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Congressional Record [.PDF]
IN THE HOUSE OF REPRESENTATIVES
Wednesday, September 10, 2003
2003 Ron Paul 96:1
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.
2003 Ron Paul 96:2
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.
2003 Ron Paul 96:3
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.
2003 Ron Paul 96:4
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.
2003 Ron Paul 96:5
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 Americans.
2003 Ron Paul 96:6
Despite the long-term damage to the economy inflicted by the governments interference in the housing market, the governments 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.
2003 Ron Paul 96:7
Perhaps the Federal Reserve can stave off the day of reckoning by purchasing the GSEs 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.
2003 Ron Paul 96:8
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 Freddie Mac.
2003 Ron Paul 96:9
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.