaining sound bites that make for great play on the evening news, for Frank it’s a diversionary tactic to shunt discussions on substantive issues to a controlled version of reality intended to spare him the need to consider uncomfortable truths. When challenger Richard Jones opposed federal rent subsidies for housing and price controls on energy during a local candidate forum, Frank countered by labeling his position as “cruel” to the elderly.5 When a Harvard law student asked a straightforward question of how much responsibility, if any, Frank took for the economic crisis as chair of the House Financial Services Committee, Barney struck back defensively. “This is the right-wing attack on liberals’ attempt to stop regulation,” he spewed as part of an aggressive if not entirely sensible tirade that would have knocked the most seasoned political brawler off balance.6 He never answered the question, and successfully evaded any hint of culpability by effectively trampling a forum of free speech with verbal jackboots.
Frank used his considerable brainpower and verbal acuity not to create and build, but rather to shift and maneuver. Instead of learning the business of construction and the economics of free-market incentives to create housing, he pushed government subsidies and rent control. Rather than learn about efficient production operations in the face of a globalizing economy to support local manufacturers, he introduced legislation calling for a boycott of products made by a nonunion textile plant that employed over 27,000 American workers across nearly 60 facilities.
Frank is known to read voraciously, often reserving his luggage space on trips for stacks of unread newspapers and legislative documents—even reading while standing at the House urinal. His appetite for words is superseded only by his physical hunger. He has often been seen ravenously gobbling down food at campaign events, and has been heard privately scoring the quality of his hosts by the quantity of their buffets.7
At five foot 10 and weighing up to 270 pounds, Frank is frequently seen with food stains on his ill-fitting suits. Thaleia Schlesinger said Barney’s shoes looked like “a dog ate them.” She later agreed to serve as press secretary for his first congressional campaign only after he agreed to buy three new suits.8 A 1974 campaign poster promoting his reelection to the Massachusetts Statehouse depicts a rumpled Frank, unshaven and sporting Elvis Costello–style glasses with Coke-bottle lenses under the caption, “Neatness isn’t everything.”
Born Barnett Frank in Bayonne, New Jersey, in 1940, Frank was reared on a fetid stew of socialistic New Deal politics and outright criminal corruption. His parents, Sam and Elsie, were committed liberals and devoted Roosevelt Democrats. A 1958 photograph shows Barney and his mother posing delightedly next to a seated Eleanor Roosevelt during an Israel Bond drive event in their hometown.
The adulation clearly rubbed off on the young Frank—and then some. In high school, Barney attended a conference at Columbia University for aspiring journalists. Instead of bringing copies of his school newspaper to distribute to his fellow attendees, Barney handed out issues of the Communist paper, the Daily Worker.9
His myopia seems to have taken hold at an early age as well. One day Barney came home from school with a note that said he needed glasses. When his mother asked, “Why didn’t you ever tell me that you couldn’t see well?” he replied, “I thought everybody saw things that way.” Although Barney got glasses, they seem not to have much clarified his view of the world.10
In one early incident while working as an unelected point man for Boston Mayor Kevin White, Barney assigned Colin Diver, who would later become president of Reed College in Portland, Oregon, to work on preparing a rent control proposal. “I had the benefit of some pretty good training in economics and I had the benefit of conversations with some economist friends of mine,” Diver said. He told Barney that rent control was bad economics and that it was not going to work, and he predicted that it would have a long-term disastrous impact on the housing market.”11 Barney dismissed Diver’s concerns and pushed the initiative forward anyway. The need for popular giveaways to a clamoring constituency, along with Barney’s own growing sense of infallibility, outweighed objective economic reality.
When Barney was growing up, his father, Sam, owned a truck stop near the Holland Tunnel entrance in Jersey City called Tooley’s. It was a unique full-service facility for its day, with diesel fuel, a weigh station, restaurant, and bunkhouse where weary drivers could spend some horizontal time enjoying a little JC hospitality. Sam also had ties to organized crime. The land behind the stop was a well-known dumping ground for dead bodies and was often searched by New York cops investigating murders and mob hits.12
Sam’s older brother, Harry, owned a local car dealership. In 1946, he was granted a city contract to supply municipal vehicles in return for kickbacks to members of Frank “Boss” Hague’s Jersey City political machine with purported ties to the Mafia, as well as the teamsters and longshoremen’s unions. Sam acted as an intermediary of some sort in the deal and spent a year in jail after refusing to testify before a grand jury as a material witness.13 At the age of only 6, Barney would visit his dad behind bars and later expressed great admiration for his father’s strict adherence to the Cosa Nostra’s code of omertà, or refusal to cooperate with authorities against a known criminal conspiracy.14
When Sam died at the age of 53, Barney took a year off from college to help resolve the family’s affairs. He reports that members of the Mafia were very supportive during the ordeal. Frank “Funzi” Tieri, who later rose to head the Genovese crime family, attended brother David Frank’s bar mitzvah when Barney was 23. It’s among these formative influences of socialist-leaning politics and mob-centered criminal activities that Barney had a chance to learn early firsthand lessons on the power of an influential position, and extracting unearned value from it.15
In 1966 during an aborted attempt to earn a doctoral degree, Frank received his draft notice. He responded with documentation showing he was a graduate student and received a deferment. The draft board, which was run by local New Jersey politicos, then mysteriously lost or misfiled Frank’s record. He was never again called up despite having suspending his studies shortly thereafter.16
Abandoning his doctoral studies, Frank cut his political teeth on Boston Mayor Kevin White’s staff as his nonelected, de facto deputy. According to White, Barney, like White himself, is a power collector—someone who gloms onto everything he can get his hands on, someone who reaches out for more power to do more things—in contrast to a power user, someone who wants only the power necessary to do his job.17 Boston Globe reporter Chris Lydon recalled, “Barney was born to be a first-class public man.”18 As we will see, that description is a contradiction in terms.
