SPEAKER: REP. BARNEY FRANK, D-MASS.

[*] FRANK: Thank you.

Actually I did not take Dick Cheney's worry that I might be as a legislator making policy too personally because it's very clear, if you see the vice president's approach, he doesn't think any legislator should be making policy, members of Congress, conservative or liberal, given his view of the Constitution. So I wasn't too upset.

I was a little troubled when one of my Republican -- soon to be no longer a colleague -- in his campaign in Indiana said that if the Democrats won, Nancy Pelosi would allow me to implement the radical homosexual agenda. The problem is that he lost. He was the first Republican declared defeated on Election Day, and that apparently left some people expecting me to produce a radical homosexual agenda, and I don't have one. I felt inadequate.

I mean, I do think we should allow gay and lesbian people to serve in the military and get married and have a job but, by tradition of radical standards, being in the military, working for a living and getting married are not the stuff of radicalism. So I'm still looking for a way to satisfy that demand.

What I do want to talk about today is the economy, and it's a problem that we have in America, and it's a problem that is worldwide. It is the increasing separation of the well-being of the average citizen from overall economic growth.

I mean, it has generally been an accepted fact that economic growth is a good thing and that the rising tide will lift all boats. I will tell you as an aside that I'm a great believer in free speech. It never occurred to me to tell people not to watch rude and stupid things if they wanted to do that.

If I was going to limit free speech, I would make it a misdemeanor to use metaphors in the discussion of public policy. They almost always mislead you, especially in foreign policy.

The rising tide lifts all boats has always been a problem. If you think about that analogy, the rising tide is a very good idea if you have a boat. But if you are too poor to afford a boat and you are standing tiptoe in the water, the rising tide goes up your nose. And so that's a mistake.

The problem we have is that that used to be something we talked about with people at the lower end. We talked about people in poverty, people who were barely making in it in our economy, not prospering when the rest of us did.

That's now been reversed. There is now a small segment of the American population that is essentially profiting from economic growth and the great majority are not.

Now, if I were giving this speech six months ago, I would've spent lot of time trying to make that point. There was a big debate. We had an argument. Was there an erosion in the real incomes of the average citizen or not?

That debate appears to be over. We've given out a handout. One of the things that struck me yesterday when we were putting that together was we got some quotes from various people from the left, from the right, from the center about inequality in America and it struck us as we looked at them that we couldn't tell who said what. That's why you were given them as a kind of a matching test. There is now a consensus. The income of 80 percent to 90 percent of Americans has substantially lagged economic growth. That fight about whether or not it happened is over. The questions, though, are now: One, should we be worried about it; two, if we are worried about it, can we do anything about it; and, three, what?

Well, there were some, particularly conservatives, who said, "Oh, don't worry about inequality. Inequality, that's just a matter of jealousy. As long as everybody's got something, that's OK."

FRANK: Well, of course, part of the problem with that is that the definition of what is adequate is not a fixed point. What you believe to be adequate, what your kids believe to be adequate, what you need to live a decent life, is an evolving concept.

It's also the case that when a handful of people have a lot of money, they may be driving up prices for others. There are people, I guess, who don't care about inequality as a moral issue. I do.

But there is a broader point here about why it matters, and that's the political factor. One of the consequences of this separation between economic growth and the well-being of the great majority of citizens is that an increasing number of citizens don't care about economic growth. Not surprising. Not only do they not benefit, but in many cases they get the short-term disruptive effects.

I mean, there was a great concept from Joseph Schumpeter of creative destruction in which, as the old economic order is destroyed, resources are freed up for the new order.

Well, increasingly, we have people who see the destruction in their own lives, but don't see that they're going to be part of the new creation.

And so, for those who don't care about inequality as a moral issue or don't care that there are people who are hurting, think about what it does politically. We are now in a situation in which many of the people in the business community are very frustrated because they cannot get adopted at the national level policies that they think are important for growth.

In some cases I agree with them. In some cases I don't.

Let's look at the specifics. George Bush proposed an immigration policy which had elements that appealed to people who had a humanitarian concern and also to people in the business community who look ahead and say: Gee, if we don't have a certain rate of immigration, we have workforce problems.

It's certainly hard to see how you solve the Social Security problem 40 years from now, not next year or 10 years from now, without the kind of increase in the population that you could get from a sensible immigration policy.

But Bush's immigration bill bogged down -- bogged down from his own party -- but there was opposition elsewhere. FRANK: Direct foreign investment's a good thing. That's people putting money into America to make jobs.

We can't get a bill through to set the rules to regulate direct foreign investment because of, one, the terrible mistake this administration made by allowing the Dubai Ports situation, and why somebody in the White House didn't say to the people of Dubai: Look, you're nice people and you're our friends and why don't you buy some shopping malls and why don't you buy some commercial real estate or some movie theaters or even a factory, but please don't buy a port right now, given what's going on.

But the overreaction to that mistake is such that it now jeopardizes our ability to set rules for foreign direct investment.

Trade is an issue. Properly done, trade's a good thing. By "properly done," I mean trade which includes some requirement that the people who want to trade with us pay attention to the environment and work rules.

Let me give you an example of what I think is the disingenuousness of those who say we should do trade without any regard for the environmental and labor practices of our partners.

