The following is the edited transcript of the interview::

Emmanuel Daniel (ED): Ladies and gentlemen, this is a very important conversation with former Congressman Barney Frank who is now in the US, outside Boston, where he lives. He was the House Finance Chair between 2007 and 2011. very much a part of the US financial services industry as well as the overall economy's construction in the crisis that took place in the 2007-2008 period, a very core member of the Obama administration. I'm very pleased to be able to reconnect with Congressman Barney Frank and tap his mind in terms of what he sees the new administration will be faced with. The conversation that we want to have today will focus on Barney's perception of the different personalities that the new Biden administration is putting together, and also on some of the key issues that all of us outside of the United States would be interested to know.

I've tapped on his thoughts on the developments taking place in the US, even right through the previous administration. I'm very excited to have this conversation with Barney to get a sense of how the first 100 days, the get go of the new administration is going to look like. As all of us know, there are a number of very important agendas, many of which are domestic to the US, but some of which are very important to the rest of the world as well. I want to focus the conversation with Barney, firstly, on the personalities that are being brought together for this new administration, and then from there, how they're likely to act out in terms of legislation, in terms of the economy, in terms of domestic policy and rebuilding the economy and so on, and also trade and what's happening globally.

We've had this conversation before, we have rehearsed it in many different ways over the years. Now, with the new Biden administration coming together. The first question that anyone talking to you would be interested in would be, you left the administration having put together the landmark legislation, the Dodd-Frank Act, and now, an entire new team is coming together to, to take it to another level. Also, they have a number of other agendas that they are taking to another level, healthcare, infrastructure, the economy and so on. What is your first sense of the lineup that the Biden administration has put together in terms of the nominees and appointees for the new administration. We have Kamala Harris, of course, but we also have Pete Buttigieg and we have Janet Yellen, as Treasury Secretary, let's start with Janet Yellen, and her relationship and role change that is going to be taking place, having been a Federal Reserve Bank Chairman, and then now on the other side of the fence, as Treasury Secretary.

Prioritise the roll-out of a COVID relief package

Barney Frank (BF): Well, I think she's very much in sync with Joe Biden. In fact, she, in many ways, symbolises or typifies the evolution they've taken. In the start, you're are going see in the Biden administration, something very close to the Obama administration in general, except move somewhat to the left. He doesn't face the political constraints that Obama faced, because Mitch McConnell who led that opposition to Obama has been greatly weakened for a variety of reasons. There was also I think, in the country after COVID. The role that the government had to play. They are broadly supported, there's going to be more support for government activism. Janet Yellen, itself typifies this a few years ago, when she was a member of the Federal Reserve, when she was chair, she said, well, we have to be careful not to let unemployment drop too low. To be honest, she said, we might have to check employment. And there was a point when she was pushing up interest rates for fear that diminished unemployment would generate inflation, along with most other economists, and particularly on the left, she no longer worries about that, to that extent. There's a recognition that unemployment now can go much lower than was previously thought under the Phillips Curve, as it was called, and not to worry about inflation. So she will be very much in line with Obama's, for instance, that nearly the $2 trillion (COVID) plan he proposed yesterday, she'll be very supportive of that. The Fed will be working very closely with the Treasury Department and Janet Yellen personally symbolises that. I think she's the first treasury secretary to have been a Fed Chair. She will also be very supportive as she was when she was Fed Chair of the regulations in the, what's called the Dodd-Frank Bill. And by the way, in that context, significant is Chris Dodd, the co-author of the Dodd-Frank. He was very close to Joe Biden. He was the chair of the committee to pick or to recommend vice presidents. So we start out with that strong favourability and Janet Yellen. The Trump administration did not weaken Dodd-Frank, very much. They talked about doing so but they recognise it was politically unpopular to weaken it. But to the extent that they made some minor tweaks in there, Janet Yellen will move to restore them.

ED: How would you describe Janet Yellen’s relationship with Jerome Powell? because, you know, she's now on the side of the fence who want to expand spending. Some things have worked in favour of the administration coming in, treasury rates have gone up slightly, hopefully it will hold up, inflation quite well, and so on. But how would you describe the relationship they're likely to have?

