May 13, 2007

Ron Paul (you know he's an HP'er) on the housing crash and Federal Reserve

Ron Paul
Don't Blame the Market for Housing Bubble

The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.

When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages. We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.

But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending.

The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly.

This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed’s easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.

The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify? Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it.

Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom.

The Federal Reserve provides the mother’s milk for the booms and busts wrongly associated with a mythical “business cycle.” Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and you’ll have a pretty good analogy for Fed policies over the last two decades. Unless and until we get the Federal Reserve out of the business of creating money at will and setting interest rates, we will remain vulnerable to market bubbles and painful corrections.

If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Alan Greenspan and Ben Bernanke.

26 comments:

serindippity said...

No, the Federal Reserve is not primarily responsible for the subprime debacle.

Most of that was greed and lack of regulation---just plain fooling ordinary people with complexity, and massive conflicts of interest. A legalized scam.

Fed, and other central banks---especially Bank of Japan---bear responsbility for excess liquidity, and lack of enforcing underwriting standards.

People are deluded that the 19th century gold standard was a golden era of stability and universal prosperity. The huge fluctuations in the effective money supply and manipulatons and runs on banks and reserves were very frequent and served to impoverish normal people and make the rich richer.

And yes, in the 19th century there were plenty of 'fiat' currencies supposedly backed by fractional gold reserves---the Fed was started to end much of the cheating.

So yes, now we are destined to have 2-4% inflation by construction when we didn't before. So what? Get used to it.

Note, I do not believe one bit in fooling people with constantly changing and ratcheting down CPI computations.

FlyingMonkeyWarrior said...

How do you know Ron Paul is an HPer, Keith?

Anonymous said...

The greed of mortgage brokers and other real estate "professionals" would lead to nothing if the great amount of phony money and credit, created out of thin air, wasn't there to create and feed the false demand for housing. Human greed will always exist, but the easy money to temporarily satisfy it is the pure creation of our central bank. Central banks are a fixure of socialism and their priciple action is to introduce coersion into what could be a peaceful market in money. Laws are passed to force people to accept the phony "money" created and managed by central banks. You accept and use their money or the police visit you. No one ever passed a law requiring people to accept and use gold as money. The use of gold is a voluntary and peaceful process...but this doesn't guarantee that all bankers will be honest and not try to cheat their customers. The principle feature of a real money is that human beings actually value it and are willing to hold it without a gun at their heads forcing them to use it. In a peaceful, voluntary market, there would be no coersion forcing anyone to use any particular "thing" as money, but when people are free to choose...it is gold that is peacefully chosen as money.

FlyingMonkeyWarrior said...

Have you spoken to him? Did he e-mail you? Tell us.

David in JAX said...

I have no proof obviously, but I bet every one of the presidential candidates has a staffer who reads HP every day. None of these candidates are stupid people and all of them employ experienced campaign managers. With the housing crash being a major upcoming issue for the campaign, you can bet that all of the most visited blogs are being reviewed and included in a briefing every day.

Anonymous said...

"Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending."

The big money investment banks had quite a role too! Their creativity and innovation of mortgage products juiced the lending market. You can't put it all on the Fed as it isn't true.

Who is Ron Paul taking campaign contributions from - I mean who are his big contributors? I hope it's not Goldman Sachs, etc. Getting rid of the Fed would be their biggest wet dream. Especially with one of their guys in charge of the Treasury.

Dale said...

Articles like this make me even more convinced that Ron Paul is the only person in the presidential race who can save America from total fiscal disaster. He really "gets it", and isn't afraid of the powers that be so he tells it like it is. GO RON PAUL!

Anonymous said...

