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Keith Ellison: The public has to demand strong financial regulation

Yesterday morning I talked with Rep. Keith Ellison, who sits on the House Financial Service Committee, about a number of subjects concerning the economy: the prospects for re-regulating the financial system, the earmarks he recently secured for a series of local projects, the plight of renters caught up in housing foreclosures, and why he thinks our present circumstances already amount to a depression.

“I’m reading as much as I can,” says Ellison, “studying as much as I can, talking to economists I trust, like [Nobel laureate Joseph] Stiglitz, [James] Galbraith and a few others who I think are worth listening to. Even [Moody’s economist Mark] Zandi. I’m talking to these people and trying to form my own opinion, but it is complicated. I understand why the average citizen feels removed from it, and just basically acted upon as opposed to acting. But I feel confident that we’re moving forward.”

SP: Since Barack Obama took office, most of the attention has been on passing the stimulus bill and engineering the terms of the bank bailouts. When do we start talking publicly about what Congress is going to do to regulate the financial sector?

Keith Ellison: The conversation around regulation began in earnest back in September. The problem is that those conversations need to be more community-focused, more focused on what the people want to see. That’s a big concern of mine, and we have a set of meetings planned through my office. The reason is, we can have a regulatory “reform” that doesn’t really regulate anything. The same people who didn’t want any regulation still don’t. They haven’t learned their lessons. And unless there’s a public process that puts issues like consumer protection up front, systemic risk up front, equity, shared prosperity, and real accountability, then we’re not going to get it.

We can only get those things through a participatory process where average citizens demand them en masse. We can’t get them just by talking to the big boys about what concessions they’re going to give.

SP: In that connection, do you feel disappointed over the number of longtime Wall Street vets who are guiding the White House’s economic deliberations at this point?

Ellison: Yeah. I’m more than disappointed. I’m worried. My personality is such that I’m focused on now, and on moving forward. [Former Treasury Secretary Hank] Paulson and [Treasury Secretary Tim] Geithner played a role in this thing to a certain extent. Not that Geithner hasn’t done some good things, but he’s done some other things too.

The very folks who guided us into the problem, we’re relying on them to manage TARP money and to offer regulatory reform. Let me just tell you this, though–I’ve got a lot of confidence in [House Financial Services Committee chair] Barney Frank. I’ve got a lot of confidence in groups like the Center for Responsible Lending. I think a lot of civil rights organizations like LARASA and NAACP. Even labor unions are much more focused on financial reform than they have been in the past. I think it’s an organizing challenge to make sure it all works out right.

I think I have a responsibility to try to pull people together toward that end. So we’re doing some things locally and in DC to try to say, when do the people get their say in this regulatory reform thing? We got here as a result of people being disengaged, and we’re only going to get it fixed by people being re-engaged.

We’re seeing massive resistance to the cramdown proposal. That’s a proposal to allow bankruptcy judges to reschedule a mortgage on a primary residence. They’re fighting this thing tooth and nail. Now the fact is, the people fighting it are the last people who should get the ear of anyone. And it goes to show me they haven’t really learned any lessons. A lot of these folks–large banks, Wall Street firms–they have the attitude that “Heads I win, tails you lose.” No matter what happens, we always get ours.

That’s why we’ve got a challenge to get average people involved in this reform debate.

SP: What’s your view of the increasing calls from economists and even some noted market conservatives for nationalizing some of the biggest banks?

Ellison: I’m definitely open to the conversation. I think the question is, what does it get us and where do we take it? I’m not opposed to the debate, but I’ve got to be honest and say I haven’t really fleshed out every element of every option enough to say for myself, here’s what I think we must do.

I’m reading as much as I can, studying as much as I can, talking to economists I trust, like [Nobel laureate Joseph] Stiglitz, [James] Galbraith and a few others who I think are worth listening to. Even [Moody’s economist Mark] Zandi. I’m talking to these people and trying to form my own opinion, but it is complicated. I understand why the average citizen feels removed from it, and just basically acted upon as opposed to acting. But I feel confident that we’re moving forward.

