From Pillars of Prosperity, a speech from September 10, 2003 (PDF and Hardcopy)
One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out 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 huge unconstitutional and immoral income transfer from working Americans to holders of GSE debt.
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 Fannie and Freddie were not underwritten by the federal government, investors would demand Fannie and Freddie provide assurance that they follow accepted management and accounting practices.
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 granted to Fannie and Freddie have distorted the housing market by allowing them to attract capital they could not attract under pure market conditions. As a result, capital 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 policy 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 overinvestment in housing.
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE 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.
Congress should 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 this committee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.
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And yet the main stream (politicians, media, voters, whatever) still consider Dr. Paul a nut. What does that say about prospects?
Although Keith:
Dr. Paul is being interviewed pretty frequently on shows like Cavuto, Wolf Blitzer, & Glenn Beck.
They’re being quite respectful to him as well.
When it comes to monetary matters, it appears they have an interest in Dr. Paul’s opinions.
So he is getting air time…which is not a bad thing.
Dr. Paul is a national treasure and just about the only one who has any insight into the root causes of our current economic ills. I am glad to see him getting more respect, but he is still the lone voice in the wilderness of Washington. I have called my two Senators (one of which is running for President) and my Representative. I got a hold of lower level functionaries who promised to make sure my views on things got to the right people. I’ve also written those people and received the appropriate form letter back. I’m going to write in Dr. Paul’s name and encourage others to do so.
Paul was far from alone or even early in this diagnosis.
One of my profs in business school in the mid-90′s had been in Reagan’s Treasury Department.
He spent considerable economics class time in the MBA program reviewing the evils of GSEs and predicting exactly the problems discussed above.
Still, good for Ron Paul.
Just thought I’d mention that the text of Ron Paul’s speech of 2002 was reprised within a commentary over at Gene Expression (gnxp.com) last week.
gene: gnxp seems to be an interesting site, but I saw no hits doing a google search: site:gnxp.com “Ron Paul” from last week or the prior month.
Care to link the posting?
Wow. Deadly precision. I wish the crash came when he was still running. More reasons why he should have actually run third-party. Supporting Chuck is throwing a lot away.
There are a lot of people living in states where their votes don’t count. NY isn’t even going to be close and all of the electoral votes from the state will go to Obama. As such, my vote can’t sway the result here. I’m planning to write in Ron Paul.
I’ve already read this twice before, but I wanted to share this link with some friends. I just read it again, for the third time, and I am still amazed at the explicit detail to which he foresaw exactly what was going to happen.
Ron Paul 2012!
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