thelobbyist Interviews Congressman Ed Royce

thelobbyists’ Dustin Siggins had the pleasure to interview Congressman Ed Royce this past week.  You can find the transcript of the interview below and the audio file (Click to stream or Right-Click, Save as.. to download the .mp3) here: Siggins-Royce Interview.

Representative Ed Royce (R-CA) is a nine-term Congressman who serves on the House Foreign Affairs and Financial Services Committees. For more than a decade Royce has called for a stronger federal regulator to limit Fannie Mae and Freddie Mac’s excessive risk taking at the expense of taxpayers. In 2003, he offered the first legislation that sought to bring Fannie Mae, Freddie Mac and the Federal Home Loan Bank System under a strong federal regulator.

Siggins: So I don’t know if you remember but I asked one or two questions when you spoke at the Heritage Bloggers Briefing?

Royce: I do. I do remember.

Siggins: I asked you about mark-to-market Accounting.

Royce: Yes.

Siggins: So that’s really the basis of some of the questions I wanted to ask you about. Obviously the financial reform is one of the biggest deals going through Congress right now.  And it’s going to have very many, long term consequences if the current bill passes…mostly negative.

You had talked a lot about Freddie and Fannie.  And I know the Gregg bill was shot down in the Senate.  And I read an opinion online that said it was a bill that people on the right and the left agreed would have very negative effects because it wound Freddie and Fannie down too quickly.

So I didn’t know if you might be able to explain what your House Republican view is on winding down Freddie and Fannie in an appropriate way so that it wouldn’t hurt the housing market but would allow better lending standards so that we don’t have a repeat of ’08.

Royce: Well it wasn’t just the lending standards that were the problem.  That was part of the problem.  But just to recap very quickly, the other aspect to the problem was that Fannie and Freddie were pushed off of their primary line of business which was very safe 30-year fixed mortgages into a virtually unknown portion of the market at the time.  And that was subprime and ULTA loans.  It’s important to remember that it was Congress that passed that legislation in 1992. That was the Government Sponsored Enterprise Act which the Democrats passed.  And it was that legislation that put in place the current regulatory structure over the GOC’s, and basically had them going into the business of arbitraging and overleveraging and 100 to 1, and placed on them mandates that eventually led to 50% of their portfolio being subprime and ULTA loans. Those portfolios exceeded $1.6 trillion.

As a consequence Fannie and Freddie took this decisive step into the junk loan market to meet their affordable housing mandates instituted in the early 1990s on them by Congress.  Once the government backed Fannie and Freddie got into the junk loan market it was believed throughout the financial system that there was little risk associated with these types of mortgages. And that false assumption was exactly what Fannie and Freddie and their allies in Congress were hoping for. They were eager to signal to the rest of the financial sector that the junk mortgage loans were actually safe investments.  What we are dealing with now is the aftermath of the meltdown where a trillion dollars in value was lost as a consequence.

So certainly there were other mistakes made along the way.  But the distortions of the mortgage market caused by Fannie and Freddie along with the excessively low interest rates pursued by central banks; the FED and the European central banks, were at the heart of the inflated housing bubble; and the financial collapse that followed.  What we are now trying to do is to slowly, slowly un-wind this catastrophe.  Deleveraging is always very painful and it’s going to take awhile for this to work its way out in the marketplace.  So it is not possible right now to convince investors to go back into the mortgage market.  One of the additional reasons investors are on the sidelines, is because you also have legislation advocated by Chairman Barney Frank to reduce the principle amounts on loans. There is legislation on what is called a mortgage cram down which would allow those that borrow money to simply come back and have part of the principle that they borrowed removed.

And so the very actions Congress is taking right now, or at least actions of the House, this passed in the Senate, have created this apprehension on the part of investors.  And so as a corollary to that, the market is going to be very slow to respond because investors don’t know what additional surprises Congress may have in store for them.  And certainly removing the protection of the sanctity of contract is one thing that is being pursued with gusto.  We find ourselves in a very tough predicament without investment capital coming back in the housing.

Siggins: How would you wind them down though?  Obviously, you have talked about the difficulty in doing so and their involvement in the 2008 crash. Republicans who comment verbally, their rhetoric, and what you said at the Heritage Bloggers Briefing, was that we have to get rid of them.  And I happen to agree with you.