BF: It'll be a very close relationship, even though they are from different parties. The fact is that when Janet Yellen was a member of the board after her chairmanship, she and Powell got along well. In fact is, Chairman Powell has sounded more like a Democrat these days, in that he has been for some time now, saying, Look to the Congress, we're doing as much as we can to be stimulative and accommodative with the monetary policy with the various forms of injection of funds into the economy. But we can't do it alone. We can't do it without you. He has been a strong advocate of fiscal stimulus. He also remember, he broke with the Trump administration, when Treasury Secretary Mnuchin decided to curtail some of the programmes as of the end of last year, that had been instituted by Congress to stimulate the economy, and Powel differed with that. He had to give in because of the way the law was. So, Powell, although he was appointed by Trump and he is a Republican, I think he's also very much in line with the administration's thinking and I think he and Yellen will have a very good personal relationship as well.

ED: The equity market is a runaway at the moment. There seems to be kind of a need to bring Main Street with Wall Street together again right now. How do you think that's going to play out? What do you think the issues are and who are the personalities that are going to shape that?

Shrinking trade-offs between inflation and unemployment

BF: Actually, critical question is Biden understands it. That's why he stressed yesterday that his first package legislatively, is to get more money into the pockets of average citizens raising that stipend from $600 to $2000. You will see, I think, on Biden’s part a serious effort to make sure that the average Americans are benefited. First of all, in the direct subsidy, I think you'll see soon later on infrastructure, which you mentioned, which puts a lot of people to work, including non-college educated people. I think you will see an extension of Medicare, not Medicare for All that was really never realistically on the table. But you will see an expansion of Medicare, maybe lowering the age to 60, maybe even into the high 50s. So Biden will be doing a lot to try to do that. I should say the one area, I was talking about how the Biden administration will be the Obama administration moved a couple of degrees to the left, because economics thinking is changed about the trade-off between unemployment and inflation seem much, much less of a trade-off. And secondly, there's more of an understanding and a willingness to support government. The one major disjunction between Obama and Biden will be on trade. You will not see an immediate renewal of TPP, as it then was, I think you've seen a great evolution. Biden will be unwilling to go forward with more trade until and unless he's gotten some of those protections for non-college educated people who tend to be hurt by some of the trade, and he would want to insulate them from that harm before he expanded it.

ED: How left do you think the Biden administration will be willing to go? Where does Bernie Sanders stand in this whole thing? Will we go all the way left and embrace that wholly or will there be some somewhat of a control in the whole process?

BF: It was never going to go as far left as the Republicans claim. There was never going to be the New Green Deal, or Medicare for All in the first place. People forget. I have to say to some of my friends on the left who argue how much we should listen to the people? Yeah, well, among the people you seem to not want to listen to, are the majority of voters in the Democratic primary who picked Joe Biden over the candidate you preferred. Biden comes in with a very solid popular majority among Democrats to expand Medicare, but not wipe out private insurance, for example. And that's been reinforced by the election, which was somewhat close. And to his credit, because I’d differ with his approach to things Senator Sanders has realised this, because he's going to be Chairman of the Budget Committee. Frankly, I think the fact that that was on the line was one of his incentives to be much more supportive of Biden in November, then he had been of Hillary Clinton four years earlier. And he himself has said that as Chair of the Budget Committee, he is kind of dividing his approach. He will work with Biden to implement the expansion of Medicare and infrastructure and those sort of mainstream liberal positions. He will continue to advocate going much further, but he won’t hold the rest of the programme hostage to get that. He'll be running a two-track thing, which is doable. He will help implement the Biden agenda, which is Obama a couple degrees to the left. And he will then on a separate track advocate going much further. One of the sayings that has gotten things wrong, it seems to me was the Lord Acton, that ‘power corrupts and absolute power corrupts absolutely’. I think in our system, and in other democratic systems, it's the opposite. What corrupts, is not having any power, not having responsibility encourages politicians to act irresponsibly. When people are given power, and there are consequences to their actions, they get more responsible. So Bernie Sanders, Chair of the Budget Committee in the Senate, that's very closely divided, will be a much more politically realistic operative than Bernie Sanders as the lone voice in the wilderness.

ED: Okay, so give the guy the driving seat and give him the steering wheel, and he'll behave very differently, right?

BF: It worked with everyone, except Donald Trump.