SP: Your office has publicized a number of local projects for which the House has voted to pony up federal money. This has led to familiar complaints about government spending and pork. At a time when the feds are trying desperately to inject spending into the economy, does that criticism miss the forest for the trees?

Ellison: That criticism was never valid. The fact is, we don’t have a singularly capitalist free market economy. Nor do we have a socialist economy. We have a mixed economy that includes both private sector action and public sector action. It’s perfectly legitimate.

I’m proud of the projects I helped to get. Here’s the whole thing. This earmark thing is the stupidest debate in the world, and I hope you quote me on that. All earmarks are is congressionally designated spending based on needs that communities have told me they have. If I didn’t have the opportunity to use earmarks, there still would be spending, but it would all be from the White House. And whether it’s George Bush or Barack Obama, I know my district better than either one of them. And I know what people want in this district–the kind of development they seek in this district.

So I feel real strong about the idea that directing these kinds of projects to local needs is a good thing. We’ve had people submit applications, we’ve vetted them. I have sworn on penalty of perjury that I have absolutely, positively no personal interest in any of these projects. They’re good projects.

Now here’s the other thing, which speaks to your question as well. We have essentially zeroed out interest rates. The federal funds rate issued by the Fed has gotten as low as it can go. There is no more opportunity through monetary policy to try to stimulate the economy. All we have as an instrument to try to pull us out of this depression is fiscal policy. So we’ve got to spend some money. It’s plain and simple.

All you have to do is study the [1930s] depression to know that the way to prolong and continue a depression is not to spend any money–to start pulling back. The government needs to spend in a recession, particularly when it’s used every monetary option that it has.

Psychology and economics are tightly tied together. If people are afraid and don’t feel like they know where their next meal is coming from, or whether they’re still going to have a job, they stop spending. If one person stops spending, somebody else’s sales go down. When that somebody’s sales go down, somebody else gets laid off. And when that somebody gets laid off, they’re not spending anymore.

This fear and lack of confidence running through the economy is what reinforces the downward spiral in the economy. Our economy has literally shrunk, and we have the lowest consumer confidence numbers we’ve seen in a long time. So how do you get people feeling better about the economy and willing to make purchases? The way I think you do it is, you inject some money into the economy. Now I will say that I think our savings rates have been too low. We do need to promote savings among Americans, because it’s good for middle class people to have some money in the bank and not just live on credit cards.

At the end of the day, we’ve got to increase wages. Wages have been stagnant for 30 years, and yet productivity has gone up. That just means that the big corporations have been reaping the gains produced by workers being more productive, and they have not shared that.

So we’ve got a lot of reform that needs to happen, but you asked me about projects that I went and got money for. I’m proud to have done it, I’ll do it again, and I would get more if I could.

SP: Yesterday you introduced a bill to offer protections for renters who get caught up in their landlords’ foreclosure proceedings. That bill would give tenants three months’ notice before they can be evicted. I wanted to ask you to talk a little about the plight of renters whose homes get foreclosed out from under them. The prevalence of real estate speculation in the housing boom left a disproportionate number of renters in peril, didn’t it?

Ellison: Absolutely. When you talk about the foreclosure crisis, too many people think in terms of single-family dwellings. But the reality is that in Minneapolis, most of the foreclosures were not owner-occupied properties. There are a number of states, including Minnesota, where if you get foreclosed on, your rights if you’re not the property owner essentially get extinguished.

This is critical for renters. We’re seeing increases in the homeless population. Dorothy Day Center says their numbers are up. Sharing and Caring Hands says their numbers are up. Essentially, a landlord who goes into foreclosure are adding to the public tax burden and public expenditures whenever they evict their people.

