Barney Frank didn’t cause the housing crisis
The surprise news that Rep. Barney Frank (D-Mass.) is retiring from Congress seems to be eliciting two types of reactions. There are elegies from folks like the finance lawyer behind Economics of Contempt, who notes, “Barney Frank will be missed. A great Congressman. Knew his stuff on banking better than any other member.” Then there are conservatives who still hold Frank responsible for the housing bust. Fox’s Monica Crowley sums up Frank’s legacy this way: “lying that Fannie/Freddie were ‘sound,’ deliberately ignoring financial crisis.”
So was Barney Frank to blame for our woes? There are two lines of argument here, and neither is all that compelling. The first contention is that Frank failed to exercise diligent oversight of Fannie Mae and Freddie Mac as the housing bubble swelled. There’s something to this, though it’s worth noting that Frank was in the congressional minority for most of the period in question. The second argument is that Frank and other Democrats — by promoting policies to boost affordable housing — somehow caused the subprime mess and financial collapse. That argument is especially hard to square with the facts.
First, it’s true that Frank was hardly Fannie and Freddie’s biggest critic. Nor did he spot the housing bubble. Back in 2003, as the Examiner’s Philip Klein points out, Frank said that the government-sponsored entities were not in any sort of crisis. “The more people exaggerate these problems,” Frank told the New York Times, “the more pressure there is on these companies, the less we will see in terms of affordable housing.” Not the most prescient of comments. (Note, however, that in 2003, Fannie and Freddie weren’t yet heavily involved in the mortgage-backed security market. They were actually losing market share to private banks, as the chart on right from researchers at the University of North Carolina shows.)
Still, Fannie and Freddie were starting to act recklessly in other ways. As Jeff Madrick and Frank Portnoy detail in the New York Review of Books, Fannie Mae “aggressively minimized federal regulation of its activities and it fought off attempts to tax its profits, partly through extravagant favors to influential lawmakers.” Frank was one of those favored lawmakers — between 1989 and 2008 he received $42,350 in campaign contributions from Fannie and Freddie. Frank even helped get his then-boyfriend a job at Fannie Mae. And yet, for the bulk of this period, Democrats in Congress were in the minority. Even if Frank wanted to help out Fannie and Freddie, he wasn’t in a position to lead these efforts until 2007. (In 2005, when Frank helped sponsor a bipartisan House bill to create an independent regulator for Fannie and Freddie, it died in the Senate.)
The broader argument, meanwhile, is that Democrats like Barney Frank actually helped create the crisis by pushing the government to expand its affordable-housing programs. New York mayor Michael Bloomberg has made a version of this argument: Congress forced banks to make shoddy loans to people who couldn’t afford them, and that caused the subprime meltdown. But it’s not true. Barry Ritholz has dubbed this argument “The Big Lie.” And disproving it simply requires a few graphs.
First, note that the housing bubble was global. As McKinsey Quarterly has shown, countries such as Belgium, Ireland, Spain, the United Kingdom, Australian, Norway and Canada all had massive run-ups in housing prices from 2000 to 2007. It’s hard to explain how Congressional rules on inner-city housing caused all of this:
But what if we focus solely on the United States? As it turns out, not only were Fannie and Freddie late in getting into the subprime game, but they remained a bit player in the whole affair. According to a Federal Reserve study, more than 84 percent of the subprime mortgages in 2006 were issued by private lenders:
What’s more, only one of the top 25 subprime lenders in 2006 was subject to affordable-housing laws. For the most part, private firms such as Countrywide Financial were issuing “nontraditional” mortgages in order to package them off to Wall Street and make money, not to please Barney Frank. Like most policymakers, Frank didn’t appear to see the housing bubble or looming subprime crisis before it was too late. But he didn’t cause them, either.