[Congressional Record Volume 153, Number 84 (Tuesday, May 22, 2007)]
[Extensions of Remarks]
[Pages E1113-E1114]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




               FEDERAL HOUSING FINANCE REFORM ACT OF 2007

                                 ______
                                 

                               speech of

                             HON. RON PAUL

                                of texas

                    in the house of representatives

                         Thursday, May 17, 2007

       The House in Committee of the Whole House on the State of 
     the Union had under consideration the bill (H.R. 1427) to 
     reform the regulation of certain housing-related Government-
     sponsored enterprises, and for other purposes.

  Mr. PAUL. Mr. Chairman, H.R. 1427 fails to address the core problems 
with the Government Sponsored Enterprises, GSEs. Furthermore, since 
this legislation creates new government programs that will further 
artificially increase the demand for housing, H.R. 1427 increases the 
economic damage that will occur from the bursting of the housing 
bubble.

[[Page E1114]]

The main problem with the GSEs is the special privileges the Federal 
Government gives the GSEs. According to the Congressional Budget 
Office, the housing-related GSEs received almost 20 billion dollars 
worth of indirect Federal subsidies in fiscal year 2004 alone, while 
Wayne Passmore of the Federal Reserve estimates the value of the GSE's 
Federal subsides to be between $122 and $182 billion dollars.
  One of the major privileges the Federal Government grants to the GSEs 
is a line of credit from the United States Treasury. According to some 
estimates, the line of credit may be worth over 2 billion dollars. GSEs 
also benefit from an explicit grant of legal authority given to the 
Federal Reserve to purchase the debt of the GSEs. GSEs are the only 
institutions besides the United States Treasury granted explicit 
statutory authority to monetize their debt through the Federal Reserve. 
This provision gives the GSEs a source of liquidity unavailable to 
their competitors.
  This implicit promise by the Government 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 connection between the GSEs and the Government helps isolate the 
GSEs' managements from market discipline. This isolation from market 
discipline is the root cause of the mismanagement occurring at Fannie 
and Freddie. After all, if investors did not believe that the Federal 
Government would bail out Fannie and Freddie if the GSEs faced 
financial crises, then investors would have forced the GSEs to provide 
assurances that the GSEs are following accepted management and 
accounting practices before investors would consider Fannie and Freddie 
to be good investments.
  Federal Reserve Chairman Alan Greenspan has expressed concern that 
the government subsidies provided to the GSEs makes investors 
underestimate the risk of investing in Fannie Mae and Freddie Mac. 
Although he has endorsed many of the regulatory ``solutions'' being 
considered here today, Chairman Greenspan has implicitly admitted the 
subsidies are the true source of the problems with Fannie and Freddie.