The least we can do is to say that people can stay 90 days in order to make other arrangements. And let me just say this: It’s good for neighborhoods. Because once people have to get out, you have an empty house where the grass not getting cut is the least of the problems. When the copper gets stripped out, or a gas line gets nicked or broken, you can have fires. And the empty houses attract nuisances. People go in there and get high. You get kids pulled into those places and raped or abused.

I grew up in the city of Detroit, and I’ve seen neighborhoods where renters get thrown out when the landlord is out. I’ve seen abandoned houses and apartment buildings proliferate. They become targets for arsonists. It’s a recipe for destroying neighborhoods.

Our tenants bill is to help everybody. The banks are trying to fight it, because they don’t want to be landlords. Well, they may not want to be landlords, but then they’d better sell those properties at prices that someone can afford. Or they’re going to have to be landlords, at least for 90 days. It’s actually to their benefit.

I feel strongly about it, and I’m trying to get as much public support as I can.

SP: A few minutes ago, you referred to what we’re experiencing now as a depression. There’s actually no formal government definition of the difference between a recession and a depression. When did you decide that the circumstances had passed over from a recession to a depression?

Ellison: It’s the combination of historically high unemployment rates together with the historically high foreclosure rates together with the historically low consumer confidence rates together with the precipitous drops in trading on Wall Street. All those things, in my mind, add up to a depression era.

I don’t want to cause panic or scare people to death. I just think it’s a good idea, when you start planning how to get out of a situation, to first know where you’re at. And I think we’re at that stage.

Comments (10)

  1. Submitted by Beth Wright on 03/04/2009 - 11:04 am.

    Thank you for this great interview, Steve. As always, Ellison is passionate, perceptive, eloquent, and wise. I feel lucky to have him representing me and the rest of the Fifth District in Congress.

  2. Submitted by Thomas Swift on 03/04/2009 - 01:36 pm.

    What is missing from these conversations, and what should raise the hair of the American public, is the very central role the federal government played in detonating a bomb under our economy.

    Freddie Mac and Fannie Mae were created by an act of congress to facilitate an leftist experiment in socio-economic manipulation of the mortage markets.

    Regulatory legislation, such as the infamous Community Reinvestment Act (CRA) illustrate the weakness of the (largely Democrat) argument that it was a lack of regulatory oversight, rather than a misuse, that played a key role in the current financial crisis.

    People have forgotten, to the Democrat party’s temporary relief, that Barney Frank, who was charged with the responsibility of regulatory oversight, was engaged in a duplicitous (or was it clueless?) defense of government sponsored entities (Mac & Mae) while the red flag was being waved by people who knew the score.

    Take for instance, these Frank quotes regarding Mac & Mae from a Sept. 10th meeting of the House Financial Services Committee, which Frank chairs.

    “I worry, frankly, that there’s a tension here. The more people, in my judgment, exaggerate a threat of safety and soundness, the more people conjure up the possibility of serious financial losses to the Treasury, which I do not see. I think we see entities that are fundamentally sound financially and withstand some of the disaster scenarios. . . .”

    “I do think I do not want the same kind of focus on safety and soundness that we have in OCC [Office of the Comptroller of the Currency] and OTS [Office of Thrift Supervision]. I want to roll the dice a little bit more in this situation towards subsidized housing. . . .”

    And marvel as Rep. Maxine Waters displays an incomprehensible dismissal of what whistle blowers were telling her:

    “Secretary Martinez, if it ain’t broke, why do you want to fix it? Have the GSEs (Mac & Mae) ever missed their housing goals?”

    In other words, as long as Mac & Mae continued to underwrite loans in targeted areas, who the heck cares if the whole thing is a house of cards? The audacity staggers one.

    Add to Obama & Co.’s completely fruitless (unless you happen to be a union member, Democrat special interest or government employee) sacking of the US Treasury, statements by supposed leaders such as Ellison who claim to so admire Barney Frank, who was as responsible for this debacle as anyone, and we have a recipe for a very long, very painful recovery.

