Reining In the Regulators

Reining in the regulators is one way politicians curry favor with key supporters.

If you wanted to telegraph the tone of an upcoming congressional hearing, it would be difficult to do better than this: "Lights Out: How EPA Regulations Threaten Affordable Power and Job Creation."

That was the title a House subcommittee gave to its July 26 session featuring the deputy administrator of the Environmental Protection Agency and two industry witnesses. It promised to be a long day for EPA's Robert W. Perciasepe. He is only one of many federal regulators who are sweating in the klieg lights of anti-regulatory fever in the House of Representatives. Rep. Darrell Issa, R-Calif., chairman of the House Oversight and Government Reform Committee is leading the charge and one of his subcommittees was doing the grilling in late July.

Controversy has long attended federal regulatory programs, but it seems we are now witnessing an unusually broad attack on EPA, the Interior Department, the Securities and Exchange Commission, the Consumer Financial Protection Bureau, and the Health and Human Services Department under the new health care reform law, among others. Appropriation riders, the principal avenue of attack, could turn out to be more effective than past assaults.

Issa and other critics say regulation increases business costs and thus retards job creation. In our weak economy, President Obama has accepted part of that premise, ordering federal agencies to review their rules and "eliminate unjustified regulatory burdens." But the administration is also at the barricades defending current regulatory programs.

Not so long ago, however, Democrats were just as resistant as Republicans to regulation that might harm constituencies that support them. Just as Republicans are said to cater to business interests, so Democrats favor lower-income groups that tend to be in their electoral coalitions. So it was that Democrats were at the core of the extraordinary expansion, and damaging collapse, of the government-sponsored housing support agencies, Fannie Mae and Freddie Mac. The agencies' extensive efforts to keep federal regulators at bay are detailed in a book by New York Times reporter Gretchen Morgenson and financial analyst Joshua Rosner titled Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon (Times Books, 2011).

Fannie Mae was run during its high-growth years by James A. Johnson, a clever political strategist who got his start working for Sen. Walter Mondale, D-Minn. With support from the Clinton White House, Johnson built a brilliant campaign to sell the idea that owning a house was essential to fulfilling the "American dream." Boosting homeownership rates required that mortgages be granted to applicants with little means, giving rise to a corrupt industry of mortgage mills that took advantage of people with little or no understanding of the documents they were signing. With the Federal Reserve Board keeping interest rates at rock-bottom levels, many speculators also got in the game, gambling that vacation and investment properties would only increase in value. And, too, it was cheap to borrow against the equity in a home, and people used these loans to buy luxury goods, fancy cars and the like.

Fannie Mae was a big player in the game. It bought many billions of dollars in loans, including huge numbers of subprime mortgages, packaged them in securities and sold them to investors, who were eager for returns higher than the meager interest Treasury securities were paying. Despite the rising risk profile of its portfolio, Johnson told Congress in 1996 that Fannie Mae "will never impose a cost on the American taxpayer."

Reckless Endangerment details the many means Johnson used to protect Fannie Mae from effective oversight. He was an early heavy investor in lobbying services. He developed a vehicle for making campaign contributions to key members of Congress. He established a nonprofit foundation that supported projects in members' districts, and started Help the Homeless walkathons and golf tournaments. He gave jobs to spouses and children of important officials in regional offices. He hired academics to provide a sheen of research respectability to Fannie Mae's economic claims. All this was done in a quasi-governmental setting, where the implicit promise of government backing allowed Fannie to borrow at low rates. This alone was worth some $7 billion a year to Fannie and Freddie, according to the Congressional Budget Office, with about a third of Fannie's share used to line the pockets of Johnson, Franklin Raines and other Fannie executives and their shareholders. Powerful members of Congress like Rep. Barney Frank, D-Mass., were in Fannie's corner.

And Fannie's tactics "for neutering regulators and opponents were . . . copied by much of the financial industry," Morgenson and Rosner write. Preventing new regulatory initiatives is perhaps easier than rolling back rules already on the books. But Issa has asked the public for examples of intrusive regulations, and the Heritage Foundation has produced a list of key prospective rules. High on the list are mandates in the health reform law and also the entire charter of the Consumer Financial Protection Bureau. The House Appropriations Committee has voted to keep the already stretched SEC budget at its current level despite the sweeping duties it's been assigned by the new financial regulatory reform law. And the committee's version of the appropriations bill for the Interior Department, EPA and related agencies in late July drew a sharp rebuke from the White House, which issued a five-page list of dozens of provisions it thought objectionable. Funding for EPA, it said, would render the agency "unable to implement its core mission of protecting human health and the environment."

The administration recently issued OMB's annual assessment of costs and benefits of federal regulations, and its positive reading was reinforced by a study from the Economic Policy Institute arguing the benefits of major regulations issued in the past decade exceed their costs by many billions of dollars. But with aggressive investigators like Issa and appropriators like Rep. Hal Rogers, R-Ky., leading the way, critics of federal regulation could gain the upper hand.