September 25, 2008

Barney Frank, the 14-term congressman from Massachusetts’s Fourth, might be the most well-connected and secure Democrat in Washington. Ideologically speaking, however, for the past decade or so he’s seemed like one of the Left Behind. Frank hails from the retro-liberal wing of the Democratic Party that most thought had gone the way of the dodo after Bill Clinton’s second term. And yet, the congressman now finds himself smack dab in the middle of the financial meltdown and, in many ways, better positioned than at any point in recent memory for his political day in the sun.

With the stock market boom in the late “€˜90s, and with much of the country experiencing that rising feeling, Democratic high-ups began to sense that an actual “€œsocial democratic”€ party would quickly lose its relevance. The liberals of yore had once talked seriously about achieving income equality, protecting American industries, and had warned of the “€œmarket failures”€ that would wreak havoc in the absence of a large federal bureaucracy. The Clintonites, backed by the “€œneoliberals”€ (in both meanings of the term), tasked themselves instead with spurring on the growth of global capitalism. And to achieve this end, they were willing to dispense with many of the liberal shibboleths of the past”€”Clinton deregulated financial markets, allowed for the “€œcreative destruction”€ of many traditional industries, and didn”€™t pay too much mind to the exploding salaries of the CEOs.

Slick Willy’s promise that “€œThe era of big government is over“€ didn”€™t quite mean that the welfare state would be repealed, or even diminished in size, but the reformed American Left was now less concerned with wealth redistribution than with “€œequity”€ and the management of “€œdiversity.”€ “€œNeosocialism,”€ in Peter Brimelow’s use of the term, might still have been socialism, but one that had made its peace with globalization, the tech boom, and Allan Greenspan.  

Many a left-leaning neocon had supported Clinton in “€™92 in hopes that he might become a Scoop Jackson-esque centrist hawk, taking his cues not from The Nation or the McGovernites but The New Republic and the Democratic Leadership Counsel. By 1999 Norman Podhoretz was writing in the pages of NR that this transformation had, in fact, come to pass. 

Standing athwart most of this was Barney Frank.  

As Clinton wanted to “end big government,” Frank was hoping that it was just getting started. As Clinton’s “€œcommittee to save the world“€ was lauded for its enlightened management of global capitalism, Frank was still interested in income inequality. While most everyone kneeled at the Temple of the Fed and High Priest Allan, Frank was a doubter.

Frank’s stature within the Democratic Party was secure, but his reformist Marxism was, like, sooo 20th century. He earned some postmodern cred as an “€œopenly gay”€ congressman, but that was about it. 

But the times they are a-changin”€™, and as the financial crisis has unfolded over the past two weeks, it’s starting to seem more and more like the future might just belong to Barney. 

First off, Frank is the chairman of the House Financial Services committee, which oversees laws and regulations related to banking, real-estate, HUD, the Federal Reserve, and Freddie and Fannie”€”put simply, just about everything related to the financial crisis. A Washington naïf might suppose that someone thus positioned would be, say, held accountable for the whole mess. But, of course, this isn”€™t how things work, as federal bureaucrats are usually quite good at turning disasters of their own making into opportunities for the expansion of their power. And so it is with Barney…

This week, Frank, along with Chuck Schumer (D-NY), is leading a congressional inquiry in which they”€™ll make recommendations for the creation of a new federal agency modeled on those of the New Deal (since, you know, FDR’s Fannie and Freddie have been working out so great!) This new entity would not simply take on bad debt, as the Treasury and Fed are already doing, but would actually invest in financial institutions in order to “€œstabilize”€ (read: “€œboost”€) commodity and stock prices. In Frank’s words, “€œWe need something big enough, strong enough, stable enough to buy [assets] and see some more value in them.”€ Quite. 

When the crisis first hit and the Democratic controlled Congress announced their intention to launch a probe, many expected a hyper-partisan “€œshow trial“€ to take place, in which lots of greedy CEOs and perhaps even Treasury Secretary “€œHank”€ Paulson, would get paraded and berated. But as the week went on, it became clear that, at least on the issue of financial bailouts, Barney, Nancy, Hank, and even Dubya, all get along quite swimmingly, thank you. In the debates on Iraq, Democrats have lamented that Bush is putting the future of average Americans in danger with his humongous war budgets. And yet when it comes to bailing out financial institutions, they”€™ve put up few roadblocks to plans that will eventually cost far more than our Mesopotamian boondoggle.  