Royce: Long term we have to basically privatize them.  Long term we have to create a situation where they evolve into businesses that don’t operate with the mandates that Congress put on them to put them into arbitrage.  To put them into a situation where they go into arbitrage and over leverage in order to compensate for the risk that they take on because of mandates from Congress.  In other words we need to allow them to be run like a business rather than to be run on the basis of whims of Congressmen who decide that 3% or zero down payment loans would be nice rather than 20%, and mandating that half of their portfolio be in sub-prime and all-day loans. It would be an advantageous step for affordable housing. We cannot have them run as an experiment in government intervention into the economy- where we introduce that sort of moral hazard and systemic risk. Instead, they should be converted into businesses that operate on market principles. The problem is that when Freddie and Fannie were finally taken over by the government, they had more than ten million subprime and other weak loans- either on their books or in the form of mortgage-backed securities that they had guaranteed. So it is going to take a while to handle this situation, and I think the first step is for people to really comprehend how much difficulty we are in right now, as well as the reasons for it- because almost 2/3 of all the bad mortgages in our financial system, many of which are now defaulting at unprecedented rates, were bought by government agencies or required, basically, by government regulation. So this is the crux of the problem.

Siggins: So how long- in a one, two-word answer- how long would this take if we did it efficiently?

Royce: It’s gonna take the return of the private market.

Siggins: Oh. So that could be decades.

Royce: Well, not necessarily. If we take the right steps, a market will return, but at this point it’s gonna require a return of investors into the market. And it’s gonna take careening, or moving away, from the government policies that create the moral hazard to begin with.

Siggins: I think I’ll have about two minutes more to your time. Two final questions. The first one is: you had mentioned, I believe, at the Bloggers Briefing, that the Federal Reserve was really at the crux of the problem.

Royce: Right.

Siggins: Artificially-low interest rates and other issues with it. I happen to agree with you, as well. But, what do you think of the Senate, the very weak audit of the Fed. Do you think Rep. Paul- Rep. Paul wrote an opinion piece on The Daily Caller the other day saying it was basically a worthless audit, because a one-time deal and then forever nothing else happens. What do you think of the audit and, just very briefly, how do you think we should be looking at the Fed?

Royce: Well, in the first place, there is little question that excessively-low interest rates resulted in an excess of credit throughout the economy, and I think- the theory behind allowing the Federal Reserve to manipulate interest rates is that, if used correctly, the central bank can ease ups and downs that are natural in an economy. But unfortunately, because it is politically unpopular to slow what appears to be a strong economy, the Federal Reserve tends to err toward interest rates that are lower than appropriate, and this was one rationale behind the Federal Reserve and other nations’ central banks setting real interest rates at a negative level from 2002 through 2006, so when adjusted for inflation those interest rates are negative. And the effect of these negative interest rates were [sic] devastating; and if we go through this cycle again, it will have similar consequences. Instead of mitigating the ups and downs of the economy, the Fed’s actions often lead to the opposite effect. So what Ron Paul would like to get to, and what I would like to see as well, is an understanding on the part of the Fed governors that, for example, Ben Bernanke’s agitation in 2002 for negative real interest rates- we’d like to see an understanding on their part that that intensified the boom-and-bust cycle, and encouraged excessive risk-taking throughout the economy, and an understanding of what that means in terms of the effect of that balloon on the financial sector and on housing. And we don’t see an admission out of the Fed as to the nature- that would indicate they understand what economists understand. And we don’t see an admission on the part of the Federal Reserve as to this problem. This is why we want to see an auditing of the Fed and a real understanding as to the consequences of these perennial policies that compound the boom-bust…help create a boom-bust cycle in real estate and the marketplace. So this is, and again, there were other mistakes made along the way. I think we need to point that out. There were speculators in the mortgage market, and large banks on Wall Street-

Siggins: Well, plus mark-to-market accounting.

Royce: And mark-to-market accounting. But these were symptoms of a much deeper illness. The distortion of the mortgage market caused by Fannie and Freddie, and the excessively low interest rates pursued by central banks- as I said- were at the heart of the inflated housing bubble, and the financial collapse that followed, and it’s the inability of participants in the Fed for the culpability of the Fed with the low interest rates or in Congress- in terms of the abilities of Members of Congress to admit their mistakes in terms of the 1992 GSE ACT that caused Ron Paul and me great concern.