George Bush says that one of the main reasons we cannot do the Kyoto Treaty is that it will not cover India and China, and that will put Americans at a competitive disadvantage because we will be bound by it and they won't be.

Many of us say: Yes, you know, you're right; there is a competitive advantage by not following environmental laws when we are. Let's then require of India and China that, if they want access to this great market that's the United States, that they have to do something about the environment. And we're told: Oh, no, you can't do that; that's introducing something that doesn't belong in a trade bill.

Similarly, with wages, the World Economic Forum, headquartered in Davos, just put out their CEO survey in which they noted that the Asian exporters -- the most active Asian exporters -- and the Baltic states pay wages well below what competition would suggest and what productivity would suggest -- therefore, according to the Davos report, giving them a competitive advantage in getting people to do business there.

In other words, my conservative friends understand that mistreating your workers and ignoring the environment give you a competitive advantage. They just don't want us to do anything about it.

Historically, I think they haven't wanted us to do anything about it because a lack of those things in those countries becomes a reason not to do them here.

At any rate, we are now stalled. We can't get any progress on trade, on foreign direct investment, on immigration, to some extent on the implementation of productivity.

FRANK: That's why the business community ought to care. Even if inequality doesn't bother them, even if Mr. Nardelli getting $210 million for being fired when other people make $7 an hour for working very hard, even people untroubled by that -- and I envy them the ease of their consciences; they must get a lot more sleep than a lot of us do -- if they don't care on those grounds, they ought to recognize that we are in gridlock; that we are unable to go forward with policies that many think are pro-growth because there are so many people who see only the short-term pain that those inflict, or even the medium-term pain and don't see any gain.

And, again, the statistics have borne that out. So then, the question is: Well, can we do anything about it? Is this some force of nature?

And it is true that the increase in inequality recently has not been somebody's conscious decision to do it. It's been a result of natural forces, including globalization, information technology.

But the fact that there are things that bring about results in the economy doesn't mean that government is helpless to deal with them. And in fact what we have is a government in power, today in the executive branch and, until tomorrow in the legislative branch, that saw the inequality being brought about by increased globalization and technology and decided that we should increase it on the grounds that increasing the inequality better incentivized the business community and therefore we'd all be better off.

You know, no matter what you think about the argument for trickle-down, when there's no trickle, it fails on its own terms. You can argue for trickle-down, but the fact is that the way -- there has just been none. There has been this freezing erosion of real wages. I believe it is very clear that this is something that we can affect.

During the Clinton administration, I think we showed -- not as effectively as I would have liked; I differed with some pieces of it -- but I think we did show that you could be concerned about increasing inequality, through the government, and retard it.

Let's be very clear. Inequality is not a bad thing. It's necessary in a capitalist system, and I'm a capitalist.

You don't have the incentives; you don't have the resource allocation without inequality. But you do not have to have a government reinforcing it. You can have a government retarding it.

What we are talking about is not whether or not there should be inequality, but where we are today.

FRANK: We have a system which is producing, by a combination of natural forces and government policy, more inequality than is necessary for efficiency or than is socially healthy, because it produces gridlock.

Now, here's one point about the American economy that my conservative friends not only get wrong but are very inconsistent: They treat it as if it is some fragile flower.

My God, if you were to raise the minimum wage and pay these people who are working hard in jobs that aren't all that much fun -- $7.50 an hour -- God knows how the American economy could withstand it.

The fact is that the American economy -- a vast, sprawling complex combination of people and resources -- is much tougher than the conservatives argue.

And, in fact, it turns out -- and you can see this in the Clinton years -- there is a wide range of public policies which are consistent with economic growth. Bill Clinton raised taxes on the top bracket in 1993, and we had a great deal of economic growth afterward. Then George Bush cut the top bracket tax and we had economic growth less than we had under Clinton.

I'm not arguing that the Clinton tax cuts caused it, only that there is a much broader range of public policies, particularly those dealing with excessive inequality, that are compatible with our national economic growth.

And the fact is that if we do not reverse this trend and begin to reduce inequality, you will continue this gridlock.

By the way, it's an international one, as well. One of the great issues right now in the world is whether the Democratic left in Latin America will be able to win elections against a somewhat less Democratic left, whether a kind of a radicalism that is not all that crazy about democracy will win elections over the more mainstream people on the left because of a dissatisfaction with the failure of the market to deliver. Because to some extent, democracy has been unwisely entangled with a free market economy as a kind of a package deal.

So the question is what to do about it. I think we here in America could do something about it.

FRANK: I thought about the grand bargain with the business community.

Now, it's an interesting fact of life in American politics today how angry it's gotten that at this point I will report to you that both sides that I have approached in terms of the bargain think it's a bad idea because they think I'm going to sell out to the other one.

The degree of confidence Americans have today is fairly low. Fortunately, I've got a pretty safe district, so I can ride out the skepticism until we get to prove it. But here's what I'm trying to do.

I'm trying to show people, look, I am a liberal. I am a strong supporter of the liberal position. I have voted against the trade bills. I have been critical of many aspects of what the business community wanted, partly because I disagree in substance, partly because I will not support policies even if I might agree with them if they're going to have short-term negative effects and no longer-term benefits.

