After Barney Frank finished explaining what he felt were the root causes of the financial crisis, and detailing his plan to prevent a recurrence of said crisis, he opened the floor up to questions. I quickly vaulted over my father and the two senior citizens blocking my way to the aisle, and was 5th in line.
The first question was a good one - the guy asked how banks could be allowed to have 33-1 leverage - and "Wasn't that the crux of the problem?" Frank repeated the argument he had made earlier, claiming that the problem was all of the non-banks who were now lending money. Again, this argument doesn't hold water for me - it's like saying we need to regulate hedge funds instead of regulating banks. If a hedge fund manages to attract $50B of investor money which they then put into lousy investments and lose, that's ok - that happens - so what - someone made a bad investment and lost money. The problem is when the hedge fund manages to take that $50B and buy $500B worth of assets with it by borrowing from a bank. Then, when the $500B in assets decreases in value to $300B, the bank takes the loss and there are real problems.
The problem isn't the non-bank lenders - it's that the banks are massively levered themselves, and also that they are extending massive leverage to counterparties. You have to stop the bank from lending the hedge fund the $450B on $50B of collateral.
After a few non-memorable questions, the elderly gentleman in front of me stepped to the mic and chastised Barney Frank for being in favor of internet gambling (if you're unaware, Frank has been pushing to repeal the UIGEA, which banned many forms of online gambling, including poker.) This questioner threw out soundbites such as "it preys on the poor," "it causes suicides," and "it generates no value." Frank responded basically by calling bullshit on those claims, and by retorting that the measure of the validity of something is not the "value it creates." He cited video games as something that can easily be considered a waste of time, but should not be banned. The old guy kept trying to push dead end right wing claims, included the phrase "casino culture on Wall Street," and started to actually get booed by the crowd! People were yelling at him "This is not a debate!" "Sit down!" Jeez - this guy was not helping my non-liberal question cause - I was on deck and he was warming up the rabid masses to lynch me!
Finally, the guy accused Frank of telling people that gambling was ok, and Frank replied, "I don't want to tell people how to live - if everyone lived like me we'd have a population problem," which of course generated raucous laughter, and resulted in the old religious nut slinking back to his seat.
I stepped up to the vacant mic, and, not wanting to incite the bullying ire of Frank, took a subdued, submissive tone. "I actually wanted to THANK you for pushing to repeal the UIGEA, which, for those here who don't know, banned online poker. Also, online poker is not gambling, it's a game of skill, and if anyone doubts that I invite you to come over to my place any time with your deck of cards and your bankroll." This generated a few chuckles in the crowd, and I'm fairly sure an octogenarian behind me derisively called me a "whippersnapper."
I continued, "I also want to comment on what someone called the "casino culture" on Wall Street, and what you said was a perverse incentive structure regarding compensation. I was a trader on Wall Street for 8 years," murmurs go through the crowd.... "and I can tell you that it simply doesn't work like that. I'd be happy to discuss it with you after this, but we are actually dis-incented from taking large risks." At this point, Frank cut me off and said "I was talking about the guys at the top." Whoa - Barney - DYKWTFIA? Quick on the draw, I immediately played back at him:
"Ok - the guys at the top," I continued, "have any of them been removed from their positions as a result of the massive losses which required massive government response?" Rhetorical question - the answer is "No." Obviously, Frank didn't love this response, and retorted that they (Congress) had "capped the pay" of the banking executives.
"Sure, sure," I nodded, "That actually brings me to my question: Why were auto bondholders and shareholders asked to make concessions during their bailout negotiations while bank bondholders and shareholders did not have to make concessions - and how do you justify the massive transfer of wealth from the taxpayer to both bank bondholders, and bank shareholders in the form of common stock dividends which are STILL being paid by Citi and BankAmerica?"
Frank replied, "Well, first of all, the shareholders have made sacrifices." I didn't argue this point with him - it's a lost cause, especially when the entire room is nodding and murmuring their agreement, but this is not true: the bank stocks have gone down - but many of them should have gone to zero. What should happen when the banks need capital is that their bondholders convert their debt to equity, diluting or wiping out the existing stockholders. BAC has a $72B market cap - now, some of that includes newly issued stock, and some of it includes conversion of preferred shares - but the equity holders are lucky to have retained such a massive share of the company. Anyway, it gets better....