A great concern over the ability of people in government to learn from mistakes that were so recently made.

Siggins: OK, I guess I have one last question, which is: I’m sure you’re involved with the program coming out of the Whip’s office?  YouCut- where Americans tell Republicans what programs they want to cut out of the federal budget. Steve Benen is a writer for PoliticalAnimal.com, calculates $1.1 Billion a year in cuts (I think it’s closer to three billion, personally) but I don’t know the exact number. But, of the five cuts, they include a half a million here, $600 million there, $2.5 billion- none of it is really getting at the systemic problem of Social Security, Medicare, Medicaid, perhaps high defense spending (depending on who you talk to). I was wondering, briefly, about what your thoughts were about the YouCut program, and second of all, if you think it will lead to real systemic reform in Congress?

Royce: Well, first, remember that in addition to the unfunded liabilities and Social Security and Medicare, and that will come about as a result of the passage of the Health Care entitlement, you also are facing a situation where we have deficits that will, this year, will total over $1.5 trillion. So in terms of focusing on the ongoing growth of these appropriations, we see these double-digit increases in appropriations bills- that’s where you see the increases in the deficits over recent years. When the Democrats took over Congress the budget deficit was $162 billion, and at the time I and other fiscal hawks were decrying the $162 billion deficit. Today it’s ten times that. And so, the spending bills  coming out of Congress are increasing government agency funding by double-digits and I think that one of the advantages of the YouCut program is getting the American public to better understand that aspect of the problem, which is half of the problem. The current deficits are half of the problem. The other half of the problem, as you correctly point out, is the unsustainability of Medicare and Social Security, long term; because the debt held by the public is going to double over five years, and it’s growing to triple over 10 years, at this rate of growth and the consequences of that are not unlike what we see in Greece today. So at some point we are going to have to come together with a Base Commission type of procedure, or a more recent example would be the Base Closure Commission process. We are going to have to- I would argue- everything would have to be on the table. You would have to get both Democrats and Republicans involved in the process, with an eye toward sustainability, or an eye toward the requirement that we reform these entitlement programs. I would also argue that if Republicans do retake the majority in the House or the Senate, I expect the first order of business to be the repeal of the Health Care entitlement legislation that passed, so at least that portion of the problem would be removed in the future but that still leaves….and at some point we are going to have to have a President elected that would sign it.

Siggins: I was going to say the Senate has too many Democrats to over-turn a Presidential Veto…

Royce: Right, right, so at some point after we pass it initially, and then we are going to have to wait until we have a Republican or a New Democrat (and I don’t see a lot of those around recently), or a New Democrat as president who is going to take a different tact, and move back to the issue of fiscal responsibility and balanced budgets. But, the first half of that is getting the budgets balanced- that is essential. The second half of it is doing something about the long-term legacy costs, or the long-term entitlement costs; we have to do that sooner than later, because as you see in Greece today if you put it off, if you continue to put it off, and continue to build entitlements, it’s…

Siggins: Devastating.

Royce: Yeah, it’s devastating and eventual government expands to a point where, how many people are working a 32 hour work week in Greece and are expecting to retire at age 52? So you set up this expectation for early retirement, for basically part-time work, and you create an entitlement mentality on top of the entitlement itself. So when you go and try to go in, and address the entitlement, the entitlement mentality floods out into the streets of the capital, as you see in Athens, with “No Compromise” as the rallying cry. I think that this tells us why it is so important to address this immediately rather than putting it off.  We are not going to get Speaker Pelosi’s attention on this because she is busy building entitlements. But come the aftermath of November’s election, I think it has to be addressed immediately.

Destruction Among The Democrats

I was at my internship with Laura Ingraham earlier today, and as part of the job I had to look up information regarding the falling house of cards that is the Democratic Party and its domestic initiatives. Below is what I found:

1. President Obama’s Transportation Security Administration nominee has resigned after Senator Jim DeMint (R-SC) and other Republicans held up his nomination due to his lying to Congress.

2. Senator Jim Webb (D-VA) is calling for health care voting to halt until newly-elected Senator Brown (R-MA) is seated.

3. White House officials and House Democrats see things differently on health care and the ramifications of the Brown election.

