Revitalizing the American economy and reestablishing the public’s trust in our financial system will require stringent governmental regulations, according to chairman of the Financial Services Committee and Massachusetts congressman Barney Frank.
Speaking to an audience of executive MBA students, alumni, trustees and Northeastern President Joseph Aoun, Frank said that the United States is in the midst of an “economic phenomenon” that began in the late 19th century with the rise of large industrial enterprises. He called for limiting securitization of loans, appointing a risk regulator and restricting incentives for CEOs to gamble precariously with their company’s money.
“A lot of the most risky economic and financial activity in this country is unregulated right now,” Frank said. “We need to have rules so people can differentiate what they should touch and what they shouldn’t touch, what’s a safe investment and what isn’t a safe investment.”
Establishing a series of regulations that limit individuals from financial overcommitments and restrict subprime lending, he said, will help assure the public of the government’s commitment to future economic stability. Today, the public is investing too safely in U.S. Treasury bonds that accrue very little interest, Frank noted.
“People are afraid to invest,” he said. “We have investments that should be made that people don’t want to make.”
New regulations governing compensation of CEOs, too, might help curtail poor investments. Often top executives make poor choices with their company’s money, but incur no personal financial burdens, giving them great incentive to take risks, Frank said. “It’s heads they win, tails they break even.”
Ultimately, though, reviving the economy will require “reinvigorating the credit system” by helping financial institutions that contributed directly to the crisis. “We have to do things that are to the direct benefit of some of the very people that people are angry with,” Frank said, offering an analogy to when the American government “fired anybody that had any role under Saddam Hussein. That was anybody who knew how to do anything,” he said.
“You cannot purge everybody in your old system unless you think you have a brand new system ready to go.”
Frank noted that there is precedent to his call for regulation.
In the late 19th century, antitrust laws and the Federal Trade Commission Act helped maintain the integrity of industrial enterprises. Later, in the face of the Great Depression, the Securities and Exchange Commission helped govern the stock market, he said.
Today, the rise of securitization, a process by which assets such as mortgages are gathered together, repackaged as securities and sold to investors, brings about new challenges and opportunities similar to those of the past, Frank said.
“Our job going forward…is to come up with new rules that allow us to continue to get the benefit of this securitization, while curtailing abuses.”
Commenting on the recent criticism of the regulatory approach, Frank said the possibility of overregulating the American economy is not sufficient enough reason to disregard his recovery strategy. “The fact that you can overregulate is no more reason not to regulate, than the fact that you can overeat is not a reason to starve yourself,” he said.