Ron Paul - Housing Crisis

Summary

Congressman Paul opposes government intervention into the free market. He believes that actions by the Federal Reserve Bank and the federal government create cycles of booms and busts that are the causes of recessions in the US. As part of this theory, Congressman Paul spoke out against the manipulation of interest rates and loosening of restrictions for the purchasing of houses. He warned in 2001 that these practices were creating a false boom or bubble that would eventually bust.

In 2007, he again warned that the bubble was beginning to bust and that when the bubble finally fully busted, house values would drop in some areas up to 40% or 50%. He warned that loose money policies had led to the problem and that the problen would not be fully solved until the Federal Reserve Bank ceased intervening into the market. He repeated these calls in 2007 and 2008 for the government to remove itself from the housing market and let it normalize itself.

In 2007, Congressman Paul proposed legislation to prevent the government from taxing people on the amount of money that they are forgiven in a deal with a bank relating to the value of their home.

Congressman Paul opposed the legislation to take taxpayer funds and pay off mortgages for banks, owners, and speculators. He stated that the government cannot be used to socialize losses of private citizens at the cost of the more responsible or uninvolved citizenry.

The Upcoming Housing Crisis

In September of 2001, Congressman Paul spoke on the House floor about his opposition to federal reserve bank policies that provided money at unrealisticaly low interest rates. He states that the loose money will lead to an eventual collapse of the housing market when the intervention of the government can no longer prop up the market.

Government and the Housing Market

In March of 2007, Congressman Paul used his "Texas Talk" to discuss the interaction between the government and the housing market.

Don't Blame the Market for Housing Bubble
March 19, 2007

The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages. When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages. We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices. But capitalism is not to blame for the housing bubble, the Federal Reserve is.

Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending. The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly. This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed’s easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed. The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify?

Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it. Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom. The Federal Reserve provides the mother’s milk for the booms and busts wrongly associated with a mythical “business cycle.” Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and you’ll have a pretty good analogy for Fed policies over the last two decades. Unless and until we get the Federal Reserve out of the business of creating money at will and setting interest rates, we will remain vulnerable to market bubbles and painful corrections. If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Alan Greenspan and Ben Bernanke.

Mortgage Cancellation Relief Act

In September of 2007, Congressman Paul issued a press statement noting his support for the Mortgage Cancellation Relief Act.

Congressman Ron Paul Cosponsors "The Mortgage Cancellation Relief Act"

September 6, 2007 – Washington , DC . Congressman Ron Paul took action today to shield American homeowners from an outrageously unfair IRS tax policy by cosponsoring The Mortgage Cancellation Relief Act.

H.R. 1876 bars the IRS from considering partial mortgage forgiveness as income subject to taxation.

Under current law, only two categories of individuals pay taxes when selling their principle residence: those who have been able to realize a capital gain of more than $250,000 ($500,000 on a joint return) and those who lose the equity in their home and are forced to pay taxes if the lender forgives some portion of the mortgage debt.

“In these difficult times with the credit crunch and housing market downturn, some homeowners are finding it more and more difficult to avoid foreclosure and stay in their homes. If the bank allows a homeowner leeway and renegotiates with them in lieu of foreclosure, the IRS should not victimize the homeowner for doing the best they can to pay their debt.” Stated Congressman Paul.

Now is not the time to increase the tax burden on struggling homeowners. Strict reins must be put on the IRS by Congress to limit as much as possible the damage it does to the taxpayer and to the American dream.

Government and Housing

In May of 2008, Congressman Paul used his "Texas Talk" to address the effects of the government intervention in the housing market.

Big Government Responsible for Housing Bubble

The House passed two bills attempting to rehabilitate the housing and mortgage market this week. There doesn't seem to be any shortage of criticism and blame for the bad decisions, and rightly so. Lenders and banks do share much of the blame for the overheated market. Lending standards were relaxed, or even abandoned altogether, creating an exaggerated pool of homebuyers that led to ballooning home prices that many, especially real estate investors, expected to continue forever.