Frank seemed to thrive on hardball city politics and quickly became known as Mayor White’s political troubleshooter. When demonstrators gathered on the Boston Common to protest the city’s midnight curfew, Frank showed up at 3:00 A.M. to coordinate the police bust. Barney frequently testified on behalf of the mayor at city council meetings, often fielding hostile questions from the elected representatives. When White ran for governor, Frank ran the city of Boston, making day-to-day decisions.
In 1971 Congressman Michael Harrington offered Barney a job as administrative assistant in his Capitol Hill office. Figuring it was a golden opportunity to learn the inner workings of an even larger power forum, he accepted. “The only legislation that I ever worked on in terms of trying to get something passed was to make sure we got ‘three deckers’ for the city of Lynn,” Barney recalled. “It was a program for one- and two-family houses, a federal loan program. I remember going to a member from Massachusetts on the Banking and Currency Committee, Peggy Heckler, to do it.”19 It was a succulent taste of using political pull to bestow unearned tax dollars on the undeserving in the name of social progress in housing—a taste that would later never seem to be sated.
When State Representative Moe Frye retired from Massachusetts Ward 5, Frank decided to run for the open seat. At the time he looked at it as a stepping-stone to greater political influence in the vein of Michael Dukakis and an opportunity to advance his social causes while honing his political maneuvering skills. Since 1972 was the first year 18-year-olds were eligible to vote, Barney tapped into the mass of young antiwar Boston University students in his ward, winning the general election with a solid 60 percent of the vote.
Loud and controversial, Frank lost no time backing extreme issues in the Statehouse, generating plenty of public notoriety and name recognition in the process. He sponsored bills to legalize marijuana use, to repeal state obscenity laws, to promote gay rights, and to establish adult entertainment zones with legalized prostitution. All were soundly defeated despite some colorful debate.
“Mr. Speaker,” Barney pronounced on record during a legislative session in characteristic form, “it is true that I have introduced bills relating to pornography, gambling, prostitution, adultery, marijuana, and homosexuality. But I am going to make a commitment to my colleague from New Bedford. I will keep on trying until I find something he likes to do.”20
Later, reflecting on his terms in the state legislature, he remarked, “There is no question that the Massachusetts House in those days was a complete dictatorship,” adding, “I say benevolent dictatorship, which is the best form of government.”21 It is an odd attitude for someone from the state that threw tea in the waters to protest King George, and one he would carry forward to the U.S. House of Representatives: that the politically powerful have a better, more expansive view of their subjects from the seat of their throne and that they should make the rules for the rest of us, because we don’t know what’s in our own collective best interest.
Frank’s next step up the political ladder was nearly a matter of divine intervention. In 1980 Pope John Paul II got word that one of his Jesuit priests was active and vocal in support of liberalized abortion laws. The kicker was that the priest, Father Robert Drinan, happened to be a five-term Democratic congressman from Massachusetts. The Pope immediately invoked a heretofore unenforced papal law prohibiting priests from holding secular public office, effectively preventing Drinan from seeking reelection and opening up the seat to all comers.
Bored with the state legislature and facing what a biographer called “a mid-life crisis,”22 Frank threw his hat into the ring and ran in a crowded field as Drinan’s handpicked successor. He won the primary, but it proved to be a tough year for Democrats in the general election. Down-home Jimmy Carter was helpless before powerfully charismatic Ronald Reagan and a tide of conservative voters in the wake of high inflation, gasoline shortages, and rampant unemployment. As doomsday pundits decried the end of American prosperity, Reagan’s campaign posters exclaimed, “Let’s make America great again.”
Barney explained to voters that the conservative Reagan position was that government takes care of the basics, such a cleaning the streets and providing police, but that beyond that it is up to private charity to help people in need. The Reagan administration’s policy, he said, reflected the credo of David Stockman, director of the Office of Management and Budget: “Nobody is entitled to anything.”23
Frank was right about Reagan’s outlook on the role of government—which matched Ayn Rand’s. Rand expressed it through Howard Roark, the hero of The Fountainhead, who said, “This our country. The noblest country in the history of men. The country of greatest achievement, greatest prosperity, greatest freedom. This country was not based on selfless service, sacrifice, or renunciation, or any precept of altruism. It was based on a man’s right to the pursuit of happiness. . . . Look at the results.”
Frank’s outlook? Ask Atlas Shrugged’s Wesley Mouch: “. . . protect the property of the rich and give a greater share to the poor . . . cut down the burden of your taxes and provide you with more government benefits . . . lower prices and raise wages . . . give more freedom to the individual and strengthen the bonds of collective obligations . . . combine the efficiency of free enterprise with the generosity of a planned economy.”
