Countering The Luntz Memo: Financial Reform Edition

February 09, 2010 1:53 pm ET

In January, Republican wordsmith Frank Luntz published a memo outlining special phrases and talking points conservatives should use to defeat efforts at reforming America's financial system.  Like his May 2009 memo on health care reform, Luntz's newest effort is riddled with falsehoods.

Frank Luntz, The Wall Street Warrior

Frank Luntz Represents A Myriad Of Wall Street & Financial Interests.  According to Frank Luntz's companies, Luntz, Maslansky Strategic Research and The Word Doctors, his clients include:

     Ameriquest Mortgage Company
     American Express
     Bear Stearns
     Merrill Lynch
     U.S. Chamber of Commerce
     VanKampen Investments

[Luntz, Maslansky Strategic Research, accessed 2/1/10; Word Doctors Corporate Clients, accessed 2/1/10; World Doctors Association Clients; accessed 2/1/10]

Republicans Dropped the Ball On Reforming The Housing Market

Frank Luntz :

Americans are divided on the cause of the crisis. The consequences of the crisis may be undeniable, but its cause is debatable.

To conservatives: government policies caused the bubble and its ultimate crash. Fannie Mae, Freddie Mac, the Federal Reserve, and the Community Reinvestment Act all had a role in the catastrophe. [Language of Financial Reform, January 2010; emphasis original]

Then why didn't Republicans tackle the problem when they were in charge?

In 12 Years, Republicans Never Reformed Fannie Mae Or Freddie Mac.  According the House Financial Services Committee, "Before this Congress, the last law enacted to reform the regulation of Fannie Mae and Freddie Mac was in 1992 - when the Democrats controlled the House and Senate. In 12 years of Republican control, Congress enacted no legislation addressing the GSE's safety and soundness and there was active resistance from the Bush Administration on the bills the House did consider. When Former House Financial Services Chairman Mike Oxley attempted to pass responsible legislation through the House, he met with White House opposition and indifference from the Republican Senate." [House Financial Services Committee, accessed 4/15/09; emphasis original]

In 12 Years, Republicans Never Passed A Law To Provide Consumer Protection In Mortgages.  According the House Financial Services Committee, "The last law enacted to provide consumer protection in mortgages was in 1994 - when the Democrats controlled the House and Senate. That law, the Home Ownership and Equity Protection Act (HOEPA), included a host of consumer protections against high-cost and other exotic mortgage products and specifically required that the Federal Reserve write rules that would stop abusive lending practices." [House Financial Services Committee, accessed 4/15/09]

  • Home Ownership And Equity Protection Act Required "New Disclosures And Clamp New Restrictions On Lenders Of High-Cost Consumer Loans." According to the Boston Globe, "When regulations are written and put into effect next October, the law will require new disclosures and clamp new restrictions on lenders of high-cost consumer loans secured by residential mortgages... The federal law is aimed at independent mortgage brokers and lenders who practice 'reverse redlining,' which occurs when lenders target poor and minority communities to make loans with unfair terms. The federal law is triggered when lenders make high-cost consumer loans in which the equity in a person's house is used as collateral." [Boston Globe, 10/16/94]

Luntz's Talking Points Are Based On A Fundamentally False Premise

Luntz Memo:

Now, more than ever, the American people question the government's ability to effectively address the issue. Billions in handouts to Wall Street. A stimulus bill that isn't creating jobs. Cash for Clunkers. Health Care. A "Credit Card Bill of Rights" that increases fees and interest rates on consumers. The American people believe Washington has gone wrong, and these legislative initiatives have become symbols of Washington's inability to do anything right. [Language of Financial Reform, January 2010; emphasis original]

Luntz's assumptions are dead wrong. 

"Billions in Handouts to Wall Street"

  • In The Midst Of A Downward Spiral, TARP Helped Stabilize The Financial System. As reported by Reuters, "The U.S. government's $700 billion financial rescue program has helped to stabilize the system, but may be creating systemic problems by fueling a belief banks will always be bailed out, a watchdog for the program said on Wednesday. 'Compared to where we were last October there is no question that the system if far more stable. We were on the precipice and I think the (Troubled Asset Relief Program) contributed with the other programs to pull us back,' Neil Barofsky, the special inspector general for the program, told CNBC. 'But I do think because of the moral hazard, because of some systemic risks that are associated with making these institutions bigger and bigger ... systemically we may be in a more dangerous place even then we were a year ago,' he said." [Reuters, 10/21/09]

"A Stimulus bill that isn't creating jobs"

  • CBO: The American Recovery And Reinvestment Act Has Raised GDP Up To 3.2%, Created Up To 1.6 Million American Jobs. According to the nonpartisan Congressional Budget Office, "CBO now estimates that in the third quarter of calendar year 2009, ARRA's policies raised real GDP by between 1.2 percent and 3.2 percent, lowered the unemployment rate by between 0.3 and 0.9 percentage points, and increased the number of people employed by between 600,000 and 1.6 million compared with what those values would have been otherwise." [CBO, 11/30/09; emphasis added]
  • McCain Adviser: "The Stimulus Was Very, Very Important In The 4th Quarter" Growth.  During an appearance on Bloomberg television, former adviser to Sen. John McCain, Mark Zandi said, "I think stimulus was key to the 4th quarter. It was really critical to business fixed investment because there was a tax bonus depreciation in the stimulus that expired in December and juiced up fixed investment. And also, it was very critical to housing and residential investment because of the housing tax credit. And the decline in government spending would have been measurably greater without the money from the stimulus. So the stimulus was very, very important in the 4th quarter." [Bloomberg via Think Progress, 1/29/10; emphasis added]

"Cash For Clunkers" Was A Huge Success.