ED: You went on record last year saying that, you wouldn't like to see Elizabeth Warren in the driving seat and now she isn't. So will that sort of play a role in how she perceives what needs to be done?

BF: The position that Sanders is in right now, frankly, Elizabeth Warren has always understood. In fact, she's had some influence. Yes, she advocates some positions to the left, although, remember, she understood the impracticality both politically and operationally, of Medicare for All. During the campaign, one of the problems she had was, she tried to bridge that by saying, Well, yes, we go with Medicare for All, but here's how we will approach it. She tried to sort of take an incremental approach to the radical change, and that cost her on both sides, but she's always been very realistic and respected by her colleagues. Sanders, over the time has not been a major player in the actual operation, he's chair of the committee, Elizabeth Warren's, the day she got there was much more operational. She was the model of how you could have these further extensive goals, but work within what is politically possible. I think she will emerge as one of the leaders in the Senate in helping Biden, but at the same time, by nudging him to the left.

ED: Let's take tax reform. This is something that the market has been quite afraid of, which is Biden has promised tax increases, right?

BF:The market is afraid of paying taxes.

ED: Right. So how far do you think that will go? I mean, if you're saying to me that they're not going to go all the way left,

BF: You know, starting with Bill Clinton, there's been a Democratic Republican alteration on the top individual rate between the mid-30s and the high-30s. Moving a few points, but a few points at that level can mean a lot of money. Yes, I think Biden will push him will succeed in getting the tax top tax rate back up close to 40% individually. He will also I believe, increase the corporate tax rate and probably the capital gains rate, but not to where they had been. I think we may see both of those go up into the mid-20s. I do think because it's taken on a great symbolic value that Democrats, I hope and I think they will finally change the tax code and make it explicit that carried interest is to be taxed as capital gains, and not as operational profit from the hedge funds. So I think you will see increases of 5% out of 100% in in the top individual rate, and in the corporate and capital gains tax rates.

ED:Are there any items on the Trump’s expenditure bill, which can be cut? I saw that Trump signed off on a $700 billion Space Force in a budget. That sounds to me like a huge deal.

BF:I don't see a decrease in the rate of increase in the military, I hope we've been stabilising, to go down. One of the paradoxes of Trump was he talked, I thought, correctly, that we were not getting enough support from our allies on military spending, and that we were sort of giving Europe a free ride and to some extent, in Japan, and he wanted them to pay more. I'm for that I've been for that for a long time. The problem is that the corollary of that is that you then can cut American spending. He has done both, he's complained that we're spending too much money to be the others. But then he increases our spending, one that removes every incentive to spend more. By the way, every year, the last couple, Trump has increased, $30 or $40 billion Federal spending to compensate American farmers for the damage he had done to them by his trade policies with China in particular. Trump's trade policies hurt American farmers. Now, maybe those were good policies or not. But nobody could deny that hurt American farmers in this great free enterprise of the way he dealt with that was to increase the most wasteful anti-market programme in the Federal budget, which is farm subsidies. So yes, you can cut back on that. Actually, I would hope he would undo this Trump’s creation of the US Space Force. We now have the Army, the Navy, the Air Force, and the Space Force. That's not more expensive in hardware, but it certainly is administratively.

Theother area is this, the Republicans have greatly relaxed the constraint of the budget deficit. When Obama was there, he had to worry about the deficit politically. I think economically, it has long been exaggerated as a problem. That is I think our country has a capacity to carry, you know more than one side thing on the debt. We do the Federal debt differently than anybody else in the world does debt. Anybody else in the world, private sector, public sector, if you do a long-term physical improvement, that doesn't count the same as an immediate short-term expenditure, the Federal government builds roads, and that counts the same as a direct expenditure for salary. We don't take into account the long-term benefits of that. But in any case, the budget deficit has just exploded under Trump. They clearly meant nothing to the Republicans. To quote, Cheney who's not in the news these days, Dick Cheney, the Vice President who said, deficits don't matter. He was right politically and much closer to right economically than its critics. Anyway, with Biden, the Republicans are starting to object to some of Biden's programmes, and the grounds are they are going add to the deficit, they will be totally non credible, given their own record.

ED: This is this is uncharted territory. I mean, we're now entering a realm where the deficient and the total debt is larger than the GDP. So we stopped counting at this point, right.