I disagree strongly with academic opinion. Those of us who have been opposing trade bills from NAFTA on have been characterized as protectionists. We're Luddites. We're selfish. We don't understand poor people overseas, et cetera.

When I think about some of my extremely conservative colleagues who start lecturing me about the need to worry about poverty in Africa, it is harder than usual for me to remain civil.

But the fact is this: We are opposing, many of us, this set of policies because they are being pursued in a way that is philosophically and morally flawed.

Our economics are as good as those who are for an unrestrained free enterprise and are better morally because we understand that growth that does not pay attention to these inequality trends does more harm than good.

Now, as I said, I'd like to win that argument on the merits, but I'll take it on the gridlock situation. I now -- and have said to my friends in the business community -- "I understand your frustrations but stop blocking unions."

You know, when I was in college, there was a big debate: Do unions raise wages? Well, with regard to industrial unions, there were arguments back and forth -- international competition. It is now clear, I think, that whether or not you think unions raised wages 50 years ago, the absence of unions and their weakness that is inflicted by anti-union public policy depresses wages. The fact is that people who are not represented, in the service industries in particular, are the victims of policies which depress their wages.

FRANK: And I understand -- people say to me, "Well, look -- look at what Wal-Mart does. I mean, look what it does for the consumer."

Well, if you can't afford health care for your kid, a cheap T- shirt is not much of a consolation.

And this anti-union policy that we have has been a serious problem. The health care situation in America. We should be -- and this is in business's own interest. It costs more to make a car in Michigan than in Ontario -- by a significant amount -- solely because of our health care system.

If we were to have a universal single-payer health care system, which took health care out of the wage system -- stop depressing wages -- we encourage people to join unions, and we did other things, including in the tax system, we would begin to reverse the inequality.

And there's one very important piece to this, and that's the role of government. Government plays a very important role in achieving the quality of our life and in reducing inequality.

That didn't used to be controversial. A guy named Roosevelt got elected four times on that issue. That was the New Deal: use our collective capacity to work together not to interfere with the free enterprise system, but to work alongside it so you reduce inequality.

There are things we can do to reduce that. So I am hoping that we could get that kind of cooperation.

If we don't -- let's be very clear: If people in the business community continue to want to restrain any unionization and fire people who try to organize and don't improve the health care system and insist on cutting back on public sector programs -- you know, I'm told by some of my conservative friends, "Well, the answer to all these problems with inequality is education."

I think they greatly exaggerate the extent to which education will do it. I know if you're 48 years old and you lose your job in a factory, the extent to which you are going to be successfully retrained to be a dental technician can easily be overrated by people.

FRANK: But in any case, even for younger people, yes, it'd be nice for them to get education, but every state is cutting back on its support for its state university. It's a rare state university today that still gets 50 percent of its funding from the government.

Community colleges or public, they're being cut back. Pell grants have dwindled in real terms.

If you agree with me that we should be reducing -- not doing away with, but reducing inequality, then public sector needs to be valued as a partner.

Let me just close with this. (inaudible) talk about all these things, and I talk about wages. And it does appear over the last year that real wages, take-home pay for workers after inflation, has been dropping.

It's not that it hasn't been keeping up; you've got handouts that show this.

Corporate profits as a percentage of the national economy have gone way up in the past five years. God didn't do that. The economy did it and the government helped and -- although to some of these people God and the government are the same thing, but I obviously don't agree with that.

We have now got the beginning, I hope, of an uptick in real wages. But you know what's happening? Many of these same business community leaders and others who complain about they can't get support for trade and they can't get support for immigration and they can't get support for foreign direct investment, they're now worrying about wages going up. Read the financial pages of the papers. There is only one concern about inflation: wages may go up.

Wages have significantly lagged growth. They have significantly lagged productivity. And if they even begin, as they have now, to start going up, respected opinion tut-tuts and says, "Oh, that's a terrible idea; we can't allow that to happen."

Ben Bernanke, to his credit, has said, "Well, if wages go up to the level of productivity, it's not inflationary."

The fact is, we have a catch-up period for wages and people are now saying, "Well, you know what? Productivity may be slowing down, things may be getting worse. We'll have to clamp down." Yes, well, you know what? Everybody else has had a pretty good dinner except the people working for wages. Everybody else ain't a lot of people.

But telling the people who work for wages, "Oh, sorry, just as you were about to eat we're closing the restaurant" -- do it if you think it's right, but don't be surprised when their reaction is this negative one you get.

FRANK: So when I talk about a bargain, I'm not talking about a negotiation, one for one. I'm not in a position to do that. I will tell you this, though.

The committee that I will be chairing as of tomorrow -- I think it is that our reach exceeds our grasp. Maybe it's our grasp exceeds our reach. I'm never sure of that.

But we have a larger jurisdiction to talk than to legislate.

We have an oversight jurisdiction over the economy, through the Humphrey-Hawkins bill and through the World Bank.

We intend to have hearings over these next two years.

At first I thought we were going to have to document the fact that real wages for most people are failing. That's now accepted.

What we're going to talk about is why this is happening, what the damage is to our society from it happening and, most importantly, what we can do about it.

Now, the committee I chair won't have the ability to do some of these bills. It will on some others. But we are ready to do that.

So there are two outcomes possible.