But Barney Frank was always more interested in such promises than in founding principles. In a 1991 comment about the document he swore to support and defend against all enemies foreign and domestic, he quipped, “There’s too much Constitution worship in this country. It is a good document, but separation of powers is a bad idea. Divided government doesn’t work.”24
Frank’s demonization of Reagan’s individualist ideals must have resonated just enough in a district with constituents seeking free handouts to sneak past the national conservative bulwark. With an overwhelming advantage, including high-profile endorsements and an historically solid Democratic constituency, Frank eked out a narrow victory against his Republican opponent, winning just five of the 23 cities in the district.
By the time Frank came to Washington, he was leading a conflicted personal life, unable to come to terms with a personal reality that nearly derailed his political career—his homosexuality. Convinced it would quash his national political ambitions, Frank suppressed the truth. He came out of the closet to just a few friends and family members. Staggering under the burden of concealing a double life, he was caustic and belligerent to his colleagues and staff. He comforted himself with an almost manic approach to his work, trying to soothe his private inner turmoil with a public ointment of grandiose rhetoric about helping the less fortunate, including statements about how the “hungry three-year-olds in America bother me a great deal.”25
On August 23, 1989, the truth broke through Frank’s walls of denial. The front-page headline of the Washington Times proclaimed, “Sex Sold from Congressman’s Apartment,” with the subhead, “Frank’s Lover Was ‘Call Boy.’ ” The article ran on the top right side of the page, next to a color photo of the Capitol Hill basement apartment where Barney lived. It began, “A male prostitute provided homosexual and bisexual prostitution services from the apartment of U.S. Rep. Barney Frank on Capitol Hill on a periodic basis from late 1985 through mid-1987, the Washington Times has learned.”26
In the ensuing ethics investigation, Barney acknowledged that in the spring of 1985 he had answered an ad in the Washington Blade, the local gay weekly, and paid for sex several times with a male prostitute whom he identified as Stephen Gobie. Barney admitted that he had written letters on congressional stationery to Gobie’s probation officer in Virginia stating that he had hired Gobie as a personal aide. Barney also admitted that he allowed Gobie to use his car and his apartment when he was out of town and affirmed that he had used congressional privilege to fix some parking tickets that Gobie had incurred.27
Frank acknowledged that he had broken the law by patronizing a prostitute,28 but maintained that he had not violated any congressional ethics rules.29 “It turns out that I was being suckered. He was, among other things, a very good con man,” he said in his own defense.30
The ethics committee concluded that Frank’s official memo contained misleading statements in an attempt to reduce Gobie’s probation sentence for a previous conviction on cocaine possession and producing child pornography. They also concluded that he improperly used his position for personal purposes to clear Gobie’s tickets.31 The House voted 408 to 18 to accept the ethics panel’s recommendation for a reprimand. In the 13 years and seven sessions since Congress established it as an alternative penalty to censure, Frank was just the fifth member of Congress to receive a reprimand from his peers.
While, incredibly, violations of the law do not themselves constitute violations of Congress’s ethics code, it’s difficult to comprehend how Frank could ever think his conduct reflected creditably on the House, or that he had abided by either the letter or the spirit of the code. In the double-speak world of Barney Frank’s relativism, apparently there are no absolutes. The truth is what he wants to believe. It is a theme he’ll use again when defending his role in torpedoing the U.S. economy.
Frank’s brush with the ethics inquiry did not deter him. As a senior member of the House Banking Committee already rising through the ranks, he wrote a letter to the CEO of Fannie Mae—the giant government-backed housing finance corporation that was under the jurisdiction of his powerful committee for oversight—asking for his help in getting a job for a man named Herb Moses. Moses was subsequently hired by Fannie Mae as a financial analyst.32
At the time Barney and Herb were dating.33
Frank’s “Noble Experiment” in Housing
Barney Frank’s story isn’t unusual in Washington, but his timing was impressive. He found himself in power at the exact moment when decades of political and philosophical corruption came to a climax that nearly caused the collapse of the American economy.
Ayn Rand’s masterpiece, Atlas Shrugged, is set in an economic collapse amid such corruption. There are plenty of corrupt government officials like Frank in Atlas, first among them Wesley Mouch, the Top Coordinator of the Bureau of Economic Planning and National Resources, who we’d now call an economic czar. A mere congressman, Frank had to confine himself to coordinating just the U.S. housing and financial industries. But he’s a match for Mouch when it comes to the economic devastation wrought by his corruption.
In Atlas, the cause of the collapse of the economy is “the strike of the men of the mind” led by John Galt. When one by one, the most able businessmen withdraw from the economy and take sanctuary in Galt’s Gulch, the economy slides into disaster. Nothing Mouch and his fellow bureaucrats can do will reverse the decline. Galt’s strike succeeds in his goal to “extinguish the lights of the world” because a modern economy can’t be run based on Mouch’s—and Frank’s—rotten philosophy.
The core of this philosophical corruption is altruism—or as Frank calls it, “equality.” Yes, these words connote noble notions of charity. But to be noble, charity must be voluntary, or else it is simply theft. Mouch and Frank are talking about using the police powers of the state to seize the wealth of some people for the benefit of other people, where they get to decide who gets his wealth seized and who gets the benefit. As Rand explained, “Whoever claims the ‘right’ to ‘redistribute’ the wealth produced by others is claiming the ‘right’ to treat human beings as chattel.”34
We know in great detail Rand’s views on government-subsidized housing (Frank’s altruistic specialty) because the concept is at the center of the climax of her first major novel, The Fountainhead. The individualist architect hero Howard Roark volunteers to design a public housing project without compensation, but only because he thinks he will enjoy the engineering challenge. Roark says at the outset, “I don’t believe in government housing. I don’t want to hear anything about its noble purposes. I don’t think they’re noble.”
