WHITE KNUCKLES ON THE GUNWALE

The Member of Congress most responsible for our current economic troubles may pay for his sins in November.

Rep. Barney Frank, D-Mass, is chairman of the House Financial Services Committee.  No one insisted more strongly on the lax lending standards at the heart of the subprime mortgage crisis.  No one fought more vigorously against oversight of the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac), whose bankruptcies triggered the economic collapse.

“The issue that day in 2003 was whether mortgage backers Fannie Mae and Freddie Mac were fiscally strong,” wrote Donovan Slack of the Boston Globe Thursday. “Frank declared with his trademark confidence that they were, accusing critics and regulators of exaggerating threats to Fannie’s and Freddie’s financial integrity… Now, it’s clear he was wrong.”

There were other villains: fly-by-night lenders such as Countrywide Mortgage, which bought off scrutiny by providing low interest loans to politicians such as Sen. Chris Dodd, D-CT, chairman of the Senate Banking committee, and Sen. Kent Conrad, D-ND, chairman of the Budget committee; and greedy Wall Street bankers who created bizarre financial instruments which were supposed to reduce risk, but multiplied it instead.

But the core of the crisis was that billions of dollars were loaned to poor credit risks who couldn’t pay it back.  When they defaulted, the housing bubble popped, and six trillion dollars of wealth disappeared almost overnight.

Companies like Countrywide could make money making bad loans because they sold them right away to Fannie Mae and Freddie Mac.  In addition to buying billions of dollars worth of bad paper, Fannie and Freddie, as “government sponsored enterprises,” were excused from the reserve requirements imposed upon other banks, so they had less of a cushion to absorb losses.  (Fannie and Freddie are bankrupt, and have received taxpayer bailouts of about $150 billion to stay afloat.)

In 2003 and 2005, President George W. Bush proposed tighter regulation of Fannie and Freddie.  But Democrats, led by Rep. Frank, blocked it.

Having pushed the policies which caused the housing crisis, Democrats now advocate policies which would make it worse.  The latest is a call for a national moratorium on foreclosures.  This would have such a devastating impact on our moribund economy that even President Obama opposes it.

The Obama administration’s interventions into the housing market have cost taxpayers a great deal of money, but haven’t helped, because the housing crisis is mostly a crisis about jobs. People who lose their jobs have difficulty making mortgage payments.

For housing to recover, the market must clear.  To reduce the excess inventory caused by overbuilding, home prices must fall another 10 to 20 percent, housing experts think.

A foreclosure moratorium would delay market clearing, and dumping all the foreclosed homes at once on the market when the moratorium ends would depress prices further.

Banks don’t want to foreclose if they can avoid it.  The typical homeowner who is being foreclosed upon has been delinquent for more than a year.

Rep. Frank called for a foreclosure moratorium last year, staying ahead of the crowd in proposing economically harmful measures.  But his reign of error may be coming to an end.

Rep. Frank has a reputation for arrogance President Obama might envy, a product of representing a safe Democratic district since 1981.  But he seemed flustered and defensive in a radio debate Monday (10/11) with Sean Bielat.

A major in the Marine Corps Reserve who holds two masters degrees and is a former program manager for the iRobot Corporation, Mr. Bielat is one of the most impressive Republican challengers this year.

In an ordinary year, this wouldn’t matter much.  But this is no ordinary year.  A poll taken for Mr. Bielat in late September showed Rep. Frank leading, 48 percent to 38 percent.

A ten point lead might seem like a lot.  But a month before the special election in January, now Sen. Scott Brown trailed Democrat Martha Coakley by more than that.  Sen. Brown carried Rep. Frank’s district.

Rep. Frank remains the favorite.  But “it’s very nice to see Barney Frank moved from the security of having a seat in the shrinking life boat to white knuckles on the gunwale,” commented Rick Ballard on the blog “Just One Minute.”