One is that we will be stonewalled by people on the conservative side, and they will continue to use their veto power.

In fact, it's an interesting point. People have said to me, "Well, wait a minute. You're saying the conservatives can block these liberal things and the liberals can block these pro-growth things. How can that be? Doesn't one side have the majority?"

The answer is, in the American system of government, whoever wants to not do anything starts out with about 25 percent advantage. So it is possible for each side to have the power to block the other.

That's where we are.

Either people will join with us in solving the health care problem and getting it out of the employment equation, which ought to be in everybody's interest; getting a humane immigration policy; good rules that welcome responsible foreign investment; going forward with trade with reasonable, not oppressive, environmental and labor standards; allowing people to join unions, and we will then be able to go forward in a pro-growth way and engage with the rest of the world and implement productivity-enhancing technology.

Or they'll continue to say no. And they'll use their powers so that you won't be able to get into a union, even if you want to, in many cases. And the NLRB will continue to be union-busting rather than the welcoming entity it's supposed to be. And you'll continue to have fewer and fewer people having health care, while it continues to interfere more and more with the wage pool, and we'll have all these other kinds of problems.

If we do -- and I regret that -- but then people should not be surprised when there is no renewal of trading authority, when you do have resistance to a sensible immigration policy.

FRANK: So that's the choice that has to be made. It's a big sprawling thing, obviously, as I said. It's not a one for one. We're not playing Monopoly. But we're not going to have a situation in which people who represent the great majority of people who work for wages are going to continue to sit by and allow their real incomes to erode and their economic positions to erode.

I think we can break out of this, but that's still to be determined. And so, as I said, what you can expect from our committee over the next two years is a documentationism. We'll listen to all sides.

I think, as radical as it is -- that Franklin Roosevelt, essentially, got it right -- namely that the best thing you can do for the capitalist system is to create conditions in the economy in which the natural tendency of a capitalist system to promote inequality is restrained, not abolished, in which the government works to help people through painful transitions, works to reduce excesses. And in that context, capitalism will flourish.

The alternative is going to be a continuation of the gridlock we have today. And that is clearly not the best outcome.

Thank you.

(APPLAUSE)

MODERATOR: Our first question: What is your top priority as Financial Services chairman?

FRANK: It is, basically, what I just talked about. There are specific issues that are important, Affordable housing, legislatively, will be to increase the stock of affordable housing which fits in to what I was talking about and that includes legislation for Fannie Mae and Freddie Mac and other pieces of affordable housing.

But that's what I've just talked about in general: getting people in the financial community and in the business community to understand the importance of acknowledging the increasing inequality and our need to break it. That's the single most important issue.

In terms of specifics, reversing a long Republican policy of not doing anything about affordable housing is a real problem. I think the affordable housing crisis -- now, there are other aspects.

I mean if I -- the single greatest thing I would like to do in American public policy is a universal, single pay health care system. But that is not my jurisdiction, and John Dingell is already worried enough about jurisdiction.

John, I am not trying to get it. Don't worry about it.

But in terms of what the legislative jurisdiction of my committee is, the single most important issue would be affordable housing.

MODERATOR: What concessions do you expect from business regarding unions? Does business have to support the Employee Free Choice Act, which would make it easier to organize, or just not be as hostile as they currently are? And if business refuses to relax its opposition, what will you do?

FRANK: That's a very good question. What I think is necessary -- both because I think it's good public policy and good for the economy and because it would help (inaudible) -- is, yes, business should support the Employee Free Choice Act, which includes letting people join unions.

Look, we now have a situation where the right that people have statutorily to join unions, granted in the National Labor Relations Act, has become increasingly unavailable. You have a hostile NRB. You also have had businesses learn in many cases that they can fire people who want to organize and stall and in the end, maybe eight or nine years later, somebody will get reinstated with back pay, except whatever you made in the interim is deducted.

FRANK: I have to say to my self-described law and order conservative colleagues: The penalties for violating labor law in America are among the lightest and slightest in the world.

You can get away with stiffing people's right to join a union with not even a wrist slap.

So, yes, the Employee Free Choice Act, which allows people to (inaudible) -- unions are a good thing. They have been a good thing historically in America. They are not just good things economically.

Let me add to this. We're also talking about democracy. One of the things we now have is this notion -- I got it today -- they said, well, Wal-Mart's got a new deal where they're going to computerize work schedules and they're going to be able to change people's work schedules and just key them up to when is the maximum time to sell.

Yes, and if you got to pick your kid up at school, that's tough. A world in which we are all running our lives according to the maximum efficiency retail distribution isn't a world I want to live in.

I want to take that into account. I don't want it to be the only value.

That's what unions do. Unions help protect people's dignity in the workplace -- and not just in the workplace.

American politics has been producer politics. Americans tend to organize themselves politically around how they make their living. I wish that weren't always the case because I think sometimes the consumer interest is underrepresented.

But here's the deal. If you don't have unions, what you do is you have a lot of working people deprived of the institution around which they can organize their politics as producers. Whereas people on the other side of the economic bargaining table have theirs.

Reducing everybody's interests to simply being able to buy things as cheaply as possible and ignoring concern over the quality of their life at work, ignoring concern about their ability to organize, that's a recipe for a very unhappy society.