According to Time Magazine:

Was the cash-for-clunkers program a success?
The short answer is yes. The program accomplished what it was set out to do, which was to get consumers back into the showrooms and to jump-start new-vehicle sales.

With some creative marketing and wheeling and dealing, dealers were also evidently able to convert many nonqualifying shoppers into the buyers of other new or used cars, a trend that created a sizable positive impact on sales as an indirect consequence of the program.

On the other hand, the clunker program was overly complicated, a nightmare to manage for dealers and difficult to understand for consumers. I would give the pure sales impact of the program an A and the administration of the program a D.

In the end, how many cars were sold through the program?
The official total sales that were directly because of the program will be right around 700,000 units. The average incentive - based on the most recent data available - was around $4,200. If we simply divide $3 billion by $4,200, we get about 714,000 units. The original forecast for 250,000 units was based on the initial $1 billion budget for the program. [Time Magazine, 8/6/09]

The "Credit Card Bill Of Rights" Protects Americans From Overbearing Credit Card Companies.

According to the Boston Globe, "Congress passed the Credit Cardholders' Bill of Rights Act of 2009 and sent it to President Obama for his signature. This bill amends the Truth in Lending Act and provides consumers with many reforms to the way credit cards are issued and administered today. According to the bill that was passed, here is a summary from the Library of Congress of what it means to consumers:

  • Creditors cannot increase the annual percentage rate (APR) during the first 12 months of opening up an account.
  • Creditors are required to provide consumers with a 45-day advance notice of changes in rates and significant contract changes. Rates that change due to a change in the index that the rate is based on are excluded from this 45-day notice requirement.
  • Promotional rates need to be in effect for at least six months from the beginning date of that promotion.
  • Creditors need to provide a 30-day advance notice of an account closure." [Boston Globe, 5/21/09]

That's What We're Trying To Do

Frank Luntz Urges Conservatives To Ask: "What Government Policies Were Changed? What Laws Were Repealed?"

Despite creating economic conditions comparative to the Great Depression, it is important to ask some basic questions -- What government regulator lost their job for their hand in the crisis? What government policies were changed? What laws were repealed? The obvious answer is none. [Language of Financial Reform, January 2010; emphasis original]

This section is as counterintuitive as one can get.  By asking "what government policies were changed? What laws were repealed?" Luntz is arguing that  financial regulatory reform shouldn't happen because it hasn't happened. 

What government policies were changed? What laws were repealed? None.  That's exactly why President Obama and Democrats in congress are seeking to enact financial regulatory reform that restores stability into the system.  Americans' retirement accounts shouldn't be gambled away by greedy Wall Street bankers seeking to make a quick buck.

The Real Cause Of Crisis

Luntz Memo:

Yet, Congress is poised to add another Washington agency with more Washington bureaucrats on top of existing laws and regulations. In fact, the proponents of the new government agency and regulations are the same members of Congress who created and supported the housing bubble.  [Language of Financial Reform, January 2010]

In this section, Luntz repeats the conservative myth that progressive legislation preventing discrimination and predatory lending caused the financial crisis.  In reality, there is a large consensus that deregulation, poor enforcement, and a lack of transparency were the underlying causes of the crisis.  In 1999, the Republican Congress passed the Gramm-Leach-Bliley Act, which repealed Depression-era banking regulations and is widely viewed as the precursor for the collapse of the financial system.

Gramm-Leach-Bliley Act Integrated Commercial & Investment Banks, Making The System Less Sound. As reported by Newsweek:

Glass-Steagall was one of the many necessary measures taken by Franklin Delano Roosevelt and the Democratic Congress to deal with the Great Depression. Crudely speaking, in the 1920s commercial banks (the types that took deposits, made construction loans, etc.) recklessly plunged into the bull market, making margin loans, underwriting new issues and investment pools, and trading stocks. When the bubble popped in 1929, exposure to Wall Street helped drag down the commercial banks. In the absence of deposit insurance and other backstops, the results were devastating. Wall Street's failure helped destroy Main Street.

