It’s not like there wasn’t anybody who saw the economic woes of the week on the horizon.
On Sept. 10, 2003, U.S. Rep. Ron Paul, R-Texas, testified before House Financial Services Committee, which was holding hearings regarding special privileges extended to government sponsored enterprises (GSEs). Think Fannie Mae and Freddie Mac. In his testimony. Paul criticized such privileges in general and warned of the potential for disaster posed by government involvement with Fannie and Freddie specifically.
Paul noted that according to the Congressional Budget Office, housing related GSEs received $13.6 billion in indirect federal subsidies in fiscal 2000 and had a line of credit with the United States Treasury exceeding $2 billion. That line of credit Paul said was an explicit promise by the Treasury to bail out GSE’s in times of economic difficulty. (Sound familiar?)
“[The line of credit] helps the GSEs attract investors who are willing to settle for lower yields than they would demand in the absence of the subsidy,” Paul testified. “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.”
As Paul saw the situation some five years ago, the government backing isolated GSE management from market discipline. If Fannie and Freddie were not underwritten by the federal government, he told the committee, investors would demand the institutions held to higher 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,” Paul predicted. “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,” Paul went on. “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.
“I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger American taxpayers,” Paul concluded. “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.”
On the same day, Paul introduced the “Free Housing Market Enhancement Act.” The legislation would have removed 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. The bill had no cosponsors; it stalled in the committee process.
A plan at ready
The past few days, major party presidential candidates have scrambled to come up with a solution to the financial crisis on Wall Street and members of Congress and the media have been searching through the thesaurus to find synonyms for “greed.” Writing in “Forbes” back in March in an op-ed entitled “the Rapidly Approaching Economic Meltdown,” Paul proposed a four-part plan calling for lower taxes, less spending, a sound monetary policy and regulatory reform. His plan would:
• Make the Bush tax cuts permanent, repeal the estate tax, end taxes on Social Security benefits, end taxes on income from tips, end taxes on forgiven mortgage debt, and end the income tax and abolish the IRS;
• Reform spending by first cutting back on “our trillion-dollar overseas budget” and shore up the “programs Washington has forced so many citizens to depend on,” while enabling young people to opt out of these programs and save for their own retirements and health care needs.” Veto any unbalanced budget.
Paul argued that lower taxes and less government spending put more money in working people’s pocket — pretty standard Republican line. But he also opined for bolder out-of-the-box actions calling for a sound monetary policy to increase the value of money and drive down the cost of living and a regulatory approach that is the inverse of what we’re hearing from presidential candidates John McCain and Barack Obama. Paul proposed:
• Requiring more transparency at the Federal Reserve Board and legalizing competing currencies. He cited the historical evidence of the inevitable failure of paper money systems. However, “I believe that for our economy to be secure in the long term,” he wrote, “Congress must reassert its authority and end the unconstitutional Federal Reserve.”
• Undertake regulatory reform and revisit the myriad federal regulations that “have stymied the innovative spirit of the American people.” At the top of the list Paul put Sarbanes-Oxley (SOX) — regulation imposed after the spate of corporate scandals earlier in the decade.
In his Forbes article, Paul noted three studies. A survey by Financial Executives International put the average cost of compliance with SOX at $4.4 million. The American Economics Association estimated SOX could cost American Companies as much as $35 billion in aggregate. Wharton Business School found that the number of American companies delisting from public stock exchanges nearly tripled the year after SOX became law (198 firms “went dark” compared to 67 the year before).
“One of the best things Congress could do for the American economy is to repeal this damaging legislation,” Paul wrote.
In short, Paul’s message is that money is the lifeblood of any economy, and control over a nation’s currency means control over its economic well-being. Fed bankers quite literally determine the value of our money by controlling the supply of dollars and establishing interest rates. Their actions can make us richer or poorer overnight, in terms of the value of our savings and the buying power of our paychecks. How’s that been working out for you lately?
Paul concludes his piece with a call to return to principle that is, perhaps, even more fitting today than earlier in the year.
“Unless we embrace fundamental reforms, we will be caught in a financial storm that will humble this great country as no foreign enemy ever could,” he wrote. “We can find safe harbor in our ideals. Reclaiming our historic legacy of principled commitment to liberty will, once again, unleash the innovative spirit that propelled our nation to the heights of prosperity.”
Or, we could keep putting lipstick on a pig.