So, yes, the Employee Free Choice Act and a recognition that unions are a good thing and working together with them is the least they can do. QUESTION: Even with the large number of new Democrats that were elected who support unlimited free trade, must free trade agreements to pass Democratic-controlled Congress include those labor and environmental provisions you talked about?

FRANK: Yes. And it's not just Democrats who argue.

Let me go back to my Kyoto example. Remember, here's the argument: What we are saying is certainly there are some things that are going to make more sense to make in one part of the world than in another. And there will be competitive advantages for countries that are poor, et cetera.

But you should not exacerbate those competitive advantages by saying in addition to having a lower cost of living so you can pay people less, you're going to have child labor; you can make people work 70 hours a week without adequate compensation; you can ignore the environment; you can have no concern whatsoever for health.

In other words, there is an added element in the ability to exploit people that is not only inhumane, but gives you a competitive advantage.

And again, I want to quote -- read the current report of the World Economic Forum -- put out by the World Economic Forum, the people (inaudible) Davos, and they surveyed something like 11,000 CEOs and they talked about wages. And they said in Western Europe, by their standards, workers get more in wages than productivity and competition would allow.

FRANK: And in the U.S. and Japan, we're at about the right level, but in Asia and in the Baltic tigers, wages are below what rational economics would dictate, and that gives them a competitive advantage.

Now, we're not even talking wage-setting and we aren't talking about unions. Although, I have to say, it becomes increasingly embarrassing for me as an American to insist that other countries recognize the right of people to join unions when we don't. And I think that that's reciprocal. These are people in America who don't want Americans to be able to join unions, so they like the fact that they can't join unions elsewhere.

But the best example, as I said again, is Kyoto. You could look it up. George Bush cites the exemption for India and China from Kyoto as a major reason why we can't do anything about global warming. And when we then say, OK, let's ask India and China to do something about global warming, we're told, well, that's got nothing to do with trade.

In other words, when he doesn't want America to do it, he cites the competitive disadvantage we would be at if we did it and they don't. When we want to put pressure on them to do it, he says it's got nothing to do with competition.

So, yes, to get Democratic support -- by the way, again, we're talking about the five basic principles of the International Labor Organization. We're not talking about setting a minimum wage. And we're talking about some environmental differential.

But, yes, you will not get trade bills through, you won't get trade authority through, in my judgment, unless you have both worker rights and environmental rights.

By the way even then it'll be controversial. There'll be people in both parties who will say it's still a bad deal. I will disagree with them.

So the notion that you're going to be able to get majorities without that is just nonexistent.

MODERATOR: You mentioned using the U.S. leverage to raise environmental standards in China and India. Is that something the Democrats will make a priority? And if so, how do you get it past the administration?

FRANK: By making it a condition of international economic cooperation.

Now, if they insist on refusing to do it, then that's the end of progress in trade.

FRANK: I mean, I think that's the example.

And by the way, there was a column the other day in the New York Times -- Tom Edsal -- debating this, and he quoted one, more moderate Democrat as saying, "Well, if we put pressure on China to do that, China will walk away."

Yeah, China will walk away from the American market the way Nancy Pelosi plans to walk away from the speakership after all these years.

(LAUGHTER)

The notion that you would ignore -- I mean, the American market -- look, we're talking from strength here. The American economy is one of the great wonders of the world. It is strong. It is growing. I'm not talking about sharing misery. The issue for us is, how come, when the country as a whole is doing so well, so few people are sharing in it? You know, it's if you're so smart, why aren't you rich? Well, if we're so rich, why aren't more people better off?

So the notion that anybody -- certainly China, with its need to keep its people happy -- that they would walk away from the American market, that's just bizarre.

So the answer is we have a good deal of that leverage. Of course, the other thing to do is to want to do it.

But, yes, we are saying that we should put leverage on these other countries to join in. And everybody wants access to the American market. There's just no question about that.

And we, I think, are too timid. As I said, I think in many cases my conservative friends underestimate both the strength and the attractiveness of the American market, including, by the way -- one other argument as well -- "You're going to reduce profitability, people are going to pay more wages. They won't want to invest here."

Where do you want to go invest? Russia, so Putin can steal your company? I mean, the fact is that the absolute security you have in America, legally and socially, is worth a couple of points in your return.

America is this wonderfully rich, extraordinarily prosperous market with absolute security for your investment. Nobody's walking away from that.

MODERATOR: What's going to happen in the new Congress regarding the regulation and oversight of Fannie Mae and Freddie Mac?

FRANK: We will pass a bill, I hope -- which we could've passed last year -- which will substantially increase the ability of the regulator to oversee Fannie Mae and Freddie Mac. That has never been in question. The bill that passed the House overwhelmingly included a very significant upgrade in the powers of the regulator -- equal to, if not surpassing, what the bank regulators have.

FRANK: What blocked it last year was the insistence on some economic conservative fundamentalists in the Bush administration who, to be honest, don't think there should be a Fannie Mae or a Freddie Mac. You know, (inaudible) the head of the Federal Reserve, is saying, well, at least he was intellectually honest about this, and said, you know, we shouldn't even have a Fannie Mae and a Freddie Mac, so, if we have one, let's have one as small as possible.