4. Senator Evan Bayh (D-IN) may very well have Rep. Mike Pence (R-IN) as a challenger this year, despite his calling out the left today.

5. White House advisor David Axelrod and White House Press Secretary Robert Gibbs don’t get it.

Below is what I have found since:

6. Suddenly, deadlines aren’t so important to President Obama.

7. Moderate Scott Brown (R-MA) and conservative Jim DeMint (R-SC) are on the same page, it appears. Kind of makes Democrats look like the ones who are purging their own ranks.

8. Representative Barney Frank (D-MA) is kinda-sorta-not-really calling for health care reform to start over.

Update:

9. Representative Earl Pomeroy (D-ND) has been rumored to be prepared to resign from Congress if the health care debate keeps going, and is being courted by a large insurance organization.

10. House Speaker Nancy Pelosi (D-CA) is being hammered by the liberal members of her caucus.

None of this is to take away from the fact that Republicans still have work to do in creating a big tent- though Ed Morrissey continues to do great work regarding that goal- and that the Tea Partiers and many other Americans are as angry at the Republican Party as they are at the Democratic Party. While I think the Republicans will win several Senate seats, and 20-30 House seats, I also think the divisions between conservative Republicans and moderate Republicans, and between social conservatives and fiscal/economic conservatives, will hand several House races and at least one or two Senate seats to the Democrats in 2010. Of course, if President Obama keeps using his waning political capital to help Democrats in tough elections, perhaps Republicans will be fortunate enough to have another two years to get their own house in order before the 2012 elections.

Media Holding Democrats Accountable on Transparency

Over the last few weeks, there has been talk of not having the traditional “conference” to meld the Senate and House health care reform bills. I laughed off such thoughts, as transparency is something this administration and congressional leaders have been hammered for over the last several months. However, it appears I was wrong. Senate Majority Leader Reid (D-NV) and House Majority Leader Pelosi (D-CA) are setting things up so they will not have to have the conference, and instead get the “conference” bill without a conference.

This is bothersome. However, a number of media sources are doing their job and calling for the Obama administration to open the melding process to the public. (H/T to The Heritage Foundation’s “The Foundry.”) Let’s make our voices heard in support of C-Span’s efforts and make certain Democrats know they should have full transparency in this debate or face the wrath of the voters come November.

Boxer’s Opponents Scraping The Barrel

A few months ago, Senator Barbara Boxer (D-CA) had an ego trip with a general who called her ma’am. This caused quite a bit of hilarity among conservatives, and wincing among Democrats. Now Boxer’s primary opponent hopefuls are making the most out of it.

The arrogance of Boxer will light a bit of a fire under the seat of the tiny Republican base in California, but it won’t play out in the general election. Boxer is powerful- the current chairman of the Senate Environment and Public Works Committee- and a third-term senator. Incumbency is a huge strength in congressional elections, and Boxer isn’t going to lose to a Republican in California, especially one using an example of her arrogance as a primary weapon.

What might work, however is continuing to highlight her major support and substantial role in creating a cap-and-trade bill; highlight how the bill was pushed to next year by Senate Majority Leader Harry Reid (D-NV), indicating both how unpopular it is and how there are no major plans to pass it (no, Democrats are not going to pass a job-killing bill in the same year as an election during a major recession); and perhaps how even President Obama has admitted electricity costs will skyrocket and how the EPA Administrator admitted earlier this year in Hill testimony that ?[she] believe[s] that essential parts of the chart are that the U.S. action alone will not impact CO2 levels.? Too, emphasize how it was liberals who created California’s economic and other messes, and how conservatives can fix them.

Up Frum Conservatism Pt. II

I began this thread addressing the issue of Conservatives that were acting neither ?conservatively? nor even making any attempt to reconcile the many factions forming in the movement.? Mr. David Frum was the person I used as the vanguard of this particular predisposition mainly because of the advent of his NewMajority.Com.? Also, I found his name a delightful play on words and figured it would be appreciated by those of my acquaintances that were, and still are, William F. Buckley fans.? Mainly it was the former point that I sought to address, because I felt like I was bearing witness to a growing faction within the Conservative movement that sought to ?reform Conservatism? as though it were a party to be reformed.? It is slightly comical to me, that anyone calling themselves a Conservative can think this way if they are aware of Mr. Russell Kirk?s laments on the issue of conservatism as a movement in a party.? Conservative is a state of mind, being a Republican is a vehicle.? You cannot reform Conservatism, therefore what I believe Mr. Frum truly intends to do is to re-brand it as ?Republicanism.??

