Barney Frank

I am struck by the tenacity of the belief by some that a 4% unemployment rate must bring inflation, and I am surprised when I read the speeches of some on the Fed that a form of Marxism has taken root there.  It is Chico Marxism:  who are you going to believe, me or your own eyes?  And they persist in believing themselves and not our own eyes, which say taht a 4% unemployment rate has been quite consistent with low inflation.

The Communist Manifesto exults over the "specter haunting Europe"--the growth of communism. America's ability to grow in a socially equitable manner confronts a serious threat from another economic theory, one that shares with Marx's construct its devotees' loyalty in the face of strong contradictory evidence. This danger can be even more appropriately labeled a specter because, unlike Marx's hope that his newborn would grow rapidly, we are menaced by the revivification of a theory from a recent inglorious demise.

I refer to the return of the NAIRU. The concept known as the "nonaccelerating inflation rate of unemployment," or NAIRU, holds that there is a point below which unemployment cannot fall without triggering economy-destroying inflation. Well into the 1990s, the theory was widely supported by mainstream economists, whose consensus pegged the NAIRU threshold at roughly 6 percent. Should unemployment fall below that magic number, the financial establishment preached, unacceptable inflation would be set in motion--and thus the authorities, particularly the Federal Reserve system, had to be ready to slow down economic activity once unemployment dropped below the NAIRU.

But in the mid-1990s, a funny thing happened to the NAIRU: It shrank rapidly. And ultimately the shrinkage was so inexplicable that the idea became intellectually and politically insupportable.

"I don't care if you ride your motorcycle without a helmet," was how Barney Frank, incoming Democratic chairman of the House of Representatives' financial services committee, recently described his attitude to wealthy individuals investing in hedge funds.

From a Financial Times interview

{The Administration} wanted to, arbitrarily in my judgment or at least summarily, say and we're going to reduce their size. 

Once you get an agreement that we are not going to have an arbitrary limit or a preset limit on the size of their portfolio, then you can go to regulation.
 
By the way, you know, arguments for the portfolio, one of the things that many of us are going to be arguing for is some forbearance by lenders so you don't get excessive foreclosures.
 
If you sell all of this mortgage stuff into the secondary market, forget about forbearance.  The secondary market can't do forbearance.  Forbearance -- allowing people who are in trouble a little extra time, et cetera -- can only come from an entity that holds those mortgages.
 
I can ask Fannie Mae and Freddie Mac to show forbearance.  I can go ask the secondary market to do it, and they won't pay any more attention to me than Dick Cheney does. 
 
     (LAUGHTER)
 
So the answer is we will increase the regulation of Fannie Mae and Freddie Mac.
 
And we will do one other thing.  And this is sort of -- well, let me give you two microcosmic examples of the bargain I want to make.  I want to keep Fannie Mae and Freddie Mac in business.  People have said, you know what, they get too many advantages, because they can borrow money more cheaply because of various perceptions of their involvement with the government, and the stockholders make too much money -- too much profit accrues to them.  Let's cut back on their
profit.
 
     My answer is no.  Let's leave them the profit, but let's take a chunk of it and put it into affordable housing.

I've always been struck -- and I have to say, I haven't found this to be Alan Greenspan's issue or Ben Bernanke's, but there are people in this country who think that the Fed somehow should be above democracy.
 
     I mean, I remember talking to some people in the Clinton administration:  Oh, we can't discuss interest rates.
 
     I mean, we can debate whether Terri Schiavo's life should be recognized as over.  We can debate abortion.  We can debate wars in Iraq.  We can debate the most fundamental questions in human existence, but God forbid anybody in elected office should talk about whether or not we need a 25-basis point increase in the Fed.  Somehow, that's sacrosanct.  No, it isn't.  It's public policy.
 
     One, I don't want a change.  There are people who have been arguing that the Fed should have its mandate changed, that the
Humphrey-Hawkins Act, which says it should deal both with stable prices and maximum appointment, that that should be changed, and it
should just go to stable prices.
 
     That's not going to happen when we're in power.  And we can prevent that from happening.

[Fed members] have to pay more attention to wages.  And I'm hoping that Ben Bernanke will recognize this. 

The last report we got -- the Fed comes and testifies before both houses twice a year and they present a report, the Humphrey-Hawkins report.  And the last time, I was going through it as we were getting ready for the hearing.  There were 13 sections about this part of the economy, that part of the economy.
 
In 12 of the sections, they talked about the economy in real terms, i.e. adjusted for inflation.  They talked about the real increase in this and the real increase in that.  In every single case, they adjusted for inflation. 

Then they got to wages, and wages were not adjusted for inflation.  They talked about nominal, i.e. they made wages look bigger than they are.
 
I think the Fed could show a little more social sensitivity to this.  I'm hoping that they will.  I have no -- I mean, I think Mr. Bernanke has been reasonable.

"You can get down to 3.6, 3.5'' percent {unemployment} without stirring inflation, Frank said in an interview in Washington last week. ``Wages that rise to the level of productivity are not at all inflationary.''

Bloomberg News interview

You say we have the two objectives, stable prices and employment - but one of those might - I mean, I appreciate the fact that you have two children and you love them both, but I'm afraid that one of them might get a little bit more for Hanukkah than the other if we're not careful.

In Q&A session with Chairman Bernanke

I think the ideal situation would be one in which the portfolios did exactly what you said, they were to be the way station for securitized mortgages and they would contain mostly liquid assets for the purpose of purchasing mortgages and then selling them back to the market. I would like to see a bill. I think we need to have a strong regulator in this arena. And we need to find some way that we can limit the growth of the portfolios.

As a practical matter, I think that restricting portfolios to mortgages related to affordable housing might be an appropriate compromise, appropriate approach that would provide some limitation.

But the Federal Reserve has always been concerned about the size of the portfolios. It never has found a substantial benefit to homeowners from large portfolios.

I want to say that I think there have been some partially inaccurate stories in the press imputing to me and some others some unhappiness with the chairman over consumer inactivity. 

In fact, I have historically been concerned about the Fed's failure to do that, and particularly their failure to use the authority they've had under the Federal Trade Act to spell out unfair, deceptive practices.

But this is something that long predated the chairman and that he is in fact addressing. So I do not think it is appropriate for people to impute this unhappiness to him.

And as I read the report and saw the last -- what? -- three or four pages of the report were about this consumer issue, it just became very clear to me this is not Uncle Alan's semi-annual report. And we think we are moving forward

I just want to note, though, that to the extent that we improve the social safety net in this country, which is important on its own, I think we also give more flexibility to monetary policy, because the Federal Reserve would then be freer in times when it felt it was necessary for other reasons to slow down the economy in the knowledge that this would not have, as it has today, a disproportionately negative effect on a lot of people who are more vulnerable economically.