They wanted -- in addition to giving the regulator all the power, they 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.

FRANK: That's what the House did. In other words, that's our bargain. Let's let capitalism flourish. Let the market flourish, but let's take a percentage of this, 5 percent, not a huge amount of the profits, and put it into affordable housing.

I'll give you another example of this. The FHA, the Federal Housing Administration, insures mortgages, which brings down the cost of your mortgage. It reduces the interest you have to pay if it's insured by the federal government.

They're not supposed to insure luxury housing in America. And they don't insure luxury housing in Nebraska, and they don't insure luxury housing in Mississippi, and they don't insure luxury housing in Massachusetts or California, and they don't insure any housing in Massachusetts and California, because the price that's set at which we decide it's luxury is too low.

On the other hand, the FHA said: You know what, we want to lend to poorer people, but some of them aren't going to pay back, so let's lend to poorer people, or let's insure poorer people, but let's make the poorer people who we insure pay more than anybody else would to make up for the other poor people who aren't going to pay back.

So that's a big favor to poor people, we let them subsidize the other poor people.

What I want to propose is -- and I'll bring this bill out -- let's do both. Let's take the cap off what the FHA can do at the one level. Let them insure the median house price in Massachusetts so they won't be doing luxury in Massachusetts but they'll be doing more. That will make money for the federal government.

Let's take the money the federal government will make from the FHA insuring higher-priced houses and use that to subsidize the higher losses for the lower-income people so the lower-income people can get their mortgage insured and pay no more than you or I would -- or than you would because I live in Massachusetts so I couldn't get it, until we change it.

But that's the answer with Fannie Mae and Freddie Mac. We will increase the regulation. We will not put any absolute limitation on the size. And we'll take a chunk of the money and put it into affordable housing. The first year, it will go into Katrina.

MODERATOR: On affordable housing, is more money the answer or are there particular other policy changes you'd like to see? FRANK: Yes. Let me say first of all, I have -- and I'm not suggesting the questioner did this -- but anytime someone denigrates the value of money in solving a problem, I know it's not a problem that he or she cares about.

People say, oh, you want to throw money at it. Well, when's the last time anybody said we should stop throwing money at the Pentagon or at the -- I mean, you could describe firefighters, I suppose, as throwing water at a fire, but I'm glad they do.

Money is always indispensable. Money is not an abstract commodity. It's resources.

And yes, we need more money. The Republicans made a grave error in my judgment by cutting off virtually all funding for affordable housing. That was not the only problem. But the large part of the problem is public resistance to housing being built anywhere.

Let me say again what I've said before. We politicians leave a lot to be desired, and I know it violates some people's conception of the First Amendment, but you journalists ain't perfect either. Those of us with responsibility make a certain amount of mistakes. But, you know, sometimes the voters are no bargain either.

And in the case of affordable housing, a big problem is the excessive negative reaction when you try and put affordable housing anywhere. That's one reason -- by the way, one of the things we're going to do in housing is this: Over the years the federal government lent money to developers, private developers, to build housing that had to remain subsidized for 20 or 40 years in return for very low interest or no interest.

Those laws were flawed, in my judgment, because many of them are now in a period where the subsidy requirements -- the rent restriction no longer applies. That is, they borrowed the money, they built the housing and now they can take the restrictions off.

You just saw that with the New York City program with regard to MetLife and Peter Cooper and Stuyvesant Village, which could have serious negative consequences there.

FRANK: At the federal level, we have hundreds of thousands of units all over the country, at least, which in five or 10 years won't be subsidized, won't be rent restricted anymore, because the restrictions will run out.

I want to see what it costs to buy out the right of the owner to take those off the restriction. Because if you buy out the owner of existing property, you don't have a zoning issue. You don't have to worry. The housing is already there.

So that is one of the issues -- one of the issues is the public resistance. And we have to accept the fact that it's there and try and persuade people that they are wrong about it.

MODERATOR: How does the Federal Reserve fit into your agenda?

How do you think the Fed should change, if it should?

FRANK: Well, one, I think we should be able to talk about it more. 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.

Secondly, though, they 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.

I think the danger will be this -- and that is, and I guess I should go back to what I said before -- what I fear is this: Wages may now be starting to rise, real wages. One, they've been depressed for so long, there's a natural tendency for that to happen. Inflation, if it stays down, allows real wages to go up some.

What I fear is that respected opinion, including the financial pages of some of our liberal newspapers, will start worrying that wages are going up. And oh, if wages go up, that's bad.

If corporate profits go up, that's a good thing. If wages go up, that's a bad thing. That's the basic received wisdom which I'm trying to change.

But what I'm afraid is that the Fed will join in this and that you will have people in the Fed saying, well, geez, wages are going up; we better raise the interest rates. And I talk about war on wages.

My fear is that, if we look at past practices, the Fed will be tempted to blame real wage increases, which are long overdue and which could be considerable for some time and still not have caught up, and they'll blame that as the reason for cutting back. So that would be my concern.

MODERATOR: You've said that you would support giving shareholders more power to constrain executive pay.

Will you provide some details, please, on how you would do this?

FRANK: We're still working out the details. But, yes -- I have to say, boards of directors, I didn't know much about them before I got to be the senior member of our committee.

