He knew that this was going to happen

[Markass]

Why did they ignore him..? Because they apparently had something to gain from ignorance..

Ron Paul in the House Financial Services Committee, September 10, 2003



Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

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 Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize 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 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 over-investment 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.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. 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.

[GoldenBoy812]

Why did they ignore him..? Because they apparently had something to gain from ignorance..

Ron Paul in the House Financial Services Committee, September 10, 2003



Mr. Chairman, thank you for holding this hearing on the Treasury Department's views regarding government sponsored enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee.

I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes government subsidies from the Federal National Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage Corporation (Freddie Mac), and the National Home Loan Bank Board.

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 Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase GSE debt. GSEs are the only institutions besides the United States Treasury granted explicit statutory authority to monetize 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 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 over-investment 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.

No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies provided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today's hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers. 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.

I bolded parts of this transcript that have some relation to our current situation...

[maladroit]

is that basically the moral hazard theory?

[Dutch Pimp]

is that basically the moral hazard theory?

or.. the "we screwed the pooch" theory?

[GoldenBoy812]

It toches partly on moral hazzard, but it is centered on competitive markets.

[maladroit]

how was the competitive market affected by the GSE's? it seemed like the private financial institutions had all the business they could handle and then some...wouldn't the subprime crisis have happened anyway even if fannie and freddie were completely privatized in 2000?

[GoldenBoy812]

how was the competitive market affected by the GSE's? it seemed like the private financial institutions had all the business they could handle and then some...wouldn't the subprime crisis have happened anyway even if fannie and freddie were completely privatized in 2000?

Did you pay attention to the bold?

Dr. Paul stated over five years ago:


I hope todays hearing sheds light on how special privilidges granted to GSE's distort the housing market and endanger the American taxpayer. Congress should act to remove taxpayer support from the housing GSE's before the bubble bursts and taxpayers are once again forced to bail out investors who were misled by foolish government interference in the market.

[maladroit]

yes i read the bold bits...did you read my questions?

fannie and freddie were privately owned and publicly regulated....their assets were not guaranteed by the government...there was no real taxpayer support to withdraw until george bush nationalized them...the bubble would have burst anyway even if fannie and freddie were broken apart and sold off to private banks the day after dr. paul's speech

[GoldenBoy812]

yes i read the bold bits...did you read my questions?

fannie and freddie were privately owned and publicly regulated....their assets were not guaranteed by the government...

there was no real taxpayer support to withdraw until george bush nationalized them...the bubble would have burst anyway even if fannie and freddie were broken apart and sold off to private banks the day after dr. paul's speech

Make no mistake about it, government would not, will not have ever let them fail. Remember, they were near bankruptcy during the time of the initial F&F bailout. The reasoning is that given on behalf of the entire bailout, they are too big to fail; to big because of what the good doctor mentioned. The Keynesian model calls for it. Short run orientated "full employment" goals trump all! Not that it is the right call:jointsmile:

[maladroit]

you and dr paul make a good point about the government encouraging F&F to be too big...the bush administration (and congress) leaned on F&F to issue half a trillion dollars of mortgage loans to low income families AFTER US home ownership had reached record levels, and then fannie and freddie were used to buy up bad loans from banks...the government screwed up big time....despite his common sense talk, i am doubtful that the subprime crisis would have been avoided under ron paul if he were president...correct me if i am wrong, but dr paul is anti-regulation and the private banks caused most of the problems leading up to the subprime crisis...they screwed up even bigger time

HOWEVER the too-big-to-fail argument was used to justify the bail out of the private non-regulated banks too, and those bum mortgage loans and mortgage backed securities would have been issued even if fannie and freddie never existed, so the bubble and bailout would have happened anyway, although it might have cost less if the risk was spread around to smaller banks that weren't too big to fail...their failure is an additional cost to americans who had business with them on top of the taxpayers money used for the bailouts so it's a wash on a per capita basis

the federal gov't demonstrated it's willingness to 'intervene' in the financial markets when george bush's daddy threw $120 billion at the savings and loan crisis...perhaps that contributed to the failure of the banks' self-interest to self-regulate their affairs

[JakeMartinez]

Make no mistake about it, government would not, will not have ever let them fail. Remember, they were near bankruptcy during the time of the initial F&F bailout. The reasoning is that given on behalf of the entire bailout, they are too big to fail; to big because of what the good doctor mentioned. The Keynesian model calls for it. Short run orientated "full employment" goals trump all! Not that it is the right call:jointsmile:

You know, "too big to fail" is bullshit in my book. Capitalism doesn't work without two things: Fear and Greed. Fear of bankruptcy, the Greed to grow.

