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How Government Distorts the Housing Market In 2007 the financial industry finally acknowledged what many of us had been saying for quite some time: The Federal Reserve’s easy-credit poli- cies had led to a bubble in the housing market. In this section I describe how the government perverts the American dream of home ownership. PART EIGHT Debate on the Housing Opportunity and Responsibility Act of 1997 Congressional Record—U.S. House of Representatives April 30, 1997 Mr. Speaker, I am very pleased . . . we will have a chance to debate housing. I think it is a very important debate. We have had this debate going on now for several weeks in the Subcommittee on Housing and Community Opportunity. Unfortunately, as far as I am concerned, the debate has not keyed in on the real important issue of whether or not public housing is a good idea. This particular piece of legislation does very little more than juggle the bureaucrats in hopes that it will do some good. Public housing started in 1937 with the U.S. Housing Act, and we have been living with public housing ever since. In 1965 HUD was cre- ated, and since that time, we have spent literally hundreds of bil- lions of dollars. We have no evidence of any sort to show that public housing is a good idea. It causes a great deal of problems and actually takes housing away from many, many poor people. But it costs a lot of money and costs a lot of hardship to a lot of people. The principle of public housing is what needs to be debated. Hopefully, in the general debate and in the debate over the amendments, we will be able to direct a debate in that area. One thing that I think our side, the side that I represent, that is the free market and the constitutional approach to housing, we 377 have, I would grant you, done a very poor job in presenting the views on how poor people get houses in a free society. Since we have had 30 years of experience and there is proof now that it leads to corruption and drug-ridden public housing projects that do not last very long and cost too much money. We who present the mar- ket view have not done a good job, emphasizing lower tax, less regulation and growth economy, sound monetary policy, low interest rates; this is what will eventually give housing to the poor people. But I think it is very important that we not construe anybody who opposes this bill as being one that has endorsed the notion or rejects the idea. Mr. Speaker, the one other point that I would like to make is one of the arguments in favor of this bill is that it is going to be sav- ing some money in the bureaucratic process. But if this is the case, one must look very closely at the CBO figures, because last year the HUD budget took $25-plus billion. This year, with this won- derful new program, we will be asking, according to CBO, $30.4 billion, an increase of about $5 billion. And this is not the end, it is just the beginning. So this is an expansion of the spending on pub- lic housing. By the year 2002, it goes up to $36 billion. So the best I can tell is we were working on the fringes, we are not dealing with the real issues, we are not dealing with the principle of whether or not public housing is a good program. I, for one, think we can do a lot more for the poor people. There are more homeless now, after spending nearly $600 billion over these last 20 years, than we had before. So I am on record for say- ing we must do more but we can do more by looking more care- fully at the market.  378 Pillars of Prosperity Fannie Mae and Freddie Mac Subsidies Distort the Housing Market House Financial Services Committee Congressional Record—U.S. House of Representatives September 10, 2003 Mr. Chairman, thank you for holding this hearing on the Trea- sury Department’s views regarding Government Sponsored Enterprises (GSEs). I would also like to thank Secretaries Snow and Martinez for taking time out of their busy schedules to appear before the committee. I hope this committee spends some time examining the special privileges provided to GSEs by the federal government. According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone. Today, I will introduce the Free Housing Market Enhancement Act, which removes 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. One of the major government privileges granted to GSEs is a line of credit with the United States Treasury. According to some estimates, the line of credit may be worth over $2 billion. This explicit promise by the Treasury to bail out GSEs in times of eco- nomic 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 huge 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 GSE debt. GSEs are the only institutions besides the How Government Distorts the Housing Market 379 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 competi- tors. The connection between the GSEs and the government helps isolate the GSE management from market discipline. This isola- tion from market discipline is the root cause of the recent reports of mismanagement occurring at Fannie and Freddie. After all, if Fannie and Freddie were not underwritten by the federal govern- ment, investors would demand Fannie and Freddie provide assurance that they follow accepted 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. 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 Amer- icans. Despite the long-term damage to the economy inflicted by the government’s interference in the housing market, the govern- ment’s policy 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 overinvest- ment in housing. 