You read about boards -- they're supposed to be -- I read about boards of directors in Enron and MCI and elsewhere, and they reminded me, I guess this is an appropriate journalistic forum to use this metaphor, the role of the boards of directors in all these crises remind me of something Murray Kempton once said, the great journalist from the New York Post, talking about editorial writers. He said the function of editorial writers is to come down from the hills after the battle is over and shoot the wounded.

(LAUGHTER)

And it seemed to me that's what the boards of directors used to do.

Now, some of them have gotten more energetic, and I think Sarbanes-Oxley has helped them do that.

But there's one area where the boards of directors do not appear to be much of a check, and it's easy to understand why, because they don't stand up to the CEO. They may stand up to the workers. People said, "Well, do you want to cut the bargaining agreements or the wages to go to shareholders?" You can count on the board of directors to want to depress what they pay the workers.

FRANK: But with regard to the CEO, in the first place, the CEO picked the board of directors; they picked the CEO. It's a very collusive relationship.

And it's clear that boards of directors do not provide any real check on CEOs. And it's true, I guess, the board of directors of Home Depot finally decided that Mr. Nardelli had to go. And they put their foot down and gave him $210 million and asked him to please leave, at which point he apparently succeeded, for the first time, in raising the stock price, by leaving. But $210 million is an expensive thing for that.

So I plan to have some legislation by which we increase the ability of shareholders to vote. And we're going to try to work out the details, including what happens if they were to vote no.

They have that in Britain, by the way. And Britain has become, recently, an example. And a lot of American corporate leaders have said, well, we like what they have in Britain. We think the Financial Services Authority is more flexible than the Securities and Exchange Commission, that Britain does it better.

But in Britain, shareholders have much more say. And particularly here, I do not think you can count on boards of directors to be adequate checks.

By the way, this compensation for CEOs -- it's not just a matter of envy. It has reached a point where it has some macroeconomic significance.

People at Harvard, Lucian Bebchuk and others, have shown the percentage of the profit of these top 1,500 corporations that goes to compensation for the top three officials has reached almost 10 percent. We're talking, now, about significant numbers. When Lee Raymond gets $400 million when he leaves ExxonMobil, and the pension is shorted, the pension fund, we're not just talking about envy.

So yes, we are going to be working on this, and when it gets to committee, we'll be dealing with it. The SEC -- I have one small difference with what they did, but the SEC has made some real gains in requiring corporations to be more open about what kind of compensations there are. And that's all compensation. It's stock options, and it's retirement, and what happens if there's a change in the corporation.

And by the way, one of the things that we don't do enough of in this business of ours and yours is to talk about the predictions of doom that didn't happen. We're often beating our breast because something bad happened, and we didn't predict it. What about all the bad things that we predicted that didn't happen?

Two that come to mind, to me, are same-sex marriage in Massachusetts and expensing stock options. In both cases, enormous negative consequences were predicted and, of course, none have materialized.

I do think it's time to have a hearing. When we voted on preventing the accounting officials from requiring that stock options be expensed, we heard terrible predictions about the negative effects this would have on the valuation, particularly, of technology companies. It has not happened.

FRANK: And I got to say -- and I voted against that bill. So yes, I am saying I told you so.

One of the most common lies in human existence is when people say, "Oh, I don't like to say 'I told you so.'"

I do not know anyone who doesn't like to say "I told you so."

(LAUGHTER)

And I have personally found that as one of the few pleasures that improves with age.

(LAUGHTER)

I can say I told you so and enjoy it without taking a pill before, during or after the operation.

And we told them so about this. So I think that -- again, there's a lot less fragility in this economy than people think.

But, yes, we have got to find some way to give shareholders -- maybe it's automatic or maybe it's whatever shareholders want to -- but shareholders have to be the check.

By the way, the shareholders we're talking about now -- we're not talking about this or that individual somewhere off in the country. You're talking about a very sophisticated set of institutional investors. You're talking about CalPERS. You're talking about other pension funds run by public officials or by unions.

There are entities out there representing groups of shareholders who are sophisticated and thoughtful, and I believe corporations would benefit greatly by their increased participation.

QUESTION: What are your reservations on industrial loan corporation applicees, more specifically, the ILC application filed by Wal-Mart? What are your plans for the future of these ILCs?

FRANK: The industrial loan corporation is a historical hangover in which you can become a bank even though you were owned by a manufacturing company, a retailer, et cetera.

Now, I have to say this to the people who think -- we have had this policy in America -- that banking and commerce ought to be separate, that if you are a bank, you cannot also be in the business of selling shoes or making cars or serving meals.

The reason, by the way, is very simple. If you want to be a bank, you want to call yourself a bank on your own, go ahead and do it. Lend anybody money you want. But don't come to the Federal Deposit Insurance Corporation or the -- and get your loans insured.

I mean, if you are an official bank, chartered to either federal or state, you have access to the Federal Reserve payment system, to the loan window they have, and to deposit insurance.

So to safeguard those, we say we don't want you having other interests. There's also a conflict of interest issue.

And by the way, for me, the most serious one is not Wal-Mart. It is, to take a company who I may appear to be picking on, but I didn't start this -- Home Depot.

