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Ron Paul saw this financial mess coming

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.

Economic lifeblood
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.

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Comments (11)

  1. Submitted by John Breask on 09/18/2008 - 12:41 pm.

    Applause for Craig Westover’s accurate description of how Ron Paul has warned America of the current financial crisis. We didn’t want to listen then, and we are feeling the pain now.

    The major-party presidential candidates don’t know how to solve this mess, yet they won’t embrace Ron Paul and his rational ideas for economic freedom.

    As individuals we can encourage our elected leaders to treat us better by using our votes to send a message that the current two-party system is broken and leads to economic disaster. is a good place to learn more.

  2. Submitted by Brad Evans on 09/18/2008 - 12:14 pm.

    Stone Age? John Olson, Are You Really That Foolish?

    Until you are able to differentiate between the symptoms and the disease you will continue to address the wrong issue.

    Ron Paul is advocating Responsible Monetary Policy.

    You Will Get Your “Stone Age” Soon Enough Because Of What Was Allowed To Happen. This Economic Event Will Make The Great Depression Look Minuscule. Things Are A Very Long Way From The Bottom And The Media Chosen Choices For President Are Involved In Creation Of This Issue.

    Case In Point:

    From Bill Moyer’s Journal Sept 12 2008 Citing A New York Times Article By Jackie Calmes:


    Both Barack Obama and John McCain say the Fannie and Freddie mess is the result of the cozy ties between lobbyists and politicians, the very thing they will “change” if elected. But guess what? Neither one of them has ever had, quote, “A record of directly challenging the companies.”

    To the contrary, Obama is second among members of Congress in donations from Fannie Mae and Freddie Mac’s employees and political action committees, even though he’s only been in the Senate since 2005. The former chairman of Fannie Mae originally led Obama’s vice presidential search committee but had to step down in a controversy over favorable loans he received, while at Fannie, from a company doing business with Fannie.

    Among Obama’s contributors are three directors and one senior vice president of the two companies. Furthermore, Obama’s fellow Democrats in Congress have long been enablers of both corporations.

    And what about John McCain? His entire campaign team stepped right out of a predator’s ball. His confidante and top adviser lobbied several years for Freddie Mac. His deputy fundraiser lobbied Fannie Mae, and his campaign manager lobbied for both of them, leading a coalition of beltway insiders whose goal was to “stave off regulations” that might have short circuited this nightmare.

    One wealthy member of Freddie Mac’s board has contributed more than $70,000 to McCain and Republican Party members working for McCain’s election.

    Even the guy who vetted John McCain’s vice presidential options is a former lobbyist for Fannie Mae.


    Things Are More Dire Than Many Would Like To Face. Safety Is A Function Of Awareness.

    Another “Fox Guarding The Hen House” Anomaly From the article :


    Fixated as I am on inflation in prices because it scares The Living Hell (TLH) out of me, I was drawn to how Peter Schiff of Euro Pacific Capital was amused that the government and its minions have reported that “the GDP deflator, used in the report to downwardly adjust GDP to account for inflation, was shown at just 1.2% annualized … the lowest deflator in 10 years”, while at the same time “the latest reading on consumer prices (CPI) in the second quarter shows year-on-year inflation running at a 5.6% rate, a seventeen-year high!”

    He asks, without the slightest hint of the venomous sarcasm you would expect, “How can it be that inflation is simultaneously running at a 17-year high and a 10-year low? Welcome to the Alice in Wonderland world of government statistics.”


    Doom Approaches.

    When The Election Is Over And Power Seated The Financial Circus Will Reach New Heights. Do Not Be Lulled Into Believing The Scapegoat Scenarios. The Problem Is Endemic In The System. The Complexity Of Corruption Is Vast.

    Wish More People Would Have Debated Ron Paul Rather Than Dismissed Him. Debate Is The Distillation Of Reality.

    Anyone Advocating A Return Toward The Constitution Is An Ally. If The Constitution Was Followed The Scenario We Are In Would Be Less Likely.

    The Circus Continues But The Bread Is Almost Gone.

  3. Submitted by John Olson on 09/18/2008 - 09:46 am.

    Or we could just return to the Stone Age.