The big banks were certainly happy to loan money at a profit and then market the lowest quality loans (greatest risk of default) off to others. But the engine, the basic cause, of this whole mess is the creation of all the easy, phony money in the first place...and that is at the hands of the central bank. People can always make investment mistakes, and some will always try to take advantage of others, but the creation of phoney money and artificially cheap credit fools the market into believing that real demand exists for a product when this demand is not real and sustainable. This causes misallocation of investment and resources. Without the basic, false perception that demand has increased when it hasn't, none of the famous investment bubbles that we have seen would have become anything like they did become. The phony resourses simply would not have existed and the belief in the phony demand would never have become more than a small pimple instead of the huge boil that money and credit created out of thin air allows them to become. It is the Federal Reserve that is the heart and soul and pump for this. The criminals in the home mortgage brokerage and banking community take advantage of the situation that could never have come into existence without the central pump (bank). In the 19th century, there were a few decades of peace during which the US and the major powers in Europe were as close to a gold standard as the world ever got. It wasn't perfect, there were still many mistakes being made by these governments with regard to banking that led to problems. At least today we have a very full Austrian School of economics to lead the way to a more honest monetary system and real free market. It is truly amazing how the human race's failure to understand the concepts of free market money and real free trade have screwed up the world. It's really not that hard to understand, but these mistakes have caused amazing hardships, economic disasters, and wars.

Anonymous said...

The overwelming majority of Ron Paul's campaign contributions in his Congressional races have come from individuals in relatively small donations, and from all over the country. I remember seeing the number somewhere on the Internet yesterday. Is was something around 97%! Most likely this was on one of his websites, but I was doing so much surfing on him that I don't remember where I saw it.

Anonymous said...

Of course the federal reserve is responsible, they are the ones creating m oney out of thin air. You have to look at the root cause of the problem. The reason the gold standard didn't work in some cases is because of fractional reserve banking, which is the creation of money, or gold, out of thin air. People can argue all they want about who or what is responsible, but I suggest investing in gold either through an offshore dgc account like pecunix, or by holding physical gold.

cool hand luke said...

"If the America people ever allow private banks to control the issuance of their currencies, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered."
Thomas Jefferson

"The condition upon which God hath given liberty to man is eternal vigilance; which condition if he breaks, servitude is at once the consequence of his crime, and the punishment of his guilt."
John P. Curran

Natural Eyebrows said...

I'm with Serendipty on this one. As the Fed debases the currency, at least they're doing it in front of our eyes. In the era of storefront bankers printing notes for gold they didn't have, or debasing their gold with other metals, it was done in secret.

Greenspan over-reacted after the Nasdaq meltdown and after 9/11. That doesn't mean we should eliminate the concept of a central bank.

Anonymous said...

Human greed will always exist, but the easy money to temporarily satisfy it is the pure creation of our central bank. Central banks are a fixure of socialism and their priciple action is to introduce coersion into what could be a peaceful market in money

I call BS. Just not true.

The extreme profits in subprime lending came about because of the extreme profit margins in legalized scamming and effective deregulation and conflicts of interest arising when origination is disconnected from owning credit risk.

If overall lending were tighter, then the subprime lending would still be much more profitable on the front end than other "normal" loans.

Increasing cost of money wouldn't change this, it just moves everything up the scale. Good, honest but boring and less profitable lending would be squeezed out just as much. Money will always go to the most profitable thing first---and scamming is more profitable than honest work.

The world has experience about how banking worked without central banks. It's worse.

What would happen today? You would have to personally investigate the hidden tendrils to see whom your local bank took as its "mama bank" on deposit for reserves to replace the Fed. You think that figuring out subprime loans is hard? What if every average depositor had to be a top-end forensic accountant able to pierce the intentional professional obfuscation of SEC 10K forms. Is that the libertarian fantasy? That, at least, theoretically there is perfect freedom without needing the state at all---assuming everybody were a superman genius

The temptations to cheat would be so much larger---why couldn't they just electroncially create more money for them?

If it's all private money, they could. The stuff about a gold standard could be worse. It would make people believe that their money is real---and then they find out that their bank has been scamming everybody (and the temptation will be extreme) and they've been lying about their gold backing. What then? What happens when your life savings suddenly isn't counted as 'dollars' any more? Your brokerage confiscates your stock holdings because they were bought with citibankdollars which now have little value?

In the 19th century, with private currencies and a supposed gold standard, there were plenty of bank scams and money-supply induced panics and screwups.

Anonymous said...

Fractional reserve banking under a gold standard needs to be considered conterfeiting. A private bank issuing notes must be thoroughly honest about the backing of those notes. If it claims 100% gold backing and this is not true, then the bank owner needs to be hauled off to jail for fraud, not simply treated as a businessman who failed. And he should be sued and his assets siezed to satisfy those he may have harmed. The same with lying, cheating home mortgage brokers. Too often, these criminals buy enough political influence to avoid real responsibility for their crimes. On the other hand, if a bank states that the gold backing for its notes is only 70%, then those loaning this bank money (time deposits) will expect more interest for their deposits (since they are taking greater risk because the bank is making more loans), and they should pay more attention to the viability of the bank's business loans and other practices.

cool hand luke said...