In a little over three months, Paulson will be gone. The agencies he will have helped established, however, will last for decades, and if the holdovers from the New Deal and Great Society are any example, they will be virtually impossible to dismantle. Moreover, in their eagerness to “€œact now”€ and prop up stock prices, Bush and Paulson will, no doubt, grant the Demcratic Congress a bone or two”€”such as allowing the prospective organizations regulatory powers over corporate profits and CEO salaries and generally establish bureaucratic fiefdoms for the allies of Frank and Schumer. The fact that Paulson speculated about the government not simply bailing out institutions but literally buying up toxic mortgages”€”socializing much of the real-estate market, having the government literally own large swaths of commercial property”€”hints at the kind of power these new organization might soon wield. 

The fact that this kind of socialist resurgence is even possible derives not simply from the fact that people like Frank are well positioned in Congress but also that the Bailout Lobby is getting almost no pushback whatsoever. Bush is “€œworking hard.”€ Obama is holding out for some add-ons on the final bailout plan, like CEO salary caps and cash for mortgage holders. McCain is incoherent, as usual, and his actual proposals for things like a new organization dedicated to “€œearly intervention”€ in financial markets reveal the true character of this supposed belt-tightening reformer. With the exception of Ron Paul and Jim Bunning, the Republican opposition has been tepid, almost perfunctory. Put simply, most everyone seems swept up head over heels in the “€œWe Must Do Something!”€ rush. 

Beyond this typical Washington Groupthink, something more fundamental”€”and certainly surprising”€”has emerged. Whereas in the mid- to late 90s Frank and his breed parted ways ideologically with the neoliberals on globalization, the “€œend of big government,”€ and the Fed, the congressman now finds that his vision of social democracy is thoroughly compatible with”€”indeed, in many ways, identical to”€”the policy recommendations of the new Fed chief and former co-CEO of Goldman Sachs. Paulson wants to boost stocks price and mortgage-backed securities (or engage in what’s now Orwellianly referred to as “€œprice discovery.”€) If this can be done in a “€œsocially equitable”€ manner”€”by, for instance, having the government subsidize and guarantee “€œsubprime”€ loans to low-income Americans and minorities“€”well then, all the better! 

Take for instance, some of the recent actions of Frank’s Financial Services Committee. As reported by the City Journal‘s Nicole Gelinas, Frank took pains last week to scuttle plans to end so-called “€œseller-financed down payments”€ in the various subsidized mortgage programs his committee oversees. As the name indicates, a “€œseller-financed down payment”€ basically allows the seller, who’s usually a housing developer, to make the down payments, allowing the buyer to put “€œno money down”€”€”the eternal siren song of the bad deal.    

As Gelber writes, under a seller-financed down payment, the developer

…finds it easier to charge an inflated price for the house, making it more likely that the government won”€™t get its money back if the home ever goes into foreclosure. And in fact the homeowner is more likely to default: since the value of the home is quite likely inflated, he is more likely to have difficulty selling it for the price he paid if he runs into financial trouble. Having none of his own money at stake, he also has less incentive to struggle to make his payments.

As HUD official Margaret Burns testified last year, seller-financed down payments “€˜have had a significant negative impact on FHA’s business for the last several years. Loans made to borrowers who rely on these types of seller-funded gifts perform very poorly. The foreclosure rates on these loans are more than twice those of all other home purchase loans insured by FHA. Moreover, FHA experiences higher loss rates from the sale of the properties associated with these particular foreclosures, a reflection of the overvaluation that occurs with these programs.”€™

Put simply, it’s a continuation of exactly the kinds of federal schemes that led to the bubble in the first place. The “€œWho & Whom?”€ of the whole thing is pretty obvious. Developers get to keep on building, and lenders get to keep on lending, both relying on Uncle Sam to subsidize mortgages and then bailout everyone after the buyers inevitably default. Congressman Frank and his friends get to brag about how they”€™re democratizing the real-estate market and making homeownership affordable to minorities and the working class. What about the buyer? Well, he probably won”€™t be able to make his payments and will get screwed”€”but never fear, another federal stimulus check is on the way! 

This is the face of the new democratic socialism. Who knew it would have so many supporters across the political spectrum? Or that Barney Frank would emerge as its champion and as Washington’s latest man of the hour?     


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