Home Depot wants to buy a bank. The bank is called EnerBank. Now EnerBank has a special relationship with home repair contractors. If you are a home repair contractor, you get qualified by EnerBank and you get good processing and quick processing on your loans. It's a great advantage if you're a home repair contractor to be with EnerBank.

FRANK: Now, EnerBank is owned by Home Depot. Home Depot says: Oh, by the way, the fact that we own this bank will not have any influence on -- that is, if you decide to buy all your stuff from Lowe's, we'll still make you one of these valued people. There will be no -- it's a total violation of conflict of interest.

I don't know that they're not telling the truth, but it'd be kind of hard to say: Hey, I'm Home Depot, and I have this thing you really want, being a special contractor with this bank, and you can buy nothing from me and all from my competitors, it'll have no affect.

Even more, I'm now the homeowner -- having gotten the FHA to insure my mortgage after my bill (inaudible) -- and I now want to fix up my home. And I go to a contractor, And it's going to cost me $50,000 in home repair equipment we're going to get, say, from somewhere.

Now, if I go to the contractor who has got the special relationship with EnerBank and he's going to buy it from Home Deport, A, I get a quicker processing of my loan, but here's the other factor. I'm Home Depot. I own a bank. Someone is now coming to borrow money from that bank to spend a lot of money on his or her home repair. And he or she's going to spend that money at Home Depot.

Now, if I am a banker making a loan, I'm supposed to be thinking only about the likelihood of that loan being repaid and the profit I'm going to make when enough of them are repaid, because I've got the deposit insurance system.

But if I'm Home Depot, I'm also figuring in the profit that'll be made when this person buys stuff from Home Depot. So maybe I'll take more of a risk on the loan. Maybe I'll charge him less interest.

So, now, people are saying: Well, that's not a real problem. Well, if it's not a problem, I mean, we have six states that are allowed to charter industrial loan corporations, grandfathered in from the 1980s law. And they can grant an industrial loan corporation. And they say: Oh, there's no problem with the (inaudible).

Well, if there isn't, why should only six states be able to do it? If we really believe there's no problem with a totally nonfinancial entity owning a bank, why have a rule and then this kind of exception, especially if exception has now gotten bigger and bigger and bigger.

FRANK: There was an episode of "Are You Being Served," the British department store comedy. And the old lady there, her home was being repaired. So they let her stay up on the floor of the department store. But she didn't want to just lay in the bed up there. She wanted to make it home-like.

So they put up a fake front for a house with a little door. But there was nothing on either side. So she was in there, you'd ring the bell and she would open your door. But you could have walked around the side.

I mean, why have that kind of an operation? If we don't think there should be any restriction, let's not have a fake front. Get rid of it altogether.

So, I mean, I do not see an argument for the current situation in which six states were allowed to charter major corporations to own banks, and nobody else is.

I think the restriction against banking and commerce ought to stay. If we think it ought to be gotten rid of, let's get rid of it.

And then there's one other one, by the way. I'm told that Ford wants one now. GM has one. And we did not disagree. GM just sold a large chunk of GMAC to the service corporation (ph). And we were told this was important to keep GM alive, and that's important, and it was going to be in business anyway. So we did not object.

And whether or not the FDIC took that into account, I don't know, but they made that exception for GM.

But now people are saying, well, Ford wants one. Well, Ford wants to own a bank. We're worried about safety and soundness. And I said, gee, I'm skeptical. And they said, oh, yes, but you know you've got a problem. Ford might go bankrupt.

Well, isn't that a wonderful reason to give someone a bank?

(LAUGHTER)

I mean, if you're worried about protecting the insurance and everything else, staying out of bankruptcy is not a good reason to charter a bank.

So that's why I don't like the ILCs.

And what we'll do about them?

If the FDIC decides that under the law, it has no option but to grant full ILC charters, then the House will pass the bill cosponsored by myself and Congressman Paul Gillmor, a Republican of Ohio, to restrict ILCs in the future of any new power for an existing ILC to entities that are 85 percent financial. That's the test that was used in the Gramm-Leach-Bliley law that said you could become a kind of bank, securities, et cetera, you had to be in at least 85 percent financial.

We'll pass that bill, and then there'll be a fight about it in the Senate.

MODERATOR: Congressman Frank, before you leave, I wanted to offer the official National Press Club coffee mug. It will be suitable for drinking coffee when you're chairing one of those hearings.

FRANK: I appreciate it. And we haven't voted on the ethics bill yet, so I don't even have to ask you how much it cost. I may send it back on Friday.

(LAUGHTER)

MODERATOR: And of course, a certificate of appreciation. Thank you very much.

FRANK: Thank you.

###



The Committee oversees all components of the nation's housing and financial services sectors including banking, insurance, real estate, public and assisted housing, and securities. The Committee continually reviews the laws and programs relating to the U.S. Department of Housing and Urban Development, the Federal Reserve Bank, the Federal Deposit Insurance Corporation, Fannie Mae and Freddie Mac, and international development and finance agencies such as the World Bank and the International Monetary Fund. The Committee also ensures enforcement of housing and consumer protection laws such as the U.S. Housing Act, the Truth In Lending Act, the Housing and Community Development Act, the Fair Credit Reporting Act, the Real Estate Settlement Procedures Act, the Community Reinvestment Act, and financial privacy laws.