Roark explains,
“I think it’s a worthy undertaking—to provide a decent apartment for a man who earns fifteen dollars a week. But not at the expense of other men. Not if it raises the taxes, raises all the other rents, and makes the man who earns forty live in a rat hole. That’s what’s happening in New York. Nobody can afford a modern apartment—except the very rich and the paupers.”
Ultimately Roark’s housing project fails despite his brilliant engineering. When bureaucratic interference destroys his design and thwarts its economies, Roark dynamites the building site. A spectacular blowup to be sure, but it was only one building. The blowup triggered by Frank’s bureaucratic interference occurred on a nationwide scale, and the panic it induced spread throughout the global economy. It will take many years for the world to recover from it.
When the end came for Frank’s housing bubble, the crowning irony was that the final lethal blow to the system came not from corrupt politicians exploiting the rich, but from corrupt businessmen who became rich beyond the dreams of avarice by figuring out how to exploit corrupt politicians. Just as in Atlas Shrugged the corrupt railroad executive James Taggart forged an unholy alliance with bureaucrats like Mouch, corrupt financiers such as Countrywide’s Angelo Mozilo (whom we met in Chapter 4, “The Parasite”) rode on the easy-money mortgage gravy train made possible by politicians like Barney Frank—and leveraged it up until they drove it straight off the cliff.
Rand once wrote,
To a . . . primitive socialist mentality—a mentality that clamors for the “redistribution of wealth” without any concern for the origin of wealth—the enemy is all those who are rich, regardless of the source of their riches. Such mentalities, those aging, graying “liberals,” who had been the “idealists” of the 30’s, are . . . frantically evading the spectacle of what kind of rich are being destroyed and what kind are flourishing under the system they, the “liberals,” have established. The grim joke is on them: . . . The collector of their efforts is not the helplessly, brainlessly virtuous “little man” of their flat-footed imagination and shopworn fiction, but the worst type of predatory rich, the rich-by-force, the rich-by-political-privilege, the type who has no chance under capitalism, but who is always there to cash in on every collectivist “noble experiment.”35
If Frank was the last link in a long, corrupt chain, let’s go back to the first link.
Franklin D. Roosevelt created the Federal Housing Administration (FHA) in 1934 as part of his New Deal initiative. During the Great Depression, banks were all but frozen. Mortgage loans, if they were made at all, required 50 percent equity with repayment terms of just three to five years. During this time, less than half of all households owned their homes.
The FHA was born to provide insurance in the form of a government guarantee to give banks confidence in lending on more liberal terms, including significantly lower down payments and 30-year amortization schedules with fixed rates of interest. If a homeowner with an FHA-backed loan defaulted, the federal government would reach into its deep pockets as the ultimate backstop and make the lender whole.
Over time, private mortgage insurance companies came to largely fill this role. Yet despite having outlived its initial usefulness in successfully bridging the scale gap long enough for private enterprise to take hold, the FHA continues to exist in a larger mutated form. As always, once government gets a toehold in the commercial markets, it grows like a fungus. In 1938, the FHA created the Federal National Mortgage Association—now famous by its nickname, Fannie Mae—to sell government-backed bonds and use the proceeds to purchase FHA-guaranteed loans, further institutionalizing the role of government in the private housing market.
From 1968 through 1970, Congress treated the already morphing mass of federal housing programs to a legislative injection of growth hormone. Fannie Mae spawned Ginnie Mae and Freddie Mac, creating an alphabet soup of parallel agencies. Fannie was then spun off as a strange hybrid—a shareholder-owned company trading on the New York Stock Exchange, yet chartered with a “public purpose” and incestuously guided by the department of Housing and Urban Development. To ensure its survival in the savage world of competitive free markets, the enfant terrible also retained special government-sponsored privileges, including tax breaks and an implicit government guarantee of its obligations.
These new so-called government-sponsored enterprises (GSEs) were also given free rein to buy up nongovernment bank mortgages, assuming they met certain standards, including loan limits and credit quality, making them what would henceforth be known as “conforming.” Suddenly, commercial banks had a way to offload their mortgages from their books, clearing the way to add new ones and earn new fees. Over a period of years, banks transitioned from lenders who directly retained risks and reaped rewards from their portfolio of investment assets to mere originators of standardized loans passed through to the GSEs for a cut of each transaction. The GSEs, in turn, were permitted to pool conforming loans and package them for further resale to private investors, spawning the first mortgage-backed securities (MBSs), and, in the process, create even more lending capacity.
In its pure form, the MBS is a valuable market innovation. It diversifies away the risk of mortgage default by any individual homeowner, which is inherently difficult to predict. Collect a hundred or so similar loans into a portfolio, and the law of large numbers ensures that whereas any one individual borrower may fall on hard times, the odds that everyone will simultaneously default are small. Investors could buy a share of a mortgage pool and earn a portion of the total profits while spreading the risk of individual default among the entire investor syndicate. To further reduce investor risk, the sponsoring GSE would backstop any losses with a guarantee, making mortgage-backed securities a safe and liquid investment for individuals, institutions, and pension funds alike. Suddenly the housing industry, previously constrained by local lending capacity, was now limited only by the appetite of a gargantuan base of global investors.