Now that the bubble has burst, the losses are staggering. However, many in Washington fail to realize it was government intervention that brought on the current economic malaise in the first place. The Federal Reserve’s artificially low interest rates created the loose, easy credit that ignited a voracious appetite in the banks for borrowers.

People made these lending and buying decisions based on market conditions that were wildly manipulated by government. But part of sound financial management should be recognizing untenable or falsified economic conditions and adjusting risk accordingly. Many banks failed to do that and are now looking to taxpayers to pick up the pieces.

This is wrong-headed and unfair, but Congress is attempting to do it anyway. These housing bills address the crisis in exactly the wrong way, by seeking to hide the problem with more disastrous government bail-outs and interventions. One measure, HR 5830 the Federal Housing Administration (FHA) Housing Stabilization and Homeowner Retention Act would allow the FHA to guarantee as much as $300 billion worth of refinanced home loans for those facing threat of foreclosure.

HR 5818 the Neighborhood Stabilization Act, would provide $15 billion in loans and grants to localities to purchase and renovate foreclosed homes with the object of then selling or renting out those homes.

Thankfully, President Bush has vowed to veto both of these bills. It is neither morally right nor fiscally wise to socialize private losses in this way. The solution is for government to stop micromanaging the economy and let the market adjust, as painful as that will be for some. We should not force taxpayers, including renters and more frugal homeowners, to switch places with the speculators and take on those same risks that bankrupted them.

It is a terrible idea to spread the financial crisis any wider or deeper than it already is, and to prolong the agony years into the future. Socializing the losses now will only create more unintended consequences that will give new excuses for further government interventions in the future. This is how government grows - by claiming to correct the mistakes it earlier created, all the while constantly shaking down the taxpayer. The market needs a chance to correct itself, and Congress needs to avoid making the situation worse by pretending to ride to the rescue.

The Government and Housing Markets

In August of 2010, Congressman Paul used his "Texas Talks" address to state that the government should withdraw itself from the housing market and allow the market to stabilize itself.

Let the Housing Market Normalize!

Recently there have been some encouraging signs that Congress is finally willing to admit what should have been evident two years ago. Even after a $150 billion bailout, Fannie Mae and Freddie Mac are still bankrupt and should be abolished. Indeed Rep. Barney Frank, a longtime champion of Fannie and Freddie has made a few statements alluding to this and I have signed on to a letter asking him to clarify his remarks and hold hearings on this topic. There seems to be a growing consensus in favor of abolishing Fannie and Freddie. This is the good news.

The bad news is that instead of simply returning to the free market, Fannie and Freddie will probably be replaced with something equally damaging, and at this point we can only guess what that will be. One possibility is that instead of these two giant Government Sponsored Enterprises (GSEs) the government will deputize thousands of smaller banks to do the same thing – that is to securitize mortgages with taxpayer guarantees to encourage lending that otherwise would not happen. In other words, there will be a myriad of smaller Fannies and Freddies, and government involvement will reach even deeper into the financial sector.

Fannie and Freddie, and thus the taxpayer, has an alarming $5 trillion exposure to the mortgage market. To some, spreading out this risk might seem tempting, and a smart thing to do. But the fact remains that if a bank expects to lose money on a loan, so will the taxpayers. Playing around with structures and definitions will still not deal with the root problem – government meddling in the housing market, playing fast and loose with our tax dollars, and central planning by the Federal Reserve.

Banks have complex risk assessment strategies in place that help them forecast if a particular loan will make them any money or not. If they expect to make money, they will approve the loan. If they have doubts, sometimes they will ask for a co-signer to improve their odds. You might do this willingly for a friend or a relative if you didn’t mind losing some money on their behalf, but current government policies essentially force taxpayers to become cosigners for risky borrowers that are complete strangers, who the banks have already determined to be bad risks. Taxpayers have no choice in the matter because politicians decided a few decades ago that dangling homeownership in front of more people seemed like a good way to garner votes.

