Joe Levi:
a cross-discipline, multi-dimensional problem solver who thinks outside the box – but within reality™

Which Presidential Candidate foresaw the bubble bursting?

This morning the conversation around the proverbial water cooler has been about the effect of the mortgage crash and how it’s pulling down the markets, and subsequently our 401(k) retirement accounts.

Having graduated college with a degree from the Business College, I understand at least the basics of macro-economics. I can’t help but shake my head when I hear about more large companies that are struggling financially. I just took some classes in the Business College, they have teams of people who got degrees in “understanding” this stuff. They went to school to learn how to interpret the markets and the conditions that lead to events, etc. They are PAID to keep the company from repeating history… and look what happened (and is still happening).

So I did a little research into the events that led up to this “collapse” and found a very interesting bill that was introduced which explains why we’re in the quagmire that we’re in today, and who got us there. So, from July 16, 2002, can you tell which Presidential Candidate said the following:

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). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.

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.

The Free Housing Market Enhancement Act also repeals the explicit grant of legal authority given to the Federal Reserve to purchase the debt of housing-related GSEs. 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.

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. This reduces the efficacy of the entire market and thus reduces the standard of living of all Americans.

However, despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the government’s 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.

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 the GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac.

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.

Was it Obama? Was it McCain?

No, it was Congressman Ron Paul, former Candidate for President.


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5 Responses

  1. Darl Johnstonbaugh says:

    Yep, as soon as i read the opening sentence, I knew it was the good doctor. He was and still is the ONLY one speaking out on this. Did you go to the Revolution March or The Rally For the Republic? I did both and also helped organize Ron’s visit to Penn State University back in April, before the PA primary. The man is a true statesman, millions love his message. Sadly, our “two party system” is only a facade meant to divide and conquer. The lame stream media along with the “corportaions” have already decided on a winner for the election, they win no matter who gets “elected”. Rock on and fight the good fight, and turn off your TV!

  2. joshpaul says:

    Great find. I sincerely wish more people would actually *listen* to Congressman Paul without some preconceived notion of who he is and what he stands for.

    He also explains this situation a little more plainly on page 141 of The Revolution.

  3. Joe says:

    @Darl Johnstonbaugh,
    Once you’ve listened to or read “Ron Paul” you can really pick out his stuff. It’s clear, it’s logical, it makes you ask “why on earth has no one else thought of this before?!”

    I haven’t been able to attend any of his rallies yet, but I won’t pass up hearing him if his travels bring him anywhere near.

    I had a “Ron Paul for President” sign in my front yard for months and months…

    And yes, the “two party system” is a thinly veiled attempt by “those in power” to keep their people in power, yet let we the people THINK that we have some say in the process.

    Thanks for swinging by, reading a bit, and especially for commenting! Don’t be a stranger!

  4. Joe says:


    Any relation to Ron Paul? 😉

    I haven’t read his book yet, thank you for providing the link!

    And thank you, also, for paying a visit and participating in the conversation! Hope to see more of your comments soon!

  5. Jake says:

    I envy Dr. Paul’s ability to articulate his point. It’s always so clear-cut and obvious. I just wish more people could think like him. We wouldn’t have to worry about such corruption.

    I have been putting off finishing “The Revolution”, but so far it’s been a great read. I don’t really think I’ve been able to disagree with Paul, at all.

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