  Mr. Chairman, H.R. 1427 compounds these problems by further 
insulating the GSEs from market discipline. By creating a ``world-
class'' regulator, Congress would send a signal to investors that 
investors need not concern themselves with investigating the financial 
health and stability of Fannie and Freddie since a ``world-class'' 
regulator is performing that function.
  However, one of the forgotten lessons of the financial scandals of a 
few years ago is that the market is superior at discovering and 
punishing fraud and other misbehavior than are government regulators. 
After all, the market discovered, and began to punish, the accounting 
irregularities of Enron before the government regulators did.
  Concerns have been raised about the new regulator's independence from 
the Treasury Department. This is more than a bureaucratic ``turf 
battle'' as there are legitimate worries that isolating the regulator 
from Treasury oversight may lead to regulatory capture. Regulatory 
capture occurs when regulators serve the interests of the businesses 
they are supposed to be regulating instead of the public interest. 
While H.R. 1427 does have some provisions that claim to minimize the 
risk of regulatory capture, regulatory capture is always a threat where 
regulators have significant control over the operations of an industry. 
After all, the industry obviously has a greater incentive than any 
other stakeholder to influence the behavior of the regulator.
  The flip side of regulatory capture is that mangers and owners of 
highly subsidized and regulated industries are more concerned with 
pleasing the regulators than with pleasing consumers or investors, 
since the industries know that investors will believe all is well if 
the regulator is happy. Thus, the regulator and the regulated industry 
may form a symbiosis where each looks out for the other's interests 
while ignoring the concerns of investors.
  Furthermore, my colleagues should consider the constitutionality of 
an ``independent regulator.'' The Founders provided for three branches 
of government--an executive, a judiciary, and a legislature. Each 
branch was created as sovereign in its sphere, and there were to be 
clear lines of accountability for each branch. However, independent 
regulators do not fit comfortably within the three branches; nor are 
they totally accountable to any branch. Regulators at these independent 
agencies often make judicial-like decisions, but they are not part of 
the judiciary. They often make rules, similar to the ones regarding 
capital requirements, that have the force of law, but independent 
regulators are not legislative. And, of course, independent regulators 
enforce the laws in the same way, as do other parts of the executive 
branch; yet independent regulators lack the day-to-day accountability 
to the executive that provides a check on other regulators.
  Thus, these independent regulators have a concentration of powers of 
all three branches and lack direct accountability to any of the 
democratically chosen branches of government. This flies in the face of 
the Founders' opposition to concentrations of power and government 
bureaucracies that lack accountability. These concerns are especially 
relevant considering the remarkable degree of power and autonomy this 
bill gives to the regulator. For example, in the scheme established by 
H.R. 1427 the regulator's budget is not subject to appropriations. This 
removes a powerful mechanism for holding the regulator accountable to 
Congress. While the regulator is accountable to a board of directors, 
this board may conduct all deliberations in private because it is not 
subject to the Sunshine Act.

  Ironically, by transferring the risk of widespread mortgage defaults 
to the taxpayers through Government subsidies and convincing investors 
that all is well because a ``world-class'' regulator is ensuring the 
GSEs' soundness, 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 market by allowing Fannie 
and Freddie to attract capital they could not attract under pure market 
conditions. As a result, capital is diverted from its most productive 
uses 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 into housing 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 been had government policy not actively 
encouraged overinvestment in housing.
  H.R. 1427 further distorts the housing market by artificially 
inflating the demand for housing through the creation of a national 
housing trust fund. This fund further diverts capital to housing that, 
absent Government intervention, would be put to a use more closely 
matching the demands of consumers. Thus, this new housing program will 
reduce efficacy and create yet another unconstitutional redistribution 
program.
  Perhaps the Federal Reserve can stave off the day of reckoning by 
purchasing the GSEs' 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 and painful market 
corrections will only deepen the inevitable fall. The more people are 
invested in the market, the greater the effects across the economy when 
the bubble bursts.
  Instead of addressing Government polices encouraging the 
misallocation of resources to the housing market, H.R. 1427 further 
introduces distortion into the housing market by expanding the 
authority of Federal regulators to approve the introduction of new 
products by the GSEs. Such regulation inevitability delays the 
introduction of new innovations to the market, or even prevents some 
potentially valuable products from making it to the market. Of course, 
these new regulations are justified in part by the GSEs' government 
subsidies. We once again see how one bad intervention in the market 
(the GSEs' government subsides) leads to another (the new regulations).
  In conclusion, H.R. 1427 compounds the problems with the GSEs and may 
increase the damage that will be inflicted by a bursting of the housing 
bubble. This is because this bill creates a new unaccountable regulator 
and introduces further distortions into the housing market via 
increased regulatory power. H.R. 1427 also violates the Constitution by 
creating yet another unaccountable regulator with quasi-executive, 
judicial, and legislative powers. Instead of expanding unconstitutional 
and market distorting government bureaucracies, Congress should act to 
remove taxpayer support from the housing GSEs before the bubble bursts 
and taxpayers are once again forced to bailout investors who were 
misled by foolish Government interference in the market.

                          ____________________