Frank continued, "But you forgot about one very important group," he paused for effect, "the autoworkers." Frank then went on a tangent, pandering to the audience about the plight of the poor autoworker and how crappy their situation was. Yes - it's crappy - I didn't say it wasn't, so I interrupted him:
"I wasn't supporting the methodology of the auto bailouts as much as I was criticizing the methodology of the bank bailouts," I explained, giving him another chance, but Frank just went right back into talking about what a travesty it was for he auto workers and the Union. So I interrupted him again, this time more forcefully,
"I am not talking about the auto workers. I'm talking about the BANK BONDHOLDERS." At this point, the crowd was 10 seconds from chanting "sit down! go back to Texas!" at me.
Frank replied that the bank workers were treated better than the auto workers, and finally acknowledged that their had been "disparate treatment between the auto bondholders and the bank bondholders." He later admitted that they (Congress, I presume) could not let the bank bondholders get wiped out because they feared it would set off "a daisy chain."
I returned to my seat, entirely unsatisfied, but knowing there was nothing more for me to do at this point except sit down and steam.
Another inquirer asked a great question, pointing out that WE are basically maxed out on debt - WE being the consumer, the corporate level, and the United States Treasury. He asked Frank if there was concern that we'd have trouble continuing this path of debt generation.
Frank responded with the insane claim that we had been in danger of actually paying off the national debt, which would have worried Alan Greenspan, until George Bush came along and ruined everything with his tax cuts, two wars and the recession. Frank claimed that this massively spiraling debt load was a new thing, the product of the GWB administration, and admitted that when the economy recovered, we'd need to increase taxes and decrease spending to remedy the situation.
Now, the claim that our debt reliance is new is false. Although Clinton succeeded in balancing the budget, this is not the same as paying off the debt - which we were never "in danger" of doing. Frank had a good, but dangerous response regarding the possibility of China ceasing to fund our debt. Frank quoted comedian Henny Youngman, who, when asked "Henny, how's your wife?" reportedly replied, "Compared to what?" The point is that although things seem crappy with our budget and economy, things aren't much better anywhere else. What can China do other than hold our debt? Keep their money "in the bank?" That is just someone else's debt! This is a great talking point, since it's probably true that we, the US, are the best credit risk, but it's also a risky Ponzi strategy to assume that we can succeed with seemingly unsustainable policies only because everyone else's situation is crappier than ours.
Frank then explained that he was working to lower the costs of municipal bond issuance by developing some sort of Federal reinsurance program. He actually said "General obligation municipal bonds never fail. They are as safe as U.S. Treauries." I strongly disagree with this point - just look at California and NYC as examples. The theory has always been "you can just raise taxes to make up the revenue," but you can't raise taxes when people aren't earning any money - right NYC?
At one point Frank mentioned that he thought we would see "most of the money back" from the bank bailouts, but that with AIG "we may not see that money back."
Asked what he would recommend to the constituents as a takeaway, Frank returned to Henny Youngman, and suggested that when evaluating policy decisions which may not be ideal, we ask ourselves, "compared to what?" In other words, what is the alternative? I have had this debate with my friend Eric numerous times - I criticize the massive continued Ponzi scheme of government debt, failure to recognize and write down bad debt, and attempts to re-inflate our way out of the bubble (too much debt? how will we solve it - I know - more debt! Brilliant!) and Eric responds that he agrees with my points, but that things would be much worse if we did nothing. This is true IN THE SHORT RUN - and as I mentioned last week, this is why we have a major problem - because politicians make decisions for the short run - for the next election. It seems clear to me that in making things better NOW, we're kicking the can down the road and exponentially increasing the potential pain we will need to recognize LATER.
In summary - I found Barney Frank to be an outrageously partisan representative who is not afraid to lie or distort the truth to further an agenda. HOWEVER, I do not hate Frank as a politician, because I can tell that he is aware of the issues and that he actually has an understanding of what good solutions are. Although Frank may attempt to mis-educate a room full of constituents by exaggerating the way things really work, his policy actions are not quite as drastic and as his words - some of them are quite logical and reasonable, even if they are not fully libertarian in nature. The bottom line is that if I apply Frank's own "Compared to What?" criteria in evaluating what I think of him as a Congressman, I'll take him over the Nancy Pelosi's of the world 100% of the time. Talk about a backhanded compliment!