And sure enough, during the 1970s as MBSs took hold, home ownership rates rose steadily from 63 percent to 66 percent in 1979. Total national mortgage debt rose modestly as well, from $1.2 trillion in 1970 to $1.9 trillion by the end of the decade. Yet home prices were remarkably stable. The capital markets provided a natural limit to the amount of funding available based on the risk profile of the borrower. As potential homeowners saved responsibly and generated stable income, they could qualify for a mortgage. Others simply rented.
The 1980s ushered in the Reagan era of deregulation, which Frank and his bureaucratic ilk decry as the root of our current mess. The reality is quite different.
In the deregulated world of MBSs, lenders had a larger tool kit of financing options and were able to serve a broader segment of the market with more flexible and customized products while retaining the ability to obtain compensation commensurate to the risks they took. Far from causing a stampede of high-risk loans and a wave of abusive lending practices, the effects were modest at best. Home ownership remained stable during the 1980s, with subprime funding accounting for a tiny fraction of loan volume. So much for the big, bad bugaboo of deregulation. It was the eventual governmental intrusions into that deregulated market under misguided notions of social subsidy—policies originated, pushed, and approved relentlessly by Barney Frank throughout his career—that led us to disaster. (See Figure 6.1.)
Figure 6.1 Home Prices versus Mortgage Credit. (Left axis) Case-Shiller Real Home Price Index; (right axis) Fannie Mae Mortgage Credit Book of Business ($ Billions). Under Barney Frank’s meddling oversight, government agencies spawned the housing bubble . . . and eventual global economic collapse.
Source: Case-Shiller Real Home Price Index, Fannie Mae 10-Ks, Congressional Record
It began when new laws in 1986 created a tax asymmetry that caused a wave of debt transfer from consumer loans to mortgages.36 Mortgage loan volume nearly doubled from a flat-line average of about $1.9 trillion earlier in the decade to $3.5 trillion in 1990. And yet homeowners seemed to have no more trouble than usual making good on their payments. The market ticked along accordingly with modest home price appreciation in line with previous decades. Fannie Mae remained a minor adjunct to the mortgage market during this time, buying primarily bread-and-butter single-family 30-year fixed-rate mortgages and never holding more than 3.5 percent of the nation’s total debt outstanding.
Yes, this seemingly subtle change in tax status of debt started a wave. But at first it was only a wave. Frank was about to make it a tsunami.
Government-Sponsored Booby Prize
Enter the Clinton era and Barney Frank’s big chance to spread the nation’s productive wealth among the least capable custodians under the banner of social fairness. The Housing and Community Development Act of 1992, co-sponsored by Frank, placed the GSEs, including Fannie Mae, under direct control of the Department of Housing and Urban Development (HUD) and disbanded their advisory board of independent experts in housing finance, actuarial science, and economics. It also authorized the HUD secretary to establish affordable housing goals for the GSEs—putting the fox in charge of the henhouse.
At the time, Herb Moses (Frank’s live-in lover and self-proclaimed “only member of the congressional gay spouses caucus”) was working at Fannie. Thanks to his relationship with Frank, Moses would rise to become assistant director for product initiatives at the very organization that Frank’s committee was charged with overseeing. According to National Mortgage News, from his senior-level perch obtained through perks and pull, Moses “helped develop many of Fannie Mae’s affordable housing and home improvement lending programs.”37
There are two ways to make housing affordable. The first is to create fundamental conditions of economic prosperity that encourage productive work and investment. As overall prosperity increases due to core economic growth, more citizens will join the ranks of homeowners with an equity investment in their abodes under rational market economics.
The second is to artificially lower the cost of housing by subsidizing those who can’t afford to buy a home priced at a fair market level. Regardless of the terminology used to couch such tactics (government guarantees, lowered down payments, or outright credits), the end result is a redistribution of dollars from people who have earned to people who haven’t—and the creation of unsustainable economic distortions that inevitably end in ruin. What Barney Frank and his utopian, quick-fix policies completely miss is that giving someone a house and expecting that person to become economically prosperous is like giving a kid a roomful of books and expecting the child to become literate. Just as literacy breeds book sales, prosperity breeds home ownership—not the other way around.
By 1995, the new law was fully in effect and HUD began jacking up the affordable housing quotas for Fannie from 30 percent to 40 percent, to 50 percent, and eventually to a peak of 56 percent just before the crash. Fannie began buying up mortgages at a furious pace. With so much home-purchasing capacity now open, lenders and mortgage originators couldn’t give money away fast enough. Fannie’s mortgage credit book ballooned from $254 billion in 1995 to $610 billion in 2000—fully 11 percent of all mortgages in the country—and it hadn’t even gotten started.
Frank wanted even more. Barney boldly proclaimed in Congress, “We have an economy that is booming and has helped many people. But it does not help everybody equally, and some people are not helped at all. . . . I think we have an obligation morally, and it makes sense economically, to help with the production of housing.38
But there was a problem. It seemed the safe mortgages were already on Fannie’s and Freddie’s books, so they had to get creative to meet their ever-increasing government lending goals. So in 2000, under Barney Frank’s committee’s oversight, Fannie and Freddie expanded their mortgage purchases to include Alt-A, A-minus, and subprime mortgages in addition to private-label securities (these are all technical terms for mortgages of less than stellar credit quality, sometimes very much less than stellar).