“The stuff about a gold standard could be worse. It would make people believe that their money is real---and then they find out that their bank has been scamming everybody (and the temptation will be extreme) and they've been lying about their gold backing.”

I think that you just described exactly how the Fed’s private bankers have acted. Our coins in circulation were once Gold and Silver and there was none of this "make people believe that their money is real" because it was, as required by our Constitution. (Un-amended to this day)


The Mogambo Guru says:

Mr. Schiff also underscores the point that inflation in prices comes from inflation in the money supply by noting that the U.S. dollar was historically gold (as required by the Constitution), and therefore incapable of producing inflation since the government cannot create gold. Ergo, "The only time during the period from 1780 to 1913 when we saw rising consumer prices was during the Civil War, when the introduction of paper money expanded the money supply. When the war was over, the paper money was taken out of circulation and prices came back down."
And why did he pick 1913? Because in 1913, the loathsome and misnamed Federal Reserve was created, and that is when our problems really began.
For some good news to momentarily lighten the mood, the next President could be a smart and educated guy who understands both economics and the Constitution, as "Congressman Ron Paul finished first in the MSNBC poll following the GOP primary debate last night held at the Reagan Library in Simi Valley, California. Dr. Paul received 43 percent, beating the second-place finisher by five points, and crushing the rest of the field."

Anonymous said...

"And why did he pick 1913? Because in 1913, the loathsome and misnamed Federal Reserve was created, and that is when our problems really began."

You mean the problems like becoming the largest economy in the world? Yes, the Fed inflates the money supply, and yes this creates excess that spills into different segments of the economy. Ther are Pros and Cons to this. On the pro side, it encourages growth by creating more money for investment. On the con side, it can create dangerous bubbles if handled irresponsibly. Don't blame the institution of the Fed, it has helped spur tremendous growth in the US and world economy. Blame the people who have used it's power irresponsibly, like Alan Greenspan and the politicians who influenced him.

Anonymous said...

"No, the Federal Reserve is not primarily responsible for the subprime debacle."

Wha???? You are obviously a product
of the public school system.

First, the FED IS PRIMARILY to blame.

Second, try getting your head out of your ass for once.

Anonymous said...

The creation of excess, phony money does not stimulate the economy in any beneficial way. In a free market, prices and interest rates rise and fall based on the amount of money, the level of production, and the demand for loans. Deflation can occur just as easily as inflation, based on the amount of gold available to use as money. Ludwig von Mises proved almost a century ago that the amount of real money in circulation does not matter! As long as prices are not controlled, as long as interest rates are not controlled, prices will adjust according to demand and productivity. The government or the federal reserve pumping more out more money does not stimulate the economy in any good way. It merely results in investors thinking demand is there when the demand is phony. This results in misallocation of investments and resources.

Anonymous said...

Serendipity is mistaken.

Fluctuations during the 19th century were not due to the gold standard, they were due to the abuse of the gold standard by the banks. Banks hate being tied to gold because it limits their profits. Many of the panics were engineered (eg 1907) with the expressed purpose of convincing the public to accept a central bank (ie. a privately held corporation with a monopoly on money). The Fed created the stock bubble in 2000 and the housing bubble. For profit.

The Federal Reserve is a banker's ultimate dream.

A gold standard is his nightmare which is why there is so much propaganda against it.

For those who don't understand the above, I suggest reading "The Creature from Jekyll Island".
http://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve

Or for those who prefer movies:
http://video.google.com/videoplay?docid=-7065177340464808778


on Ron Paul: I send articles, links to videos, and talk about him every chance I get. He is our one last chance to save this Republic.

Anonymous said...

hey everyone look out behind you there's a FED monster out to eat you.

Anonymous said...

Would the internet be as prevalant as it is today if not for some "misallocation of resources"? It is not always a bad thing. The market is not all-powerful or efficient, and it can sometimes take a long time for the market to iron out it's inefficiencies on it's own. Giving it some help is not always bad.

Anonymous said...

There are better economists than Ludvig von Mises.