That was sold to voters as a compassionate gesture to the poor and beneficial to society as a whole. After all, how could giving more Americans an ownership stake in society be bad? The combined policies of loose credit and government backing increased the demand for housing and drove prices sky high. When the housing market heated up to the breaking point everything came crashing down. Those suddenly facing foreclosure saw the reality of government compassion. Truly, when government offers you a gift, you should eye it with great suspicion.

Another tragedy is that many job seekers are now tethered to their locations because of upside down loan obligations. It takes a lot of effort with their bank and damage to their credit scores to figure out how to get out and move to a place where there are jobs. Will the government now be seeking ways to subsidize renters in some way because of this lack of mobility? Some think so.

My hope is that for the long term stability and health of the economy, the government will extricate itself from the market altogether and let it normalize. My fear is that in its usual misguided efforts at solving one crisis, it will create a thousand others.

New Hampshire Debate

In August of 2011, Congressman Paul participated in the Republican debate in New Hampshire. He noted the effects of government involvement in the housing market.

KING: So, Congressman, come into the conversation. As you do, don't make it just about foreclosures. This is -- this is an interesting topic of discussion, especially -- especially when money is scarce and you've got to start cutting. It's a question of priorities. What should the government be doing? And maybe what should the government be doing in a better economy that it can't do now that has to go?

So talk about foreclosures a bit, but then tell me something, if you were president and you were dealing with it in your first few weeks, and you said, "I might like to do this, but I can't afford to do this," be as specific as you can, what goes?

PAUL: Well, I -- I would want to do much less, much sooner. The government shouldn't be involved. You take the bankruptcies, we've been doing a whole lot. We've been propping them up. We've had the Federal Reserve buy all the illiquid assets, which were worthless, stick it with the taxpayers. The people who've made the money when the bubble was being blown up, they're the ones who got bailed out.

But you want the correction. Corrections are good. The mal- investment in the bubbles are caused by the Federal Reserve and the government, and we keep propping it up. And that's why this is going -- it was predictable it would come. It's predictable it's lasted three years. And it's predictable, as long as we do what we're doing in Washington, it's going to last another 10 years.

We're doing what we did in the depression. We're doing what the Japanese have done. You need to get the prices of houses down to clear the market, but they're trying to keep the prices up. They actually have programs in Washington which stimulating housing. You need to clear the -- clear the market and then we can all go back to work. But what we're doing now is absolutely wrong.

Dartmouth Economic Debate

On October 11, 2011 Congressman Paul participated in a debate at Dartmouth college. He discusses the causes of bubbles in general and the housing bubble in particular.

ROSE: Let me go to housing, what you’d do. Would you get the federal government out of housing? Yes?

PAUL: Absolutely. I mean, there’s no need to. Look at...

ROSE: No Freddie - no Freddie Mac, no Fannie Mae, nothing?

PAUL: The - no. You - that’s where the distortions come. That’s where the moral hazard comes from. That’s where the malinvestment, overbuild.

It was predictable. You talked about what economists we should look to. And, unfortunately, we’ve been living with Keynesian economics for many, many decades. And everybody who was right about predicting the bubbles were Austrian economists. They said they were coming. And yet they’re also saying - and I agree with them - that everything that we’re doing right now is wrong.

So what we did with the housing bubble, yes, we had too many houses. It was glaring in our face. The bubble was doomed to burst, and it came because of Fannie Mae, Freddie Mac, easy credit, and also Community Reinvestment Act.

So who - who got into trouble? The people who did the speculating, the Wall Street, the derivatives market? They got the bailout. They got (inaudible) so what happened to the middle class? They lost their jobs. They lost their houses.

This whole system is all messed up. And you’re - what I hear here is just tinkering with the current system and not looking at something new and different, and it’s a free-market economy without a Federal Reserve system, with sound money. If you don’t have that, you’re going to continue with the bubble.

