Classic Ron Paul: End the “Fred” (and the “Fan”)

No, that wasn’t a typo.

In the fall of 2003, five years before the housing bubble burst, then-Congressman Ron Paul was a lonely voice in D.C., warning that the Federal Reserve, Congress, and the Bush Administration had created a bubble that was eventually going to burst with drastic consequences. One of the ways he tried to prevent the bubble was to end all government support for the government sponsored entities Fannie Mae and Freddie Mac, which underwrote housing loans.

Dr. Paul introduced legislation, the Free Market in Housing Enhancement Act, to end government support for Fannie and Freddie. Not only did the act not pass, but Fannie and Freddie are still using taxpayer money to create new housing bubbles! But, thanks to Dr. Paul and Campaign for Liberty, more Americans than ever understand the dangers of housing bubbles and are involved in the fight to restore free-markets and sound money.

Here and below is Dr. Paul’s official statement on the bill:

INTRODUCING FREE HOUSING MARKET ENHANCEMENT ACT

______

                            HON. RON PAUL

                               of texas

                   in the house of representatives

                    Wednesday, September 10, 2003

 Mr. PAUL. Mr. Speaker, I rise to introduce the Free Housing Market

Enhancement Act. This legislation restores a free market in housing by

repealing special privileges for the housing-related government

sponsored enterprises (GSE). These entities are the Federal National

Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage

Corporation (Freddie Mac), and the National Home Loan Bank Board.

According to the Congressional Budget Office, the housing-related GSEs

received 13.6 billion worth of indirect Federal subsidies in Fiscal

Year 2000 alone.

 One of the major government privileges granted the GSE is a line of

credit to the United States Treasury. According to some estimates, the

line of credit may be worth over $2 billion dollars. This explicit

promise by the Treasury to bail out the GSEs in times of economic

difficulty helps the GSEs attract investors who are willing to settle

for lower yields than they would demand in the absence of the subsidy.

Thus, the line of credit distorts the allocation of capital. More

importantly, the line of credit is a promise on behalf of the

government to engage in a massive unconstitutional and immoral income

transfer from working Americans to holders of GSE debt.

 The Free Housing Market Enhancement Act also repeals the explicit

grant of legal authority given to the Federal Reserve to purchase the

debt of GSE. GSEs are the only institutions besides the United States

Treasury granted explicit statutory authority to monetarize their debt

through the Federal Reserve. This provision gives the GSEs a source of

liquidity unavailable to their competitors.

 The connection between the GSEs and the government helps isolate the

GSE management from market discipline. This isolation from market

discipline is the root cause of the recent reports of mismanagement

occurring at Fannie and Freddie. After all, if investors did not have

reason to believe that Fannie and Freddie were underwritten by the

Federal government then investors would demand Fannie and Freddie

provided assurance they were following accepted management and

accounting practices before investing in Fannie and Freddie.

 Ironically, by transferring the risk of a widespread mortgage

default, the government increases the likelihood of a painful crash in

the housing market This is because the special privileges of Fannie and

Freddie have distorted the housing marketing by allowing Fannie,

Freddie and the home loan bank board to attract capital they could not

attract under pure market conditions. As a result, capitol is diverted

from its most productive use into housing. This reduces the efficacy of

the entire market and thus reduces the standard of living of all

Americans.

 Despite the long-term damage to the economy inflicted by the

government’s interference in the housing market, the government’s

policies of diverting capital to other uses creates a short-term boom

in housing. Like all artificially-created bubbles, the boom in housing

prices cannot last forever. When housing prices fall, homeowners will

experience difficulty as their equity is wiped out. Furthermore, the

holders of the mortgage debt will also have a loss. These losses will

be greater than they would have otherwise been had government policy

not actively encouraged over-investment in housing.

 Perhaps the Federal Reserve can stave off the day of reckoning by

purchasing the GSE’s debt and pumping liquidity into the housing

market, but this cannot hold off the inevitable drop in the housing

market forever. In fact, postponing the necessary, but painful market

corrections will only deepen the inevitable fall. The more people

invested in the market, the greater the effects across the economy when

the bubble bursts.

 No less an authority than Federal Reserve Chairman Alan Greenspan has

expressed concern that the government subsidies provided to the GSEs

make investors underestimate the risk of investing in Fannie Mac and

Freddie Mac.

 Mr. Speaker, it is time for Congress to act to remove taxpayer

support from the housing GSEs before the bubble bursts and taxpayers

are once again forced to bail out investors who were misled by foolish

government interference in the market. I therefore hope my colleagues

will stand up for American taxpayers and investors by cosponsoring the

Free Housing Market Enhancement Act.