(Extensions of Remarks - September 11, 2003)

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[Extensions of Remarks]
[Page E1767]
From the Congressional Record Online through the Government Publishing Office []



                             HON. RON PAUL

                                of texas

                    in the house of representatives

                     Wednesday, September 10, 2003

  Mr. PAUL. 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 the housing-related government 
sponsored enterprises (GSE). These entities are the Federal National 
Mortgage Association (Fannie Mae), the Federal Home Loan Mortgage 
Corporation (Freddie Mac), and the National Home Loan Bank Board. 
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 the GSE is a line of 
credit to the United States Treasury. According to some estimates, the 
line of credit may be worth over $2 billion dollars. This explicit 
promise by the Treasury to bail out the GSEs in times of economic 
difficulty helps the GSEs 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 GSE. GSEs are the only institutions besides the United States 
Treasury granted explicit statutory authority to monetarize their debt 
through the Federal Reserve. This provision gives the GSEs a source of 
liquidity unavailable to their competitors.
  The connection between the GSEs and the government helps isolate the 
GSE management from market discipline. This isolation from market 
discipline is the root cause of the recent reports of mismanagement 
occurring at Fannie and Freddie. After all, if investors did not have 
reason to believe that Fannie and Freddie were underwritten by the 
Federal government then investors would demand Fannie and Freddie 
provided assurance they were following accepted management and 
accounting practices before investing in Fannie and Freddie.
  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 and 
Freddie have distorted the housing marketing by allowing Fannie, 
Freddie and the home loan bank board to attract capital they could not 
attract under pure market conditions. As a result, capitol 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 
  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 the GSE's 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 the government subsidies provided to the GSEs 
make investors underestimate the risk of investing in Fannie Mac 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 who were 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.