And this propping up this debt and keeping the correction, you need the correction. You need to get rid of the malinvestment and the debt.

ROSE: All right. Time.

PAUL: The debt is the burden on the economy.

Michigan Economic Debate

On November 10, 2011 Congressman Paul participated in the Michigan Economic Debate. He spoke there about international debt, US debt, and the housing industry. He also states that spending is a tax.

CRAMER: Congressman Paul...
(APPLAUSE)
(inaudible) to say, and I really get that. But I'm on the frontlines of the stock market. We were down 400 points today. We're not going to be done going down if this keeps going on, if Italy keeps -- the rates keep going up. Surely you must recognize that this is a moment-to-moment situation for people who have 401(k)s and IRAs on the line and you wouldn't just let it fail, just go away and take our banking system with it?

PAUL: No, you have to let it -- you have to let it liquidate. We've had -- we took 40 years to build up this worldwide debt. We're in a debt crisis never seen before in our history. The sovereign debt of this world is equal to the GDP, as ours is in this country. If you prop it up, you'll do exactly what we did in the depression, prolong the agony. If you do -- if you prop it up, you do what Japan has done for 20 years.
So, yes, you want to liquidate the debt. The debt is unsustainable. And this bubble was predictable, because 40 years ago we had no restraints whatsoever on the monetary authorities, and we piled debt on debt, we pyramided debt, we had no restraints on the spending. And if you keep bailing people out and prop it up, you just prolong the agony, as we're doing in the housing bubble.

PAUL: Right now, Fannie Mae and Freddie Mac are demanding more money because we don't allow the market to determine what these mortgages are worth. If you don't liquidate this and clear the market, believe me, you're going to perpetuate this for a decade or two more, and that is very, very dangerous.

CRAMER: Governor...

(APPLAUSE)

(inaudible) Italy's too big to fail. It's great. I'd love it if we were independent. It would be terrific to say, "It's your fault. It's your fault. It's your problem." But if this goes, the world banking system could shut down. Doesn't that involve our banks, too?

BARTIROMO: Congressman Ron Paul...
(APPLAUSE)

BARTIROMO: ... you have said you want to close down agencies. Tell us about your tax plan as well as closing agencies -- federal agencies. Where do those jobs go?

PAUL: Well, eventually they go into the private sector. Then don't all leave immediately when the plan goes into effect. But what my plan does is it addresses taxes in a little different way.

We are talking about the tax code. But that's the consequence, that's the symptom. The disease is spending. Every time you spend, spending is a tax. We tax the people, we borrow, and then we print the money and the prices go up, and that is a tax.

So you have to address the subject of spending. That is the tax. That is the reason I go after the spending.

I propose in the first year cut $1 trillion out of the budget in five departments.
(CHEERING AND APPLAUSE) PAUL: Now the other thing is that you must do if you want to get the economy going and going again is you have to get rid of price- fixing. And the most significant price-fixing that goes on, that gave us the bubble, destroyed the economy, and is preventing this from coming out, is the price-fixing of the Federal Reserve, manipulating interest rates way below market rates.

You have to have the market determine interest rates if you want a healthy, viable economy.

BARTIROMO: So you think the economy would be stronger if interest rates were higher right now?

PAUL: You would have more incentive. You would take care of the elderly. They get cheated. They get nothing for their CDs. Why cheat them and give the banks loans at zero percent? And then they loan it back to the government at 3 percent. They are ripping us off at the expense of those on fixed incomes and retirees.

BARTIROMO: Even though higher interest rates would make it much more expensive to borrow, mortgages.

PAUL: But you want is the market to determine this. Whoever thought that one person, the Federal Reserve Board chairman, knows what the money supply should be? Just in the past six months, M1 has gone up at the rate of 30 percent. That spells inflation. That spells lower standard of living and higher prices and watch out. They are coming.

Sponsored and Cosponsored Legislation

This representative has not been identified as sponsoring or cosponsoring significant legislation related to this title.

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