Capitalism is basically a game of musical chairs...except when the music stops, someone's left with nothing instead of just being forced to stand. If people aren't comfortable with the idea, they should look for something different.

[GoldenBoy812]

you and dr paul make a good point about the government encouraging F&F to be too big...the bush administration (and congress) leaned on F&F to issue half a trillion dollars of mortgage loans to low income families AFTER US home ownership had reached record levels, and then fannie and freddie were used to buy up bad loans from banks...the government screwed up big time....despite his common sense talk, i am doubtful that the subprime crisis would have been avoided under ron paul if he were president...correct me if i am wrong, but dr paul is anti-regulation and the private banks caused most of the problems leading up to the subprime crisis...they screwed up even bigger time

The issue boils down to the misappropriation of money entering the real estate market. This was a real estate market that was heavily regulated (not correctly regulated), and when granting privileges to GSE's, it soon allowed investment to pool into what was considered a government backed sector. Had normal market practices been in place, money would not have foolishly flowed into the real estate market.

Moody's along with S&P would have faced much smaller growth potential in a slowing housing market, so they did what government does, although it was technically illegal for them; they pump primed the housing sector by giving bad paper good ratings. This in turn created an artificial housing boom (F&F government backing along with artificial demand created out of dishonest analysis), especially that of sub prime debt (junk being peddled off as > B+ rating). Yet the analysis market is heavily regulated, of which only 3 firms, but mostly the big two (Moody's and S&P) make the calls. Would they have been able to practice fraud had more firms had a clear entrance into that market??? I believe not...



HOWEVER the too-big-to-fail argument was used to justify the bail out of the private non-regulated banks too, and those bum mortgage loans and mortgage backed securities would have been issued even if fannie and freddie never existed, so the bubble and bailout would have happened anyway, although it might have cost less if the risk was spread around to smaller banks that weren't too big to fail...their failure is an additional cost to americans who had business with them on top of the taxpayers money used for the bailouts so it's a wash on a per capita basis

The bubble would not have happened if the marginal propensity for real estate investment was not that high. Granting special privileges, and distorting the market allowed it to surface...


the federal gov't demonstrated it's willingness to 'intervene' in the financial markets when george bush's daddy threw $120 billion at the savings and loan crisis...perhaps that contributed to the failure of the banks' self-interest to self-regulate their affairs

Like i have been saying, this bailout is only a temporary fix; i also believe the frequency of such events has increased due to economic ultrainterventionist policy...

[GoldenBoy812]

You know, "too big to fail" is bullshit in my book. Capitalism doesn't work without two things: Fear and Greed. Fear of bankruptcy, the Greed to grow.

Capitalism is basically a game of musical chairs...except when the music stops, someone's left with nothing instead of just being forced to stand. If people aren't comfortable with the idea, they should look for something different.

True capitalism would not have allowed the result of high market concentration in sensitive sectors...

[maladroit]

"Had normal market practices been in place, money would not have foolishly flowed into the real estate market. "

- that is a reasonable theory, but normal market practices existed outside of the GSE's where over 80% of the bad subprime loans originated...the regulations on the GSE's restricted their ability to issue risky subprime loans BUT the bush administration pressured fannie and freddie to buy the mortgage-backed securities containing subprime loans from the private banks so they could raise some cash to issue more mortgages...if fannie and freddie did not do that, there would probably be less money floating around for mortgage loans...however, other private institutions could have stepped in to buy up those mortgage backed securities...i would like to believe that normal market practices would have prevented this, but i have no confidence in the invisible hand's ability to regulate the markets




"Moody's along with S&P would have faced much smaller growth potential in a slowing housing market, so they did what government does, although it was technically illegal for them; they pump primed the housing sector by giving bad paper good ratings."

- why would they do that? was that because of the falsely perceived government guarantee? didn't they continue to rate the paper highly even after widespread warnings about subprime loans? i hope they are held accountable for that



"The bubble would not have happened if the marginal propensity for real estate investment was not that high. Granting special privileges, and distorting the market allowed it to surface."

- i read a little about those special priviledges....the government actively enhanced the marginal propensity for real estate investment by creating policies to expand home ownership to 5.5 million low income families, despite existing record high levels of home ownership...george bush hosted conferences where mortgage giants, developers, and realtors accepted his challenge (and special privileges) to expand the already hot real estate market to include people that couldn't afford homes...the advertising networks were soon overflowing with enticements for easy approved-on-the-spot mortgages and other loans to people with poor credit histories...here's the president kicking off the bubble party:

LADIES AND GENTLEMEN _ THE PRESIDENT OF THE UNITED STATES:
"Homeownership is also an important part of our economic vitality. If--when we meet this project, this goal, according to our Secretary of Housing and Urban Development, we will have added an additional $256 billion to the economy by encouraging 5.5 million new homeowners in America, The activity--the economic activity stimulated with the additional purchasers, the additional buyers, the additional demand will be upwards of $256 billion. And that's important because it will help people find work.