Alt-A mortgages have little or no borrower income or asset documentation backing them. A-minus and subprime mortgages are made to borrowers with low credit scores and a history of trouble repaying lenders. With a new government-sponsored buyer willing to gobble up these risky loans, the subprime market exploded like Barney Frank’s waistline at an all-you-can-eat buffet. What was a minor fringe product in the 1990s accounting for a mere $35 billion in debt outstanding—less than 1 percent of all mortgages—quickly reached critical mass under the GSEs’ radioactive funding injection, spawning a mushroom cloud of $1 trillion in new subprime originations during 2006—fully 50 percent of all mortgages issued.39
Meanwhile, Barney Frank was reveling in the home ownership rate as it skyrocketed to a historic high, approaching 70 percent of all households. Here was Frank’s lifelong vision coming to fruition. “It seems to me,” said Wesley Mouch in Atlas Shrugged, “that the end justifies the means.” But did Frank even understand what means he was employing?
Frank didn’t see that by forcing home ownership above 60 percent, you are, by definition, pushing loans on the bottom 40 percent of income earners who probably can’t afford to repay them (or even to cover the expenses of home ownership, such as taxes and insurance). In 1995 this represented 20 million households earning less than $27,000 annually. Many earned much less. Is it reasonable to lend the median home value of $120,000 to a family bringing in just a few hundred dollars a week and expect anything less than disaster?
Frank didn’t see, because he didn’t even look. As Wesley Mouch’s fellow bureaucrat Eugene Lawson put it in Atlas Shrugged, “We must not let our vulgar difficulties disrupt our feeling that it’s a noble plan motivated solely by the public welfare. It’s for the good of the people. People need it. Need comes first, so we don’t have to consider anything else.”
But consider this: With a combination of low rates and easy money available to nearly all comers, buyers began bidding up properties across the nation, exacerbating the affordability gap even further. As prices rose, the GSEs lowered their standards further and bought even more mortgages to achieve their politically forced housing goals. This renewed buying in turn fed the already out-of-control process like a financial Chernobyl. By the end of 2003, Fannie alone held $2.2 trillion in mortgage debt, nearly one in three mortgages in the country. It was a sum larger than the entire housing loan market just 20 years before.
Warning flags began to pop up, followed by signal flares, then alarm bells. Undaunted, Frank ignored the facts, belittled his critics, and pushed for even more. Despite a complete lack of experience in any area outside of politics, he felt he knew better than everyone else on almost any subject he touched upon. “Expertise is sometimes more overrated than the dollar,” he once said, delivering another intimidating but logically screwy epigram in a debate.40
In 2003, proposals were already being bandied about to increase oversight on the GSEs. When asked by Mortgage Banking magazine in November about the odds of mortgage regulatory reform passing his committee by the end of the year, he responded, “Virtually 100 percent negative,” adding, “[We] have a lot of other things to deal with.”41 These “other things” included increasing the FHA limits and “doing something about down-payment assistance for low-income people for homeownership.”42
He went on to defend his opposition to the proposal by the U.S. Treasury—now in Republican hands—to rein in the GSEs by saying that “it interferes with housing. Virtually every entity we deal with in the United States that cares about housing—whether it’s low-income housing advocacy groups, community development groups, Realtors, the home builders—they are all opposed to the Treasury proposal as one that would interfere with housing.”43 Since when are Realtors, home builders, and special-interest groups representative of “every entity” in the United States that has an interest in housing? What about 160 million taxpaying households, the majority of whom were doing just fine without Frank’s wealth reallocation programs? Isn’t invoking the beneficiaries of a housing bubble to justify the government subsidy spigot like citing defense contractors against reducing the size of our military? Apparently, what constitutes “interference” to Barney Frank is what others call laissez-faire capitalism. “Hands off” means not interrupting the flow of money from the producers to the parasites through Barney’s hands.
The twisted defense of socialistic policies and denial of economic reality wouldn’t stop there. In October 2004, Gretchen Morgenson ran an article in the New York Times quoting analyst Josh Rosner, presaging with deadly accuracy the results of Fannie’s relaxed underwriting standards. “The move to push homeownership on people that historically would not have had the finances or credit to qualify could conceivably and ultimately turn Fannie Mae’s American dream of homeownership into the American nightmare of homeownership where people are trapped in their homes,” Mr. Rosner said. “If incomes don’t rise or home values don’t keep rising, or if interest rates rose considerably, you could quickly end up with significantly more people underwater with their mortgages and unable to pay.”44
Later that same week in a subcommittee hearing on Fannie Mae, Frank acknowledged that he had read that very article but then dismissed it with a pabulum of blather. “There was an article by Gretchen Morgenson in the New York Times on Sunday that said the problem is that they have done too much to bring housing to people who really cannot afford it and should not be given this chance to own the housing. Her article said the problem here has been they have overextended by lending money to people who were below the economic level that should be there,” Frank stated for the record. “I think what we need to do is to go forward as we were ready to do with a tougher safety and soundness regulator, but in ways that do not impinge on Fannie’s and Freddie’s ability to do a better job than they have been doing with affordable housing and to continue to do the job they have been doing with regard to housing in general.”45
But national integrity of the financial system was not Barney’s goal. Later in the same hearing Fannie’s chief regulator, Armando Falcon, director of the Office of Federal Housing Enterprise Oversight, seemed desperate to warn the subcommittee of a serious and looming financial crisis before it was too late. During questioning, Frank cut off the witness and refused to hear about the safety and soundness issues that might restrict his ability to continue funneling federal support to an ever-increasing spiral of socially altruistic housing inflation.