  3. Submitted by Eric Ferguson on 03/04/2009 - 04:14 pm.

    Thomas, thank you for the lengthy and grossly inaccurate history of Fannie and Freddie. Jumping from the 1930’s to 2005, brilliant. Leaving out the important parts was smart, because they would have undermined your point.

  4. Submitted by Bernice Vetsch on 03/04/2009 - 04:17 pm.

    Mr. Swift — Community Investment Banks were created to (1) combat the racial red-lining of neighborhoods and (2) to provide mortgage money to persons with incomes that may have been lower than average BUT who had excellent credit ratings and histories that showed they were responsible borrowers.

    Mortgagees purchasing their homes through Community Investment Banks have fallen into foreclosure at the very same rate as buyers with regular bank loans.

  5. Submitted by Thomas Swift on 03/04/2009 - 05:53 pm.

    Eric, Fannie Mae didn’t become a GSE until 1968.

    And it didn’t become an out of control monster until 1995 when President Clinton revised CRA to put some teeth into it and in 1999 when he signed the Gramm-Leach-Bliley Act, which really lit the fuse.

    I’m not sure what you consider “the important parts”, since you didn’t provide any detail, or pertinent information of any sort for that matter, but I’d be more than happy to fill in any blanks you’d care to offer.

    Bernice, I’m aware of what the purpose of laws like CRA was. Good intentions do not, unfortunately, excuse the fact that it was the government’s meddling in the private mortgage market that was largely, but not wholly, to blame for our current economic catastrophe.

    Pretending otherwise won’t help us recover, or teach us not to let it happen again.

  6. Submitted by Eric Ferguson on 03/04/2009 - 07:44 pm.

    Thomas, to answer your question about the holes, you said, “Freddie Mac and Fannie Mae were created by an act of congress to facilitate an leftist experiment in socio-economic manipulation of the mortage markets.”

    That’s nonsense. The mortgage market collapsed in the 1930’s after the last period of conservative economics. They were created to stabilize the mortgage markets buy buying maortgages and putting capital back into the private banks. As you mentioned, it was government agency until privatization in the sixties. However, you left out of your first post that they were privatized, leaving the impression these were government agencies that screwed up the mortgage markets.

    You also left out that Fannie and Freddie were late to the mortgage bubble, staying out of subprime until 2006. You indicated only Democrats were their protectors, when in fact one of McCain’s senoir campaign staff had been the lobbyist for one of them. Likewise, though Clinton gets blame for signing deregulation bills in the 90’s, these were Republican bills. In partisan terms, the Republicans are in at least as deep as the Democrats, and in ideological terms, deregulation was a conservative policy. Liberals, you may recall, were angry at Clinton and a minority of congressional Democrats who went along with it.

    A lot of that is details, so the big things I thought you left out were that Fannie and Freddie were privatized, that Republicans were the main movers of deregulation, and that Fannie and Freddie were responsible for only a small part of hte housing bubble.

  7. Submitted by Craig Westover on 03/05/2009 - 10:18 am.

    A simple question: If Freddie and Fannie were not securing loans that did not meet conventional underwriting standards, what purpose would they serve?

    The fact is, the Community Reinvestment Act is a very small piece of the problem, but a (negative) piece nonetheless. It was part of intentional government policy to increase homeownership, not just among minorities, but across ethnic and economic lines.

    Consequently, through low interest rates and lower lending standards, government intervention sent a message to the construction industry that consumers were saving more than spending (the free-market cause of lower interest rates), which prompted them to build for the future. The fact was, consumers were not saving, but spending. In other words, no one really had money to buy what the industry was building.

    Evidence for this scenario is that the depression started in the most capital intensive industries and moved outward to industries closer to the consumer. Equipment manufacturing was hit first, followed by construction and the auto industry, and now retail (with the exception of Wal-Mart whose “Live Better. Spend Less.” slogan ought to government policy).

