Friday, September 19, 2008

Who Predicted the Meltdown?

When looking for a way out of our current economic disaster it would be nice if we could look to leadership from someone who saw this crisis coming, and proposed meaningful steps to prevent it.

This testimony was given by a Rep. Ron Paul (R-TX) in the House Financial Services Committee on July 16, 2002.
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.
and continues . . .
However, 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.
Seems we should be listening to the people who had the foresight to warn us about the problems with our banking system before the crisis hit.

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