Mr. Frank: But I have seen nothing in here that suggests that the safety and soundness are at issue, and I think it serves us badly to raise safety and soundness as a kind of a general shibboleth, when it does not seem to be the issue.
Mr. Falcon: No, I think our report absolutely does implicate safety and soundness.
Mr. Frank: Is the safety and soundness at risk now?
Mr. Falcon: Are they at risk of becoming insolvent right now? No. We have an agreement with the board in place that will address these problems, provide an adequate capital cushion. We think we—
Mr. Frank: That is the answer. The rest is just rhetoric.
According to Fannie’s annual report, “Determining our loan loss reserves is complex and requires judgment by management about the effect of matters that are inherently uncertain.”46 Even while Frank was busy bludgeoning the prophetic whistle-blowers in his committee hearing, those reserves totaled just $745 million on guaranteed loans of over $2.3 trillion. Put another way, Fannie reserved just 30 cents of every $1,000 to pay for any potential losses due to borrower defaults on loans it guaranteed—just 0.03 percent. Private-sector banks typically hold 8 percent, or $80 per thousand.47 Residential mortgage delinquencies and outright foreclosure would later top 14 percent, or nearly 500 times higher than accounted for by Fannie’s reserves.48 To borrow Frank’s own bombast, “on what planet” is this sound judgment?
The chairman of the subcommittee, Republican Michael Oxley, did hear the warning and in April 2005 introduced H.R. 1461, the Federal Housing Finance Reform Act of 2005. The bill would have effectively removed the GSEs from HUD control and placed them under a new, stronger regulator with the ability to raise capital reserve requirements to ensure safety and soundness, to establish loan limits, and to reduce affordable housing goals. Additional amendments were offered by Republicans to further impose capital strictures on the GSEs, and to dispose of assets or liabilities that pose a risk to the financial system. The amendments were defeated.
The bill itself passed the House, with Barney Frank voting “Nay” on additional regulation. It eventually died in the Senate, where Republicans held the majority but lacked the 60 votes necessary to push the bill past the Wesley Mouch think-alikes Chuck Schumer and Christopher Dodd.
Frank again went on record with some of the most delusional statements of the decade. In front of Congress on June 26, 2005, he made the case for further home ownership subsidies, donning his ephod as an oracle of housing economics.
Homes that are occupied may see an ebb and flow in the price at a certain percentage level, but you will not see the collapse that you see when people talk about a bubble. So those of us on our committee in particular will continue to push for homeownership. Obviously, the market will take care of a large number of people, but it will not take care of everybody. And if we are going to expand homeownership, there will have to be a sensible set of public policies, such as reducing the down payment in the FHA. . . . There are also a variety of advocacy groups that work with us so that we can make homeownership available to people who might not on their own in a market situation be able to afford it.49
Yes, by all means, Comrade Frank, let’s make home ownership available to those who can’t afford it. Let’s reduce the already insignificant 3 percent FHA down payment to zero to make sure we can get even more penniless, financially incapable citizens participating in our socialist vision of free assets for the people at the expense of the rich. Then, when it all blows up, we’ll brand the victims as reckless perpetrators of the collapse even as we evict them from their homes, shatter their already fragile credit scores, and put them through the humiliation of bankruptcy or outright financial ruin.
Then, even after housing prices had peaked in late 2005, driven up by government interference in the free market, even as defaults were on the rise and the country’s financial system was teetering on the edge of collapse, Frank spoke out in support of H.R. 5121, the Expanding American Homeownership Act of 2006. The bill would further degrade the FHA’s already low standards to chase the dragon’s tail of home values. It eliminated the measly 3 percent down payment as unaffordable, and raised the government guarantees from 87 percent to 100 percent of the already inflated median home value. Incredibly, he insisted the bill would profit the nation. “This is a money maker bill. This is a bill that expands housing, but it will make money for the Treasury.”50
With a complete misunderstanding of how free markets manage risk, Frank made the ultimate plunge into collectivism.
We do, in this bill, extend FHA’s authority to lend to people who have lower credit scores, people who are bigger risks. And when that happens, you have to worry about higher defaults. I did not think we, the Federal Government, should be in the position of saying that, as we lend to people who are bigger risks, we should take that risk pool and make those people who are higher risks who meet their obligations pay for the people who are higher risks who don’t . . . it is not fair, and we the Federal Government should not set the principle that one low-income person or 10 low-income people who meet their responsibilities are the ones who have to make up for the low-income person who isn’t able to.51
Democratic California congresswoman Maxine Waters said about the bill’s passage that “it certainly could not have happened without my ranking member, Mr. Frank, who has the ability to see things in legislation that no one else sees.”52 Apparently he sees nonexistent profits and views risk through a kaleidoscope created by Karl Marx. In Frank’s world, smokers would be charged the same life insurance premium as nonsmokers, while Treasury bonds, stock mutual funds, and slot machines would all pay the same return.
In 2008, we experienced the full consequences of Frank’s collectivist power trip. Bear Stearns failed in March, triggering the collapse of Frank’s house of cards. On July 1, Bank of America completed its purchase of Countrywide Financial, one of the largest mortgage lenders on the planet, under severe financial distress from its headlong dash into subprime loans. On July 11, the Federal Deposit Insurance Corporation (FDIC) put IndyMac Bank—a 1997 spin-off from Countrywide—into receivership.
