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.

Markass Reviewed by Markass on 10-30-2008. He knew that this was going to happen 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 Rating: 5

[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