Barney Frank kicks off his opinion piece in Sunday's Financial Times with Paul Krugmanesque precision:
As we prepare for this autumn's election, the results are in on America's 30-year experiment with radical economic deregulation. Income inequality has risen to levels not seen since the 1920s and the collapse of the unregulated portion of the mortgage and secondary markets threatens the health of the overall economy.
The chairman of the House Financial Services Committee has never made any secret of his belief that a "mature capitalist economy is as likely to suffer from too little regulation as from too much." So the news value in his pronouncements is minimal. But he did let drop one interesting historical observation.
In 1994 a Democratic Congress -- the last before the Republican takeover marked the arrival of the deregulators -- passed the homeowners equity protection act, giving the Federal Reserve the power to regulate all home mortgage loans. The avatar of deregulation, Alan Greenspan, then Fed chairman, flatly refused to use any of that authority.
The relevant section of the Home Ownership and Equity Protection Act (HOEPA) reads as follows:
The Board, by regulation or order, shall prohibit acts or practices in connection with--
(A) mortgage loans that the Board finds to be unfair, deceptive, or designed to evade the provisions of this section; and
(B) refinancing of mortgage loans that the Board finds to be associated with abusive lending practices, or that are otherwise not in the interest of the borrower
HOEPA, writes lawyer Raymond Natter in an analysis of the legislation, was designed to prevent "reverse redlining" -- "the practice of targeting residents of specific disadvantaged communities for credit on unfair terms, and in particular by second mortgage lenders, home improvement contractors, and finance companies." But it was written broadly enough so as to give the Federal Reserve Board authority to do whatever it wanted. If Greenspan had decided that the popularity of no-money-down, stated-income, negative-amortization inducing option-ARM mortgage loans might undermine the health of the housing sector, he could have squelched them.
Of course, he did the opposite. He recommended them: "American consumers might benefit if lenders provided greater mortgage product alternatives to the traditional fixed-rate mortgage."
Which speaks to an obvious point: The presence or absence of regulation is almost a sideshow to the real deal -- the presence or absence of legislators willing to regulate. Before the 2006 midterm elections, Barney Frank's views on regulation were not receiving prime placement in the Financial Times or being echoed throughout the blogosphere. Now he's the chairman of a crucial House committee, and waiting eagerly to see just what kind of majority in both branches of Congress the Democrats might end up with this November.
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