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
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
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
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.