“You just can’t keep using the Fed,” the chairman told Politico. “Do you need more of what happened (with AIG) yesterday? If you do, it has to be on a systematic basis.” Frank: U.S. can't 'keep using the Fed'

With the markets still unhappy after the takeover of AIG, House Financial Services Committee Chairman Barney Frank said Wednesday that Washington must consider a bolder, less ad hoc approach to cleaning up the bad debts “clogging the arteries” of the nation’s financial system.

“You just can’t keep using the Fed,” the chairman told Politico. “Do you need more of what happened (with AIG) yesterday? If you do, it has to be on a systematic basis.”


Going forward, the Massachusetts Democrat made two additional points. First, the government should press harder for financial institutions to show more forbearance to avoid foreclosures. “There is some optimism there,” he said of progress made already. “Substantially reducing the foreclosures would help.”

Second, Frank suggested that central bankers in nations allied with the United States could be more helpful. And he specifically took a shot at European bankers who he said pressed Treasury Secretary Henry Paulson for the AIG rescue but put up no money of their own.

“They figured out that we would do it without them, is my guess,” he said.

But with the Dow down again Wednesday and no relief in sight, Frank’s chief focus was on finding a way to bridge the gap between the markets today and what he hopes will be a more orderly, regulated system in the future.

“The easy part going forward is regulation,” he said. “But how do you survive to where you can have regulation and keep bad things from happening? It’s not clear.”

“Everything else having been tried, does the federal government have to buy up a lot of the bad stuff? It’s the good bank/bad bank notion. The federal government has to take up the bad stuff to unclog these arteries, hold it, hope that there will be some recovery in assets, and get the thing going.

“That’s the next question. I don’t know what else you can do.”

It would be a huge undertaking, calling for legislation that would be immensely difficult for Congress to address in the short time remaining before November’s election. But if the markets were to continue to deteriorate, it could yet force a lame duck session at least to address the problem.

Frank is not alone in calling for this debate. Former Federal Reserve Chairman Paul Volcker and Nicholas Brady, Treasury secretary under President Bush’s father, helped author an opinion column published in the Wall Street Journal Wednesday making similar arguments for some new federal entity akin to the Resolution Trust Corporation, which was create to address the S&L crisis in the late 80s and early 90s.

“Until there is a new mechanism in place to remove this decaying tissue from the system, the infection will spread, confidence will deteriorate further and we will have to live through the mother of all credit contradictions,” Brady and Volcker wrote together with Eugene Ludwig, comptroller of the currency under President Clinton.

Frank himself is leery of comparisons to the RTC since he feels it can confuse the debate, but he has talked with Volcker and is planning a hearing on the issue next week before his panel.

“It clearly involved buying up some of the bad stuff. Who buys it, under what terms, etc., etc., you have to have a hearing.”

But it has to be legislation?

“In a democratic society, it’s a great mistake not to,” he said.

“RTC confuses people because it’s real property, etc.,” Frank said. But the debate is better seen as one “arguing that you need a systematic intervention basically to have the federal government step in and unclog the arteries or we die – not die, things don’t get better.”

In the meantime, he joked of introducing a resolution to declare Sept. 15, the day that Treasury and the Fed watched Lehman Brothers go bankrupt, as “Free Enterprise Day.”

“That’s the one day… `Let them all go under, Let the chips fall where they may,’” Frank said. “That lasted one day, free enterprise. And then we went back to a big bailout.”