  4. Submitted by Jana Murray on 09/18/2008 - 05:02 pm.

    The American public must wake up to the fact that we can no longer afford these bail-outs, that our dollar is going to be absolutely worthless, and the Amero will soon take its place. Welcome to Lil’ China, as the Marxist wealth re-distribution begins.

  5. Submitted by Craig Westover on 09/19/2008 - 07:39 am.

    Brad, John —

    What do you agree to disagree on? The need for policy that creates a sound dollar? That Paul’s policy will or will not create a sound dollar? That monetary policy isn’t up there with campaign issues like tax policy and the war in Iraq? Here’s an opportunity to discuss issues, which everyone says they want. No?

  6. Submitted by Terry McCall on 09/18/2008 - 06:39 pm.

    Craig, thanks for writing another astute article. No matter where people come down on Dr Paul (i.e. for or against) we all can learn from his knowledge on this subject. Most eyes glaze over quickly during a discussion of economics and currency, but as we have now learned we pay in the end for our neglect. Two places that readers can go to learn about these issues, critical to all are: 1) Chapter 6 “Money: The Forbidden Issue in American Politics”, of Ron Paul’s best selling book, The Revolution A Manifesto. In 20 pages he clarifies the issue in terms that all can understand. 2) A free to download e-book found at titled, ‘The Austrian Theory of the Trade Cycle’ is more detailed but gives you everything you need to know about sound money, the causes and cures of depressions, etc. Quoting p138 of Revolution, “As John Adams wrote to Thomas Jefferson in 1787, ‘All the perplexities, confusions, and distress in America, arise, not from defects in their Constitution or Confederation, not from a want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.”

    And one comment for Mr. Swift; it is not Ron Paul who has gone over the edge on immigration and foreign policy. It is both the GOP and the Democrats who have done just that. Our current immigration policy is nothing short of invasion. Our foreign policy is equivalent to building an empire with troops in 130 countries and funding both sides of conflicts around the globe. Our treasure in young men and women and our wealth in shrinking dollars are systematically being drained, or better fleeced, from the American people. The neocons in power in both major parties and their globalist partners are the only beneficiaries.

  7. Submitted by Thomas Swift on 09/18/2008 - 02:10 pm.

    This is an example why RP has a somewhat enthusiastic fan base among the GOP faithful. It’s a pity that he has gone so far over the Libertarian edge on immigration and foreign policy.

  8. Submitted by John Olson on 09/18/2008 - 08:24 pm.

    No Brad I am not. Trying to turn the clock back to the 1700’s and 1800’s is equally foolish, so I will simply tip my hat and agree to disagree.

  9. Submitted by Darryl Schmitz on 09/19/2008 - 08:19 am.

    Over the millenia, we see case after case of visionaries/prophets ridiculed and otherwise ignored. While we ridicule and ignore people like Ron Paul, we eagerly tune in to TV shows featuring psychics and other snake oil salespeople.
    It seems we never learn.

  10. Submitted by John Olson on 09/19/2008 - 05:42 pm.

    This transcends well beyond monetary policy Craig, and you know it.

    I grew up in the 1960s and ’70s fairly close to where the Posse Comitatus folks in North Central Wisconsin resided. In the late 1970’s and early 80’s, a group there tried to secede from the U.S., form their own country, establish their own militia, print their own currency, etc.

    For the rest of us living in the area at the time, if you did not want to put yourself at risk of harassment and/or bodily harm, you stayed away from Tigerton Dells. Period. I do not know what it is like over there now, but I can guarantee you that even today I’d still go a long way to avoid the place altogether.

    I’m reading many of the same positions and beliefs today that those folks had 30 years ago or so (minus the racist stuff of that time). I have heard enough to make my hair stand on my neck.

    I will simply stop here and be done with it.

  11. Submitted by bob barnes on 09/28/2008 - 12:41 am.

    The biggest critics of RP, the ones that say we will go back to the Stone Age, appear to be the ones that are sucking the gubbermint tit the biggest. Could their job vanish without gubbermint money propping their butt in a job?

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