On July 14, a still delusional Frank—the very man supposedly most in the know on the status of the agencies he oversaw on behalf of the American people—said in a CNBC interview, “I think this is a case where Fannie and Freddie are fundamentally sound, that they are not in danger of going under.”53
On September 8, Fannie Mae and Freddie Mac were placed under conservatorship, a legal status akin to Chapter 11 bankruptcy, sparking a global financial panic. As financial fissures opened worldwide, the Wall Street Journal declared it “the worst financial crisis since the Great Depression.”54
When Fannie and Freddie were finally taken over by the government in 2008, more than 10 million subprime and other weak loans either were on their books or were in mortgage-backed securities they had guaranteed.55 An additional 4.5 million were guaranteed by the FHA and sold through Ginnie Mae before 2008, and a further 2.5 million loans were made under the rubric of the Community Reinvestment Act (CRA), which required insured banks to provide mortgage credit to home buyers who were at or below 80 percent of median income. Thus, almost two-thirds of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required by government regulations.56
On September 14, Lehman Brothers collapsed and Merrill Lynch was sold in panic to Bank of America. On September 18, Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke met with Barney Frank and other legislators to propose a $700 billion emergency bailout fund to buy toxic assets from financial institutions. Bernanke told them, “If we don’t do this, we may not have an economy on Monday.”57
On September 25, Washington Mutual was seized by the FDIC and its banking assets were sold to JPMorgan Chase for $1.9 billion. Washington Mutual was the biggest bank failure ever in all U.S. history, scuttled by $77 billion in subprime mortgages and billions more in other toxic home loans.58 Over the next few weeks the stock market would lose over one-third of its value.
After Paulsen and Bernanke’s $700 billion Troubled Asset Relief Program (TARP) was approved by Congress, Paulson decided not to buy toxic assets at all as had originally been pitched.59 Instead, he’d buy equity stakes directly in U.S. banks to make the government a direct owner in private enterprise—a move amounting to a partial socialist-style nationalization.
At the climax of Atlas Shrugged when the economy is crashing—economically and physically—Wesley Mouch and the other bureaucrats whose policies had caused it all huddled together in abject fear, thinking only John Galt could save them now. “ ‘He . . . has . . . to . . . save . . . us,’ said Mouch slowly, as if straining the last of his mind into blankness and delivering an ultimatum to reality. ‘He has to . . . save the system.’ ”
At the climax of the banking crisis of 2008, it was all in Henry Paulson’s hands. Barney Frank personally called the Treasury secretary and didn’t exactly beg him to save the system—just one little part of it: a TARP cash infusion for the Boston-based OneUnited Bank.
On November 25, 2008, following Frank’s intervention, the Treasury Department awarded $12,063,000 in bailout funds to OneUnited, which is located in Frank’s district.60
Did Barney Frank admit that his policies to expand home ownership had nearly destroyed the housing market, the mortgage market, the banking system, and the whole world economy? No—and here is the most chilling parallel between the real Barney Frank and the fictional Wesley Mouch.
As the economy is collapsing in Atlas Shrugged, a fellow bureaucrat—an especially cynical one—advises Mouch, “Whatever you do, don’t apologize. . . . Make them feel guilty.” Mouch takes the advice, just as Barney Frank did. “I’m not apologizing! . . . I’m not to blame. I need wider powers.”
How did Frank make them feel guilty? Frank’s biographer sums up Frank’s position this way: “Lenders’ ability to package mortgage loans into securities (lend money and sell the loans to passive investors) took away from lenders the incentive to be more careful in making loans.”61
How did Frank prove he’s not to blame? In an interview with Aaron Task in July 2009, Frank denied all responsibility by saying, “I wasn’t in a position to do anything . . . even when it did come up as an issue, I was critical of giving loans to people who couldn’t afford them. I wanted to help them out with housing, but with rental housing.”62
Did he really call for broader powers, even when it was his powers that nearly destroyed the world economy? In a speech to young Democrats in June 2010, he said, “You can reach out to your fellow young people and make it clear to them, that when [sic] they may not be satisfied with everything we’ve done—we’re not satisfied with everything we’ve done. The way to cure that is to give us more authority.”63
Yes, he really said that. It’s almost as though he was trying to walk in Wesley Mouch’s footsteps. Don’t let anyone tell you that life doesn’t imitate art.
Did Frank get those wider powers that Wesley Mouch wanted? Yes, at least in a way. In July 2010, President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act. It is a massively complex law of 848 pages that creates sweeping new regulatory powers for the federal government over every aspect of the American financial industry, from banking and credit cards to derivatives and monetary policy.
Frank’s name is on the bill, which assures that he will go down in history as a noble regulatory reformer, rather than what he actually was: an ignoble regulatory deformer, who used the power of government to destroy rather than to protect.
But maybe the American people aren’t as easily gulled as Frank has always expected. Bill or no bill, Frank personally no longer has the power he once enjoyed. In 2010 the Democrats lost majority control of the House of Representatives, which means that Frank is no longer chairman of the Financial Services Committee.
So the real-life Mr. Mouch wants wider powers? The voters have said, “You’ve done quite enough already, Mr. Mouch.”