Low interest rates, low inflation are very important foundations for economic growth. The idea of encouraging new homeownership and the money that will be circulated as a result of people purchasing homes will mean people are more likely to find a job in America. This project not only is good for the soul of the country; it's good for the pocketbook of the country as well.

To open up the doors of homeownership there are some bafflers, and I want to talk about four that need to be overcome.

First, downpayments--a lot of folks can't make a downpayment. They may be qualified. They may desire to buy a home, but they don't have the money to make a downpayment. I think if you were to talk to a lot of families that are-desire to have a home, they would tell you that the downpayment is the hurdle that they can't cross. And one way to address that is to have the Federal Government participate.

And so we've called upon Congress to set up what's called the American Dream Down Payment Fund, which will provide financial grants to local governments to help first-time homebuyers who qualify to make the downpayment on their home. If a downpayment is a problem, there's a way we can address that. And when Congress funds the program, this should help 200,000 new families over the next 5 years become first-time homebuyers.

Secondly, affordable housing is a problem in many neighborhoods, particularly inner-city neighborhoods. You may--we may have qualified homebuyers, but if there's no home to buy, this initiative isn't going anywhere. And so one of the things that we're going to--that I'm doing is proposing a single-family affordable housing credit to encourage the construction of single-family homes in neighborhoods where affordable housing is scarce.

Over the next 5 years the initiative will provide homebuilders and therefore homebuyers with--homebuilders with $2 billion in tax credits to bring affordable homes and therefore provide an additional supply for homebuyers. It's really important for us to understand that we can provide incentive for people to build homes where there's a lack of affordable housing. And we've got to set priorities, and one of the key priorities is going to be inner-city America. Good schools and affordable housing will help revitalize our inner cities.

Another obstacle to minority homeownership is the lack of information. You know, getting into your own home can be complicated. It can be a difficult process. I had that very same problem. [Laughter]

Every homebuyer has responsibilities and rights that need to be understood clearly. And yet when you look at some of the contracts, there's a lot of small print. And you can imagine somebody newly arrived from Peru looking at all that print and saying, "I'm not sure I can possibly understand that. Why do I want to buy a home?" There's an educational process that needs to go on, not only to explain the contract, explain obligation, but also to explain financing options, to help people understand the complexities of a homeownership market, and also at the same time to protect people from unscrupulous lenders, people who would take advantage of a good-hearted soul who is trying to realize their dream.

Homeownership education is critical. And so today I'm pleased to announce that through Mel's office, we're going to distribute $35 million in 2003 to more than 100 national, State, and local organizations that promote homeownership through buyer education.

And of course, one of the larger obstacles to minority homeownership is financing, is the ability to have their dream financed. Right now we have a program that all of you all are familiar with--maybe our fellow Americans aren't--and that's what they call a Section 8 housing program, that provides billions of dollars in vouchers to help low-income Americans with their rent. It encourages leasing. We think it's important that we use those vouchers, that Federal money, to help low-income Americans go from being somebody who leases to somebody who owns; that we use the Section 8 program to not only help with downpayment but to help with continuing monthly mortgage payments after they're into their new home. It is a way to help us meet this dream of 5 1/2 million additional families owning their home.

I'm also going to encourage the lending industry to develop a mortgage market so that this script, these vouchers, can regularly be used as a source of payment to provide more capital to lenders, who can then help more families move from rental housing into houses of their own.

These are some of the barriers that homeowners face--potential homeowners face, and this is what we intend to do about it. But like in a lot of our life, Government can't do everything. It's impossible to provide every aspect of a national strategy, particularly in this case. And that's why we need the help of private and nonprofit sectors in our country to help play a vital role in helping to meet the goal. Many of you here represent the nonprofit as well as the private sectors of our economy and our country, and I want to thank you for your commitment.

Last June, I issued a challenge to everyone involved in the housing industry to help increase the number of minority families to be homeowners. And what I'm talking about, I'm talking about your bankers and your brokers and developers as well as members of faith-based community and community programs. And the response to the homeowners challenge has been very strong and very gratifying.

Twenty-two public and private partners have signed up to help meet our national goal. Partners in the mortgage finance industry are encouraging homeownership by purchasing more loans made by banks to African Americans, Hispanics, and other minorities. Representatives of the real estate and homebuilding industries, through their nationwide networks or affiliates, are committed to broadening homeownership. They made the commitment to help meet the national goal we set."
- President George W Bush, October 2002