While Democrats and Republicans welcomed big government policies that subsidize the real estate market, Congressman Ron Paul warned about the dire consequences of such interventionist anti-free market policies.
In response to the expansion of the FHA program that President Bush announced, Ron Paul addressed the House on July 16, 2002 with a speech where he proposed his pro-free market approach to housing and credit.
“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 housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB).
One of the major government privileges granted these GSEs is a line of credit to 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 these GSEs in times of economic difficulty helps them 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.
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, Freddie, and HLBB 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.
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.”
Neither the House Financial Services Committee nor its Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises felt that Ron Paul’s wisdom deserved further attention or a vote. While Ron Paul has been on record warning about the consequences of interventionist government policies that distort market dynamics, Big Government proponents in both parties have voted for endless bills that grow the role, size, and control of the Federal Government. The result of such policies are greater powers to interfere with and subsidize the real estate, credit, and equities markets.
Congressman Paul ends his speech with a hypothetical forecast of how the Federal Reserve might react once the Real Estate bubble bursts.
“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.
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 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.”
Unfortunately not much has changed and the people who warned about the Big Government policies that will lead to the housing bubble are ignored while the politicians who voted to get us here are now given center stage for their solutions.