There is an odd Calvinist-type appeal to the Austrian school---"scourging is good"---even though a fair amount of their work is rejected by modern economics and empirical evaluations.

Even hard-asses like Milton Freidman reject Austrian orthodoxy.

Right now it seems to sell goldbug newsletters and other paranoid writers more than useful economics.

Anonymous said...

"Don't blame the institution of the Fed, it has helped spur tremendous growth in the US and world economy."

Tremendous growth, indeed! Why, in 1913 it only took about US $48,000 to have the same purchasing power in 2006 of $1 million. Yes! Tremendous growth, in monetary inflation! Hallelujah! The illegal Federal Reserve has done a most wonderful, admirable job of maintaining a stable monetary unit!

Ooooo... Ahhhhh...

Before becoming FRB Chairman, Ben Bernanke promised to drop 'dead presidents' from helicopters if need be, hence the moniker Helicopter Ben. That's being responsible with the people's money? Really? But since it really is only paper, who cares?

The legislation that enacted the FRB was passed on Christmas Eve, December 24, 1913. While most of Congress were with their families, a small FRB sig stayed in DC to vote their pet project into existence. If the full Congress had been in town, it would not have passed!

If the USGov had to live within its means (gold & silver money imposes fiscal conservation), it wouldn't have the easily (created from thin air at no cost) loaned 'money' to finance wars and other foolishness that none of us have ever voted 'for'. All the IRS does is collect from us to pay the interest on that debt to pay the Fed for money that the Treasury could create at cost but "Congress" voted away to a private cabal of bankers!

Yes, the illegal Fed and the illegal IRS need to be phased out. It's domestic extortion used to finance foreign terro..., er, 'policy'. True patriots see the hypocrisy of claiming to be free while remaining economic serfs to a system that uses every crisis to ratchet up perpetuating its own existence at the expense of our freedom. Of course those in control are going to discourage us at every turn to maintain their position of power.

Is it any wonder that Ron Paul and his supporters are enemies of that state which sees itself as more important, yea even entitled, over those whom it is supposed to serve?

Ron Paul in 2008

Lee

RJ said...

serindippity is simply incorrect. First, the U.S. was not originally on a "gold standard." By definition, the "dollar" was originally, roughly one ounce of silver ( Coinage Act 1792). The gold standard was introduced later as a successful attempt at creating more paper than was actually backed by metal and led to Roosevelt's gold confiscation in 1933 and Nixon's removal of the gold standard in 1971 and double digit inflation.
Second, the only serious inflation that occured in the 19th century occured during the Civil War. The dollar was comparatively stable throughout the 19th century. Compare that stability to the constant and accelerating devaluation of the dollar after the creation of the FED.
Third, the reason that both Jefferson and Jackson opposed a central bank was because of the inflation and booms and busts they observed in Europe due to Central Banks in England and later France.
Fourth, the booms and busts that occured in the U.S. during the 19th century were typically short in duration and localized. They were not systemic.
Fifth, it is simply a false dichotomy to set up the problem as either having a central bank or a wild west, unregulated banking system.
Sixth, the FED was not started to prevent cheating. The FED was created to place control of our monetary system into the hands of a politically connected cartel.
Lastly, America's "wealth" since the creation of the FED has been borrowed. Every single dollar now created is a debt (Look at a FED Bank balance sheet). Real inflation is running about 11%, not 2-4%, do to FED policy. Without the FED, there would have been no possible way to have a nationwide, asset value meltdown. Unscrupulous lending and fraud would have been isolated and infrequent.
These discussions give me a glimmer of hope. For the first time since Jackson "killed the bank," people are openly questioning the value and legitimacy of a central banking system. I hope this spurs Americans to study this most basic issue.

RJ said...

If you will take the time to read this article "U.S. Dollar Bear 5" at this link http://www.safehaven.com/article-7533.htm, you will see the financial abyss upon whose edge we are precariously balanced. The slow destruction of our currency is a FED enabled crisis. It does represent a stealth tax on Americans. It is playing out in serial asset bubbles. And it will end badly if we don't have the courage to make painful but necessary corrections, one of which is to end our central banking system.

KBaird said...

To those of you who think the Fed is not to blame, go read the book Creature From Jekyll Island, about the creation and history of the Federal Reserve. I agree 100% with this article. Not a single word is amiss.