Barney Frank, Chairman of the House Financial Services Committee has suggested that Fannie Mae and Freddie Mac, the now bankrupt housing finance giants, should relax their lending standards. This suggestion is farcical. One’s immediate reaction after the laughter has subsided might well be, “will we never learn?”
For many years, analysts of diverse stripes warned that Fannie Mae and Freddie Mac, the housing finance giants, were a disaster waiting to happen. But the financing giants also had giant friends in Congress, and so efforts to rein in Fan and Fred were easily thwarted. Among those congressional defenders was Barney Frank. Fannie and Freddie are now explicit wards of the state, financial markets have been put through the wringer, and taxpayers are out many billions of dollars propping them up.
Economists and other analysts might be inclined to conclude from Chairman Frank’s suggestion that, indeed, Washington policymakers are immune to economic education. Many may be immune, but this episode is evidence of something else entirely.
Politicans respond to incentives and opportunities and shy from bad publicity. Chairman Frank has learned. And his lesson will likely prove very expensive to the rest of us. After being dead wrong about Fannie Mae and Freddie Mac over the years, Chairman Frank learned he can get away with being dead wrong and costing the taxpayers billions. He can even keep the Chairmanship of the committee with jurisdiction over his past errors. Chairman Frank has learned that not only can he get away with contributing fundamentally to the greatest financial disaster in modern history, but hardly anyone makes a serious attempt to hold him accountable.