    What government ought to do is decrease the inflated money supply. The longer the government waits to do this, the longer the depression will last. The government should not prop-up or bailout failing businesses — they need to fail so the resources they are consuming can flow to stronger businesses. Government should not prop-up wages or the prices of consumer goods. While this appears to be good for those with the jobs and those who produce the subsidized goods, the opportunity cost is unemployment in other industries and higher consumer prices — meaning consumers are paying more for less than they otherwise could. And the government above all should not be inflating the money supply further with a stimulus plan. Even if that plan “succeeds” in stabilizing the economy, that is a short term solution (as we learned following that strategy after the high-tech bubble and 9/11 depressions).

    What the economy needs right now is not more spending (irrespective of whether that spending is done by government through a stimulus package or consumers through tax cuts), but more savings to validate the excessive investments made in production — overbuilding McMansions, for example.

  8. Submitted by Eric Ferguson on 03/05/2009 - 12:02 pm.

    Craig, I’m not sure you make the case that CRA was part of the problem. It was seriously weakened by deregulation before the mortgage bubble, not that you suggested otherwise, but I don’t see the connection to new construction. Mostly CRA addressed redlining, which was race based, and had the effect of stopping lending in lower income areas, where new construction is pretty rare. The new construction was mostly in newer suburbs, which is where developers built way more than they should, like the McMansions you mention (I keep driving through McMansions, but no one will sell me a hamburger, what gives?). The CRA was meant to stop, and before deregulation did stop, the sort of predatory lending that caused the subprime problem.

    The ultimate point is that regulation prevented the problem, until deregulation allowed it. We just can’t take the referees off the field and not expect bad things to happen.

  9. Submitted by Thomas Swift on 03/06/2009 - 11:27 am.

    “The ultimate point is that regulation prevented the problem, until deregulation allowed it. We just can’t take the referees off the field and not expect bad things to happen.”

    Ha ha! We agree! Well kind of.

    It was governmental manipulation of regulation to fulfill a political agenda. The Democrats wanted the referees off the field just as much as the Republicans; just for different reasons.

    You are never going to get around the fact that when ever government sticks it’s nose into the private markets, politicians are going to use their authority to fulfull their political agendas.

    No banker would ever have produced sub-prime paper in the amounts they did if they didn’t have the assurance that someone else (the US Treasury in the guise of Freddie and Fannie) to leave holding the bag. And the securities market wouldn’t have bought into the scheme, to the tune of billions, for the same reasons.

    These guys all knew that when the piper came calling, the federal government would pick up the tab….and they were right!

    Altruistic or otherwise, removing the restraints the free market imposes *upon itself* (fiduciary responsibilities), either through some misguided concept of “oversight”, or the manipulation of regulation for political purposes, is a recipe for disaster.

    THAT is why conservatives fight to keep government at bay.

  10. Submitted by Glenn Mesaros on 03/16/2009 - 09:05 am.

    Barney Frank wrote the Bank Bailout bill for $750 billion taxpayers giveaway, and Ellison voted for it. They caved into Wall Street Schachtian bankers, and then postured against them. They were part of the problem, not the solution.

    They refused to meet with citizens who had proposed the Larouche Homeowners and Bank Protection Act back in 2007. This will would have used the FDIC, and related institutions, to take over the insolvent banks in 2007, and liquidate their gambling debts, instead of funneling tax dollars through AIG to investment banks.

    Glass Steagell was implemented by FDR during the Depression to prevent Wall street from becoming a gambling casino. Clinton and Greenspan led the way to repeal Glass Steagell in 1999. We need to reinstitute Glass Steagell to fix this problem. Geithner and Summers are Wall Street lackeys, and they will bury Obama, if he lets them. He has the unique support of the people now to reinstitute all FDR reforms to reincorporate Wall Street into the United States.

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