BF: You may also argue that there were different kinds of debt. People said, well, what are you doing to future generations, if you build up the debt? Well, it's the result is that future generations have a much better transportation system, much less damage to the climate, that's a good thing. You know, when you buy a house, you get into debt but you got a house.

ED: I noticed that Labor Secretary Marty Walsh and the Agricultural Secretary, these are guys with grassroot background right, ex-labour, ex-union people who worked on the ground and holding it that way. Also, something that is not pointed out very clearly is that the Biden administration is planning for $1 trillion worth of infrastructure spending, right. That's going to be going into local government.

BF: By the way that spending in the Federal government, because as I said, it's the same as operational day to day but in any other entity, it would be capital improvements, which you do for daily operations. You know, we were talking about the administration and who they are, before we run out of time, I do want to say, one very important signal has been given that this is going to be a very fair but tough administration of the Dodd-Frank Bill.

They were the two toughest regulators, but also fair, I believe, and accurate under Obama. One was Sheila Bair at the at the Federal Deposit Insurance Corporation (FDIC). The other was Gary Gensler, who was chairman of the Commodity Futures Trading Commission. He is the appointment that Biden has announced. He's going to be head of the SEC, which is the most important of the corporate regulators. That in itself, and as a signal to me, you are going to see a full-fledged, accurate and reasonable but very tough administration of financial regulation.

ED: Do you have concerns about municipal debt at the local government level because that's raking up as well?

BF: You know what my concern is. My concern is that I wish I had some cash to buy it. Historically, the rate of default, on what we call “full faith in credit” municipal debt, that is debt that is backed by the taxing power of the issuing entity, is the safest debt. It is only slightly less safe than US Treasuries. The default rate on municipal debt is very small, what often happens is of an entity, a city is in trouble, the state will step in to cover their debts, because otherwise it would affect negatively every other city in that state in terms of interests they had to pay. The biggest difference between the Republicans and the Democrats on the question of a COVID relief package, which whether or not, at state and local government, Trump and McConnell were against that. The Democrats give that a very high priority. Ironically, for Republicans who objected that Democrats didn't want to fund the police. The biggest attack on police funding was the Republicans’ refusal to give money to the entities that paid for the police. You know, the cops aren’t volunteers, they get paid pretty well as they should be. But what you have in the package that Biden announced yesterday is hundreds of billions of dollars of aid to state and local government. So whatever people thought about the fear of default, I think it was exaggerated before, but with the Democrats in power with Biden administration, the fact is that help is on the way for the state and local governments. Municipal debt is clearly a lot more secure, going forward than it was a week ago.

ED: Something about Dodd-Frank, is that there was a lot of focus in the past on the institutions on capital charge and all of that, but not very much focus on the community level support that was being created under Dodd-Frank. You have the Community Reinvestment Act. One of my favourite really was the consumer protection aspect of the Dodd-Frank Act. What do you think would be the priorities now to either strengthen, ameliorate, or vary what Dodd-Frank had already achieved?

BF: That's the biggest area where Trump managed to weaken what we did in the financial reform bill. He put people in charge of the Consumer Financial Protection Bureau that didn't believe in it. Mick Mulvaney, who was the acting director, tried to kill it when he was in the House, and it will be restored to great strength, it's very popular. It's interesting that while the Republicans kept moving to try to repeal President Obama's health care plan, they left all that complaints about the Consumer Bureau.

They never ever tried to repeal it or change it. But Republicans didn't want to have to vote to weaken it. That will be fully strengthened. That will be the appointee that frankly will I think be chosen that'll be an area of great influence by Senator Warren. And that the Consumer Bureau will be restored to full strength. Similarly on the Community Reinvestment Act, but actually predates our bill by about 40 years, which says that banks cannot only do activity in the nicer neighborhoods, and ignore the poor neighborhoods in their services. There was an effort by the Trump administration to weaken that.

The Federal Reserve, because it's a joint operation, objected to that. You will see again a full restoration of the Community Reinvestment Act expanded to cover the new digitalisation, the diminution of geography independent of bank activity, but those consumer activities will be greatly strengthened.

ED: What about Fannie Mae and Freddie Mac? What's going to happen to these two organisations, the commercialisation of mortgage debt, mortgage risk?

