This is Ron Paul with your weekly update for August 23rd.
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.
Thanks for calling this update. A new update is placed on this number, 888-322-1414 every
Monday morning. The written text can be found on my website www.house.gov/paul under the
heading "Texas Straight Talk". Thanks for calling.