??????????? Conservatives and Republicans alike feel slighted by the recent regime that left power a mere six months prior.? Conservatives are of course divided further into the various principles they adhere to.? Neoconservatives are much kinder to President Bush, and easily ready the defenses against the gauntlet of attacks from Paleoconservatives, libertarians, liberals and mainstreamers.? Talk about President Obama?s ?blank slate,? President Bush was a champion of natural rights for those around the world by some; the advocate of unmitigated military expeditions by others.? He was a New World Order member hell bent on the destruction of the state sovereign in favor of a North American Union; and he was the Carl Schmittian disciple that put state above all and practiced the true international form of politics with a Hobbesian approach to state affairs and reckless disregard for the UN and international community.? He was an unapologetic radical Conservative by moderates; and a tax-cut and spend moderate Republican by Conservatives.? One got a very similar George W. Bush speaking to leftist rappers like Immortal Technique as they did rightist Conspiracy nuts like Alex Jones.? A convoluted portrait, as if Picasso were hired to have painted it to adorn the halls of the White House (I imagine something like this, you know, representing a Cowboy hat and such); A momentous digression, but interesting to point out to ?Bush Haters? nonetheless.? Either way, to be conservative is a reference of mind while being a Republican is the vehicle for action.? Mr. Frum and others on NewMajority seem to want to turn conservatism into something it?s not at the national level: a party.

??????????? Mr. Frum?s, and others?, actions are not malicious in that they are trying to ruin conservatism as some would suggest.? The NewMajority site claims to want to build a ?conservatism that can win again,? taking the bite out of standing on principles, and turning conservatism into a pragmatic arm of the Republican Party.? Here in lies Mr. Frum?s misunderstanding because as I have said before, Conservatism is a state of mind for people that may occupy the Republican or Democratic Parties (it happens to make up more of the Republican Party than Democratic, though I cannot see how one reconciles their conservatism with the Democratic Party of today as Henry ?Scoop? Jacksons or Zell Millers could in their day).? Conservatism, per se, is claimed by those who abhor it as an ideology.? It is contra to that notion, because conservatism was supposed to be the anti?ideal.? Conservatism is not a neat package.? At times I find people trying to argue this to Mr. Frum, or others on his website; but their plights seemingly fall on deaf ears.? They argue that they stand on principles, but the Republicans ask them to make their principles more malleable, ask for Conservatives to be more Republican because Republicans can win.? That?s like saying ?if you outlaw guns, only outlaws have guns.?? Yes, the only the Republicans can win because they are part duex currently of a two-party system.? But Republicans have been losing as of the past half a decade, which has caused a stir and focused the limelight on the Conservative movement that led the party to its zenith since its inception.? The prescription for Republicans? recent ill-health has been to blame the Conservatives and try to get Conservatives to ?open up;? which is the wrong strategy.

??????????? One could go on about the policies under President Bush and the then-controlled Republican congress, and how they did not live up to Conservatives? expectations and it cost the Republicans.? I will spare you the lecture, as there is little of that horse?s decayed carcass left to beat.? Rather, to borrow a term from my dear friend Tom, I will take the route of a ?forward-looking Conservative? and expound on my last paragraph by reaching back and taking some of the past principles that deserve to come with us into the new millennium.? There are two tenets to the Conservative movement that are strong and can help the Republican Party gain prominence (maybe not a majority, but being steamrolled by an Executive-Legislative tyranny of the majority is time and space we currently inhabit, and frankly it sucks): fiscal Conservatism and Social Conservatism.?