BF: Well, two things, one, in terms of irresponsible mortgage debt, etc, we really did take care of that in the legislation we passed. We banned, Fannie and Freddie aren’t able to finance inappropriately granted mortgage. We basically hauled out those kinds of mortgages, and we did tighten up some of Fannie and Freddie. But the big thing is, for the last 10 years, it's been a consensus that Fannie and Freddie should be replaced by a federally charted set of entities. So you're going to have competition, that would sell a guarantee to mortgage issuers against interest rate fluctuations, but not credit, the lender would still take the full responsibility for any bad credit decisions. But the institutions would be protected against great fluctuations in the interest rate, because otherwise, you couldn't have 30-year fixed rate mortgages.

Nobody is going to lend, the government wouldn't allow a bank to lend a fixed rate for 30 years, unless it was such a high rate, nobody wanted to take it out. So what I think you will see now is support for the chartering of entities that have the mandate to sell appropriately priced interest rate risk insurance to mortgage issuers, so they can do the 30-year mortgages.

ED: Barney, when you were the Congress Chair for Financial Services, I had this impression that there was this so-called kitchen cabinet as it were, of people like yourself, Lawrence Summers, maybe Timothy Geithner sort of, coalescing to form policy and create direction. Who do you think would be the most important, influential people coming together and not just in the Fed, but also in the Office of the Comptroller of the Currency (OCC), the FDIC, the personalities that are going to hold the whole relationship together?

Enforcement on financial regulation

BF: Well of course, Secretary Yellen, because she'd been on the Fed had was deeply steeped in the regulation. Gary Gensler, who I mentioned before, he is a very assertive regulator and have a major impact as the head of the SEC. On all the other regulators they fit together in this agency we created called the Financial Stability Oversight Council. On the Federal Reserve, Lael Brainard who had been the undersecretary of the treasury with a major role in trade. She was a lead defender on the Fed. She's a governor for good regulation, she helped block he Republican effort to undo Community Reinvestment Act. She'll have a major role, I believe. Senator Warren, who is a very thoughtful regulator, she goes further in some ways, and I would have gone or did go. But she will certainly be an important voice in that operation.

ED: Something that foreign banks are concerned about is where some of the prescriptive regulation, and sometimes the fines that they face when they do US dollar clearing in the US. I was under the impression it was the New York Fed that oversaw that or had jurisdiction over it, because the foreign banks are generally located in New York. But there's also the New York state banking authority, right? How would you describe the relationship between the two? What is it that foreign institutions doing clearing in the US need to be concerned about?

BF: The New York State Fed and the Fed duo work close together. One of the things that puzzles that non-American sometimes causes us difficulty is what we call the dual banking system, being Federally chartered or state chartered. and there's an overlap. If you have a charter from the state, you're not regulated by any Federal regulator, except the FDIC, because you need deposit insurance. Generally, the two work very well together. I'm on the board of a bank in New York City, a bank that is state chartered. But we're also covered by the FDIC as all banks are. It's been my experience that the two regulators work very closely together. When we have meetings with regulators or discussions with regulators, it's generally with both of them and they have worked clos. There was a case in New York, where there was friction. New York had a very vigorous regulatory system when Eliot Spitzer was Attorney General, people remember, and I do remember at least one case where the Fed thought the state of New York had been too vigorous. Some of that regulations of the foreign bank is from the state regulators in New York, I think you will see fairly good coordination of that going forward. The area that you see very vigorous international regulation, is of the overseas derivative activity of American banks. Gary Gensler fought very hard. There was an effort led by JP Morgan Chase, to say that if an American bank was doing things overseas in the derivative area, that they would be governed by the host country's laws and Gensler fought successfully quoting, I think, accurately our bill, they said, No, we have the right to say that that can only happen if we think those laws are accurate. The American regulators will decide whether the host country's laws are adequate and if not, those banks will be regulated by America. That came up in the middle of that debate, JP Morgan Chase suffered that $8 billion loss from the so-called London whale, and that it’s on American supervision.