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 mar- ket corrections will only deepen the inevitable fall. The more peo- ple invested in the market, the greater the effects across the econ- omy when the bubble bursts. 380 Pillars of Prosperity No less an authority than Federal Reserve Chairman Alan Greenspan has expressed concern that government subsidies pro- vided to GSEs make investors underestimate the risk of investing in Fannie Mae and Freddie Mac. Mr. Chairman, I would like to once again thank the Financial Services Committee for holding this hearing. I would also like to thank Secretaries Snow and Martinez for their presence here today. I hope today’s hearing sheds light on how special privileges granted to GSEs distort the housing market and endanger Ameri- can taxpayers. 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. I therefore hope this com- mittee will soon stand up for American taxpayers and investors by acting on my Free Housing Market Enhancement Act.  The American Dream Downpayment Act Congressional Record—U.S. House of Representatives October 1, 2003 Mr. Speaker, the American dream, as conceived by the nation’s founders, has little in common with H.R. 1276, the so-called Amer- ican Dream Downpayment Act. In the original version of the American dream, individuals earned the money to purchase a house through their own efforts, oftentimes sacrificing other goods to save for their first downpayment. According to the sponsors of H.R. 1276, that old American dream has been replaced by a new dream of having the federal government force your fellow citizens to hand you the money for a downpayment. H.R. 1276 not only warps the true meaning of the American dream, but also exceeds Congress’s constitutional boundaries and How Government Distorts the Housing Market 381 interferes with and distorts the operation of the free market. Instead of expanding unconstitutional federal power, Congress should focus its energies on dismantling the federal housing bureaucracy so the American people can control housing resources and use the free market to meet their demands for affordable housing. As the great economist Ludwig von Mises pointed out, ques- tions of the proper allocation of resources for housing and other goods should be determined by consumer preference in the free market. Resources removed from the market and distributed according to the preferences of government politicians and bureaucrats are not devoted to their highest-valued use. Thus, government interference in the economy results in a loss of eco- nomic efficiency and, more importantly, a lower standard of living for all citizens. H.R. 1276 takes resources away from private citizens, through confiscatory taxation, and uses them for the politically favored cause of expanding home ownership. Government subsidization of housing leads to an excessive allocation of resources to the hous- ing market. Thus, thanks to government policy, resources that would have been devoted to education, transportation, or some other good desired by consumers, will instead be devoted to hous- ing. Proponents of this bill ignore the socially beneficial uses the monies devoted to housing might have been put to had those resources been left in the hands of private citizens. Finally, while I know this argument is unlikely to have much effect on my colleagues, I must point out that Congress has no con- stitutional authority to take money from one American and redis- tribute it to another. Legislation such as H.R. 1276, which takes tax money from some Americans to give to others whom Congress has determined are worthy, is thus blatantly unconstitutional. I hope no one confuses my opposition to this bill as opposition to any congressional actions to ensure more Americans have access to affordable housing. After all, one reason many Ameri- cans lack affordable housing is because taxes and regulations have made it impossible for builders to provide housing at a price that could be afforded by many lower-income Americans. Therefore, Congress should cut taxes and regulations. A good start would be generous housing tax credits. Congress should also consider tax 382 Pillars of Prosperity credits and regulatory relief for developers who provide housing for those with low incomes. For example, I am cosponsoring H.R. 839, the Renewing the Dream Tax Credit Act, which provides a tax credit to developers who construct or rehabilitate low-income housing. H.R. 1276 distorts the economy and violates constitutional pro- hibitions on income redistribution. A better way of guaranteeing an efficient housing market where everyone could meet their own needs for housing would be for Congress to repeal taxes and pro- grams that burden the housing industry and allow housing needs to be met by the free market. Therefore, I urge my colleagues to reject this bill and instead develop housing policies consistent with constitutional principles, the laws of economics, and respect for individual rights.  Reforming the Government Sponsored Enterprises (Fannie Mae and Freddie Mac) House Committee on Financial Services Congressional Record—U.S. House of Representatives May 9, 2007 H.R. 1427 fails to address the core problems with the govern- ment Sponsored Enterprises (GSEs). Furthermore, since this legis- lation creates new government programs that will further artifi- cially increase the demand for housing, H.R. 1427 increases the economic damage that will occur from the bursting of the housing bubble. The main problem with the GSEs is the special privileges the federal government gives the GSEs. According to the Congres- sional Budget Office, the housing-related GSEs received almost $20 billion worth of indirect federal subsidies in fiscal year 2004 alone, while Wayne Passmore of the Federal Reserve estimates the How Government Distorts the Housing Market 383 value of the GSE’s federal subsidies to be between $122 and $182 billion. 