Barney Frank, former member of the U.S. House of Representatives (D-MA) and chairman of the House Financial Services Committee, visited the Woodrow Wilson School as a Conor D. Reilly Distinguished Visitor from October 12-15, 2015.
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On the first day of his visit, Frank sat down to an intimate lunch with undergraduate and graduate associates of The Julis-Rabinowitz Center for Public Policy and Finance in the Prospect House Library. In the context of a quiet, shared meal, students and faculty were able to address Frank directly with questions related to their learning and research at Princeton.
The conversation covered a wide range of topics related to financial markets and policy. He first responded to a question about the financial crisis and the subsequent regulatory reforms. In his view, the single most important cause of the crisis was the weakening of the link between risk and responsibility: Financial innovations were developed without corresponding changes in regulation, and, in particular, securitization proliferated. He said that the financial reforms enacted in Dodd-Frank aimed to restore that link.
According to Frank, the reforms have already done much to make our financial system stronger. He pointed to the mandate that sponsors of securitizations must now retain on their books 5% of the value of the assets that they bundle and sell as securities. To his dismay, however, this provision does not apply to residential mortgage-backed securities, as a result of strong opposition from the industry.
Discussing the failings of credit rating agencies, Frank described them as likely “incurable.” Ideally, the rating agencies would serve the buy-side, and not the sell-side (as is currently the case); this poses a free-rider problem, however. As a compromise, the act instead made it easier for buyers to sue the rating agencies. Duplications among regulatory agencies also proved politically impossible to address. There is no justification for having both the Securities and Exchange Commission and the Commodities Futures Trading Commissions acting simultaneously, he says, but historical factors pose formidable obstacles to a possible merger.
The questions then led to a lively discussion about the government promotion of home-ownership. Frank’s views on housing, as described during the lunch, stand in stark contrast to the way he is portrayed by many of his critics. He said, quite simply: “Housing is not the way for poor people to gain wealth.” Frank has long held the view that home ownership is an oversold promise; instead, he has always been a fervent advocate for more affordable rental housing.
Frank also debunked the popularly-held notion that the big banks have biggest sway in Congress – rather, he says, community banks and other local groups have the strongest ties to voters, and therefore far more influence on Congress.
Turning to the intersection of research and policy, Frank was asked if he thought countercyclical capital requirements should ever be enacted. There is a growing body literature suggesting that the existing capital requirements exacerbate the business cycles--encouraging lending during booms, and discouraging it during recessions. With countercyclical capital requirements, banks would be required to hold higher levels of capital during booms, and lower levels during recessions. Frank argued that, while a nice idea in theory, new problems would likely arise in the attempt to enact such countercyclical requirements: first, several distinct agencies maintain jurisdiction over capital requirements, and consensus on such changes would be unlikely; second, defining the criteria for the reversal would likely be politically unfeasible; and finally, there are important international considerations (like Basel accords) that would further challenge such a dramatic change.
“It was nice to be able to have an up-close-and-personal experience with him,” says Princeton University PhD candidate in economics Jason Ravit. “It gave me a clearer idea of how the things we’ve learned about in class are actually translated into policy, and how just because something works in theory doesn’t mean that it’s politically feasible.”
At a public lecture in McCosh Hall later that afternoon, which was organized by the Woodrow Wilson School for Public & International Affairs, Frank spoke openly with students and faculty about his experiences as chairman of the House Financial Services from 2007-2011, and his views on the current troubles plaguing our country’s political system; he insisted that more needs to be done to address voter frustrations that stem from surging wage and wealth inequality, citing possibilities that include a reduction in military spending and an end to the “war on drugs.”
Frank shared his time generously with wit and good humor, and everyone involved with The Julis-Rabinowitz Center for Public Policy and Finance thanks him for his visit.