ED: Actually, on the financial oversight agenda, there are a number of things building. There is derivatives of American banks, that's one. The second is actually the cash position of American corporations, right. The largest ones are getting larger. We had the problem of GE in the 1990s and then into the 2000s, and AIG, but today the top 5-10 American corporations, incredibly cash positive and they are not just domiciled in the US but globally and so on. So there's this whole thing about too big to fail and the knock on effect of systemic risk. How do you think that's going to evolve? What are some of the issues there?

BF: I'm very proud of what we've seen from Dodd-Frank in the two or three areas. We have reduced their ability to do risky things and we have increased the amount of money they have to keep on hand and in case risk goes bad. But one thing that hasn't been tested is what happens when a very big institution of systemic impact goes kept can't keep going. We have a rule in there that says, in that case, they're not too big to fail, they failed. What happens though is when they fail, the Federal government will step in, take over. To the extent that there is not enough in the entity to cover it’s debts that the Federal government will cover enough of those debts to prevent a downward spiral and recover that money from other large financial institutions by a formula, I think that'll work. We fortunately haven't had tested it yet. I do think that, that's one area when we talk about the cash position of corporations. I hadn't thought about that. But as you mentioned, that could be an area where Gary Gensler as the head of the Securities and Exchange Commission could have a role because obviously, one of the things the SEC is the guardian of the investor is to really make sure that you don't get sold stock by a corporation that shouldn't be doing it. So that excessively heavy debt position endangering you. That could be an area that became a problem. I think, given Gary Gensler’s personality and ability that would be an area where the SEC might step into.

ED: So we're going to keep a watchful eye on Gary Gensler. Barney, when Dodd-Frank came about, bitcoin was nothing, right? Today, where it is now, $40,000? It's creating all kinds of potentially systemic issues. It's a new asset class, it's huge, it's unregulated, and so on. What do you think needs to happen to legislation to sort of start and wrap it?

Bitcoin should not undercut monetary policy

BF: The SEC has already stepped in and basically objected to people selling it as an investment vehicle, as opposed to a currency vehicle. Obviously, the Federal Reserve and other central banks don't want to see it become an alternative currency to the extent that it undercuts their control of monetary policy. I think you'll continue to see the investor protection, although it does seem that the investors don't need that much protection, except they're probably forgetting their passwords. But that's not up to the SEC, that's for the with the memory drugs. I don't know what's going to happen. I do think you can see central banks, trying to restrain the extent to which it becomes an alternative currency. I guess you just have to, the question will be how is it used in your transactions? Inevitably, that's going to increase. But I'll be honest, we had enough to worry about back then. I have not looked at that the way I had to look at these other things. You have to go back to my statement that the lack of responsibility is what weakens you. I've had no responsibility for bitcoin. So I don't really think about it.

ED: Yeah, well, in some sense, it's not just bitcoin, it’s the whole technology dimension of finance. Now, the OCC would take care of it, if it is banking related. But now increasingly, there's this thing called financial technology and non-banks, which are significant.

BF: A great deal to be gained in terms of efficiency, by modernising and digitalising the payments system. You know, there's no reason inherently why I should be able to actually deposit a cheque tomorrow, and have to wait three days to have that money. That's an impediment in the system. So obviously, if you are able to get rid of that, that would be very helpful.

ED: Do you think that Lawrence Summers and Timothy Geithner would have a role in the new administration? How would they be as actors?

BF: Tim Geithner’s main job is running a company which is pretty time consuming. Larry Summers is part of the evolution I have talked about. Larry Summers is, I think more in line with the evolution I talked about with Janet Yellen with Joe Biden. Give him credit, Larry Summers has said, you know what, we have new evidence, and he's part of this new consensus, I think that says, we don't have to worry as much about too much employment, because no, that's not going to cause inflation. I think he'll continue to be an important policy voice in encouraging this more flexible approach. But also, I think his saying it gives a lot of people assurance, that this is not just some left-wing flight of fancy, that says, we don't have to worry as much about the constraints but a serious economic analysis based on experience.

ED: You know, one of the nice things I liked about the lineup for the Democratic Party, presidential selection process, was the range of issues that were raised and the range of options, and I would have liked to see a little bit of everything in the administration. I would have liked to see Andrew Yang given an executive position but he's not part of the lineup, and neither is Elizabeth Warren. But Pete Buttigieg is definitely in there, how representative do you think the administration will be of all the ideas that were put up during the nomination process?