Predicting the Mortgage Crisis

Ron Paul in July 2002 spoke to the house when he presented his bill, the Free Housing Market Enhancement Act.  His speech, Government Mortgage Schemes Distort the Housing Market, can be read in full on his congressional website.  Ron Paul predicted the crash in the housing market:

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, Freddie, and HLBB 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.

He then went on to explain what the government just might do to make it worse:

Perhaps the Federal Reserve can stave off the day of reckoning by purchasing GSE 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.

We are now having the beginnings of a crash in the housing market and the Federal Reserve has stepped in to delay the final day of reckoning.  As Ron Paul points out, “postponing the necessary but painful market corrections will only deepen the inevitable fall.”  That last part hasn’t happened yet but should be down the road soon.

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