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. GSEs also benefit from an explicit grant of legal author- ity 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 liq- uidity 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 allo- cation of capital. More importantly, the line of credit is a promise on behalf of the government to engage in a massive unconstitu- tional and immoral income transfer from working Americans to holders of GSE debt. This is why I am offering an amendment to cut off this line of credit. The connection between the GSEs and the government helps isolate the GSEs’ management from market discipline. This isola- tion from market discipline is the root cause of the mismanage- ment 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 fol- lowing accepted management and accounting practices before investors would consider Fannie and Freddie to be good invest- ments. Former Federal Reserve Chairman Alan Greenspan has expressed concern that the government subsidies provided to the GSEs makes investors underestimate the risk of investing in Fan- nie 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. H.R. 1427 compounds these problems by further insulating the GSEs from market discipline. By creating a “world-class” regulator, 384 Pillars of Prosperity [...]... Davis-Bacon Repeal Act of 199 7 The National Right to Work Act Congressional Record—U.S House of Representatives May 6, 199 8 Mr Speaker, I rise today to speak for 80 percent of Americans who support the National Right to Work Act, H.R 59 The National Right to Work Act repeals those sections of federal law that give union officials the power to force workers to pay union dues as a condition of employment Compulsory... an excessive amount of credit preemption, largely in the area of guarantees, which has created excessive monetary growth and is the base of inflation in the system 393 394 Pillars of Prosperity A vote for the Chrysler bailout is, simply put, a vote for further inflation Some may argue that the inflation is necessary in order to avoid unemployment, echoing the now repudiated idea of A.W Phillips, that... moving the nation further down its current path of fiscal demise The monetary interventionists offer amendment language which allows circumvention of the deficit restrictions by Congress “in case of recession.” This policy, based in the now-discredited Keynesian paradigm under which governments borrow and 398 Pillars of Prosperity spend their way out of their own prior inflation-induced recessions,... government’s level of spending and borrowing Spending, Taxes, and Regulations 399 Authorizing President to Award Congressional Gold Medal to Mother Teresa Congressional Record—U.S House of Representatives May 20, 199 7 Mr Speaker, I rise today in opposition to H.R 1650 At the same time, I rise in total support of, and with complete respect for, the work of Mother Teresa, the Missionaries of Charity organization,... money The Davis-Bacon Repeal Act Congressional Record—U.S House of Representatives October 23, 199 7 Mr Speaker, I rise today to introduce the Davis-Bacon Repeal Act of 199 7 The Davis-Bacon Act of 193 1 forces contractors on all federally-funded construction projects to pay the local prevailing wage, defined as “the wage paid to the majority of the laborers or mechanics in the classification on similar... at these independent agencies often make judicial-like 386 Pillars of Prosperity 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... consequences of this regulation instead of on the question of whether OSHA has the constitutional authority to regulate any part of a private residence (or private business for that matter) The economic and social consequences of allowing federal bureaucrats to regulate home offices certainly should be debated However, I would remind my colleagues that conceding the principle that the 406 Pillars of Prosperity. .. employment and standard of living of the very people proponents of the minimum wage claim will benefit from government intervention in the economy! Furthermore, interfering in the voluntary transactions of employers and employees in the name of making things better for low wage earners violates citizens’ rights of association and freedom of contract as if to say to citizens “you are incapable of making employment... real life consequences of this bill will be vested upon those who can least afford to be deprived of work opportunities Therefore, rather 410 Pillars of Prosperity than pretend that Congress can repeal economic principles, I urge my colleagues to reject this legislation and instead embrace a program of tax cuts and regulatory reform to strengthen the greatest producer of jobs and prosperity in human history:... Reagan in Recognition of Service to Nation Congressional Record—U.S House of Representatives April 3, 2000 Mr Speaker, I rise today in opposition to H.R 3 591 At the same time, I am very supportive of President Reagan’s publicly stated view of limiting the federal government to its proper and constitutional role In fact, I was one of only four sitting members of the United States House of Representatives . the American dream of home ownership. PART EIGHT Debate on the Housing Opportunity and Responsibility Act of 199 7 Congressional Record—U.S. House of Representatives April 30, 199 7 Mr. Speaker,. would demand in the absence of the subsidy. Thus, the line of credit distorts the allo- cation of capital. More importantly, the line of credit is a promise on behalf of the government to engage. 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