The policy response was to erect a wall between investment banking and commercial banking. It outlasted the Berlin Wall by a few decades. In the 1990s, as another bull market took hold, momentum built to overturn Glass-Steagall. Commercial banks were eager to get into high-margin businesses like underwriting hot tech stocks. Brokerage firms saw commercial banks, with their massive customer bases, as great distribution channels for stocks, mutual funds, and other financial products that they created. Generally speaking, the investment banks were the aggressors. In April 1998, Sandy Weill's Travelers, which owned Salomon Smith Barney, merged with Citicorp. The following year, Congress passed and President Clinton signed the Financial Services Modernization Act of 1999, known as the Gramm-Leach-Bliley Act. This law effectively deleted the prohibition on commercial banks owning investment banks and vice versa. [Newsweek, 9/15/08]

  • Gramm-Leach-Bliley Act is Commonly Blamed For The Current Financial Crisis. According to the Washington Post, "[Phil] Gramm's aggressive efforts when he was chairman of the Senate Banking Committee to deregulate the banking and financial services industry. That culminated in passage in 1999 of a sweeping financial services law that tore down the Depression-era Glass-Steagall wall separating regulated commercial banks from largely unregulated investment banks. And little regulation was put in place to replace it... To many liberal economists, Gramm's efforts set the stage for the current crisis. Lending by noncommercial banks has soared, to about 70 percent of total lending. Investment banks, including Bear Stearns, grew too large to be allowed to fail." [Washington Post, 4/2/08]

"Lax Regulation, Supervisory Neglect, Lack Of Transparency, And Conflicts Of Interest All Undermined The Foundations Of Our Financial System."  In a November 2008 hearing in the House Committee on Oversight and Government Reform, Center for American Progress Fellow Michael Barr testified on the cause of the financial collapse.  Barr said, "We must act aggressively to contain the crisis, reform our home mortgage system, and develop new approaches to broad-scale housing and financial-sector reform-beginning with a clear understanding of the problem itself. Lax regulation, supervisory neglect, lack of transparency, and conflicts of interest all undermined the foundations of our financial system. Financial innovations in securitization and other factors brought increased liquidity, but also broadened the wedge between the incentives facing brokers, lenders, borrowers, rating agencies, securitizers, loan servicers, and investors. The lack of transparency and oversight, coupled with rising home prices, hid the problems for some time. When home prices and other assets imploded, credit woes cascaded through the financial system, and the lack of trust in the system meant that even sound financial institutions faced contagion from the crisis. That is why we need fundamental change in our system of financial regulation." [Center for American Progress, 11/14/08; emphasis added]

"It Was A Disdain For Regulation By Those Tasked With Enforcing The Rules... That Caused The Financial Crisis." Center for American Progress Vice President for Economic Policy Michael Ettlinger wrote: "The descent into the Great Recession established without a doubt the necessity of establishing a set of rules and regulations to guide our nation's financial structure. It was a disdain for regulation by those tasked with enforcing the rules-and an incoherent regulatory structure that allowed them to get away with it-that caused the financial crisis and precipitated the Great Recession that has left more than 15 million Americans unemployed and searching for work. We cannot move forward on a path of sustained economic growth until we have addressed the lapses in financial regulation. Delaying on this policy agenda is only hampering economic growth, and President Barack Obama recognized this in his speech last night. Financial firms need to know the new rules on leverage requirements, their consumers, and what kinds of businesses can be combined under one roof, so that they can adapt their business models and get back to the important role they play in the economy of providing credit and markets." [Center for American Progress, 1/28/10]

The Case For Comprehensive Financial Regulatory Reform

"Banks And Other Financial Institutions Are Now So Interconnected That Problems At One Can Lead To Problems At Others." Brookings Institution Economic Studies Fellow Douglas J. Elliot wrote, "Regulation has largely focused on ensuring that each financial institution was sufficiently sound in its own right with less attention paid to how the dominos could fall if a major institution fails. Banks and other financial institutions are now so interconnected that problems at one can lead to problems at others which are then magnified throughout the entire system. The level of systemic risk before this crisis was much higher than had been appreciated, spurring the government into significantly more extreme responses than one would have expected to be necessary." [Brookings Institution, 6/17/09]

"Investors Also Need To Have Their Faith Restored In Some Of The Basic Tools That Markets Rely On." Center for American Progress Vice President for Economic Policy Michael Ettlinger wrote: "Investors also need to have their faith restored in some of the basic tools that markets rely on. Without reform it's going to be a long time before wise investors place much faith in credit-rating companies and professional guidance from the financial services industry. Nor are many going to be willing to put their trust in black box models developed by Wall Street's mathematical geniuses." [Center for American Progress, 6/18/09]

Historically, The Government Acts To Restore Stability In Times Of Turmoil

After Financial Crises, The Government Has Historically Stepped In And Fixed The Broken System.  As reported by the Wall Street Journal, "various crises have sent the pendulum swinging back and forth. The handling of the financial panic of 1907 -- when a private individual, banker J.P. Morgan, bailed out a floundering U.S. economy -- stirred so much political outrage on the left that in 1913 the government created the Federal Reserve to run the financial system. The Depression-era collapse of markets led to the birth of a slew of new agencies, including the Securities and Exchange Commission and the Federal Deposit Insurance Corp., which regulated and remade American-style capitalism." [Wall Street Journal, 7/25/08]