??????????? Fiscal Conservatism is a boring topic in my eyes.? Economics is a rambunctious beast that can be tamed through myriad means.? It is circumscribed by the actions of the market forces, or by government.? One keeps it chained so that it can move about within the confines of an open space while still being contained within the boundaries set by other outside forces so it cannot run off.? The latter keeps the beast caged; unable to attain any inkling of freedom, it is stifled by the iron confines of government completely.? During the last generation, we saw that the forces that generally tend to keep economics chained in the yard let the Cujo loose because they felt his total freedom and depravity would lead to unmitigated growth and prosperity.? Cujo was his by a truck.? Now our economy occupies the oppressive cage in the vet clinic, while Dr. Obama and his Technicians seek a treatment.? There is a complete lack of freedom now, which will not help our situation either because our economy will not grow at all.? Furthermore, our President has decided to overzealously pursue all of the drastic changes he campaigned for in his first year while he has the most political capital.? This has brought out the fiscal conservative in the average citizen.? Anderson Cooper can make sexual jokes about the Tea Parties, and ?conservatives? can deride the Tea Party protestors all they want; but there is a spirit and a fight in these people that can help the party.? Recent trends demonstrate a growing unease regarding President Obama?s spending and budget, and a new Gallup Poll shows that Americans are becoming increasingly conservative regarding the size and power of the national government.? This Gallup Poll released other preliminary numbers showing more Americans classifying themselves as ?Conservative? which now hovered at 40%, and David Frum was quick to squelch our optimism with his The Week piece? in which he makes the important argument that 40% won?t win elections.? He leaves out that we witnessed an impressive growth in self described ?Conservatives? at a time when the label and brand have been lambasted by the liberal media since 2006.? The Conservatives in the Republican Party need to act Conservative about spending, and the problems that arise from this are two fold: 1) history has not erased the fact that Republicans spent like drunken-sailors under President Bush and 2) it makes us the ?party of ?no??.? It is important that men and women like Mr. Frum continue doing what they are best at, molding Republican policies to be more Conservative.? How can we accomplish what we want by spending less, or incentivizing better behavior??

??????????? The second ?type? of conservatism was the one that took the most grief by their counterparts in the movement (libertarians) and liberals alike: the social Conservatives.? Being socially conservative can be broadly defined, but we imagine white bible-thumpers from the south.? While a lot of white southerners demonstrate a deep attachment to their faith and abiding by the teachings of that faith, we cannot let social conservatism be defined this way.? What about the black families that have strong values and a sense of tradition?? What about Hispanics who tend to be Catholic and also possess phenomenal family values?? There are a lot of pundits that dwell on hating social conservatives and deriding the party for failing to rake in more non-WASPs, but fall short in addressing the problem of attracting minorities on a foundation of social conservatism and family values.? Another Gallup Poll demonstrated America?s move into a Pro-Life direction, more Americans were self described as Pro-Life over Pro-Choice for the first time ever.? This is despite the fact that it is inherently an up-hill battle for a ?pro-life? movement because of our basic beliefs in curtailing what we view as government intrusiveness.? Nevertheless, people are deciding that protecting the concept of ?life? is a part for government even in this sense, and the increase came among Republicans and Moderates.? Also, there is something to be said about the Proposition 8 vote in California.? I have still managed to find an article that attempts to spin the Prop 8 outcome as some ?Republican surge to keep gays from marrying? and give no credit to the vote attributed by minorities.? As a matter of fact, the entire article is dedicated to snuffing out the African American vote by stating well they only make up ten percent of the population anyway.? Never mind that 70% of blacks voted for Prop 8, and furthermore, Latinos also supported the measure according to a Public Policy Institute poll; this in a state that voted 61% to 37% in Barrack Obama?s favor.?

??????????? Conservatism can be an inclusive tent, we need to find the ways and means to include people that don?t mean surrendering our ideals though.? This is not about ?reforming conservatism? because it cannot be reformed; the Republican Party can be reformed, but the drive to stand ?athwart history yelling ?stop?? and fighting for the principles or traditions you hold dear is a different story.? I believe that the Republican Party can be inclusive, but it needs to remember who the party people are and who the Conservatives are.? We need to be better about arguing our points and reaching out.? Not ostracizing anyone who crosses us as is accused of some radio-show hosts, and certainly not by abandoning what makes us conservative in the first place by pragmatists and Party loyalists.? We need to preach a good sermon, and more importantly, we need to practice what we preach.? If you build a strong Republican Party on a foundation of rights and justice, we can unify conservatives of all races, creeds and religions.? Our conservative impulses are not something to transcend, but something to embrace.?

?

-rj