I’m visiting the Atlanta Fed this week, and had planned to arrive in my hotel room Tuesday evening in time to compose something interesting for you to read Wednesday morning. But the Atlanta airport was “closed for weather” as the airlines choose to word it, so I flew to Greenville, SC instead, drove a rental car to Atlanta, and arrived too late to say anything thoughtful.
I will leave you instead with this seven-year-old quote, and let you contemplate how history might have been different if anyone had listened:
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. . . . 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.
| —Ron Paul, 2003 |
(Hat tip to Patri Friedman.)
History would not have been the slightest bit different. To believe it would be is to have little faith in the most standard models of economics and political science. And it would require much more evidence in support than the testimony of a goldbug politician.
It’s depressing, and makes me lose faith in democracy, still, Go Ron Paul!
If Patri sees this, godspeed on your seasteading project. (I guess I’m assuming you’re that particular Patri Friedman.)
I agree that it may have averted the Housing bubble. The real issue was the Fed pumping liquidity into the economy – it had to go somewhere. The housing market was the path of least resistance. If it wasn’t going there, the money would have had to flow somewhere while Greenspan primed the pump and we would have had a different asset classt bubble and burst.
Having said that, Ron Paul does want to audit the Fed. And then end it. I agree.
Ron Paul is the new Barry Goldwater. I have literally seen bumper stickers made to follow the 1964 “They told me if I vote for Goldwater that there will be war in Asia, race riots and economic unrest. Well I voted for Goldwater, and they were right.” about Ron Paul. This quote is just one more example of that.
It’s too bad Ron Paul wasn’t good looking and well-spoken. He would have made a terrible president for photo-ops and press conferences, but the policy side would have been great.
Paul’s proposal seemed reasonable then, and more reasonable now. But I’m not sufficiently knowledgeable to draw all the necessary connections here to understand how that policy would have influenced subsequent events.
After all, would the US have been spared the cost of bailing out Fannie and Freddie? As an initial matter, it’s unclear to me that the US ever had the legal obligation to bail out Fannie and Freddie. Moreover, it IS clear to me that the US chose to bail out plenty of entities that it had no legal obligation to bail out.
Would withdrawing taxpayer subsidies have made any difference? Did Fannie Mae and Freddie Mac require cash infusions from the taxpayer between 2003 and the collapse? I was under the impression that these were quite profitable entities during that period. Thus, as far as Fannie and Freddie were concerned, Paul’s proposal would have consisted of publicly clarifying that the US denied any responsibility for the debts of Fannie and Freddie. Would that really have made any difference to subsequent events?
Perhaps. Perhaps this would have prompted investors to demand a higher interest rate in order to lend to Fannie and Freddie, and that would have applied the gradual breaks needed to avert the housing bubble. But Fannie and Freddie’s principle role in the housing market was to add liquidity. As Dave points out, the world was awash in liquidity. So it remains unclear to me how much practical difference Paul’s policy would have made.
History might also have been different if anything had been done to prevent the MASSIVE frauds that wrecked the mortgage programs. It’s ironic to read this note on the same day as I read about the indictment of TBW and its chief. Too bad the people who made billions on liar loans in 2003 and since aren’t facing similar grand jury indictments.
Alan – why would entity in the world want to lend money to someone they believe would default unless they know they will get bailed out on downside and keep all the upside? The incentives were only there because the Government played as a backstop.
Dave, when you say the fed pumped liquidity into the market, why do you think it did that? And don’t they do that all the time? So it was too much liquidity is what you mean? I’ll be honest …why the fed does what it does befuddles me…the nature of money And the optimal way a government should manipulate it befuddles me too. As an additional side thought, why would anybody have trusted the fed to be honest about a housing bubble? Once the bubble had begun, the fed was then in a catch-22 situation. If you speak out about it, the housing market collpases, but if you don’t speak out the housing market will still collapse…the collpase was simply delayed and much larger!
wkw: I believe the comment was “…how history might have been different if anyone had listened.” Not, “why didn’t anybody listen?”
I think it would have sent a mesage that the government was not going to bail out failing institutions, so there would (probably) have been less malinvestments. It would also have caused the bust to come at once, and (since the then senate&house would have supported him) have done nothing, leading it to end quickly. This may (unfortunately) have led to him being kicked out and someone worse than Bush/Obama coming into power, causing an even greater boom and a bust far worse than the 30s-40s, as public opinion (stupid as they are) would blame the free market.
I don’t know whether the mortgage interest tax deduction contributed to the housing bubble, but it seems logical that it increases prices. If I’m in a 30% tax bracket and I purchase a $100,000 house at 6% interest, my monthly payment is $600, but my after tax out of pocket expense averages $389 in the first year. If I don’t have that tax deduction, then my $389 can only buy a $65,000 house.
I’d be interested in knowing how much the existence of the mortgage interest tax deduction inflates house prices. Probably not the 50% of my illustration, but I would guess a lot.
It seems to me that the tax deduction probably didn’t cause the bubble to happen, but it must have increased the magnitude of the bubble.
Josh – they were pumping excess liquidity to try fight off the recession coming from the previous dotcom bubble. That’s the Fed’s motto: to forever blow bubbles
(I’m sure there’s a Michael Jackson joke in there somewhere)
Re. my prior point, who benefits from the mortgage interest tax deduction? The selling point is that it allows people to become homeowners, but that doesn’t make sense. If we didn’t have the deduction, they I would have less money to pay for a house, but so would everyone else. I would think that supply and demand would dictate that I would get the same house (approximately) but for less money. So who benefits? The taxpayer pays, but it seems that the main beneficiary is the banks, because a higher home price implies higher payments, and thus more money to the bank over the life of the loan.
The seller benefits somewhat. If I buy a $65,000 house and sell it 15 years later for $130,000, I’ve made a capital gain of $65,000. If I can leverage my tax deduction to buy a $100,000 house and sell it for $200,000, then my capital gain is $100,000. So the tax deduction increases the capital gains from buying and selling houses.
And obviously, the realtor benefits, because an inflated price means an inflated fee.
AI V: what cause the bubble was the fed flooding the market with cash and credit.
What directs the particular asset class to bubble is govt incentive and policy.
I’m fairly certain that if there were huge tax incentives for every citizen to buy pre 1990 Italian sports cars, we’d be sitting here today lamenting the Ferrari bubble.
Bob’s deep thoughts:
1. If any significant number of Congressmen were like Ron Paul, I believe that would be disastrous.
2. If more (or all) Congressmen were a little more like Ron Paul, it would be a great improvement on the current situation.
[I’ve spent a couple of minutes trying to figure out how to soundbite this better. I’ve obviously given up.)
Dave: “Alan – why would entity in the world want to lend money to someone they believe would default unless they know they will get bailed out on downside and keep all the upside? The incentives were only there because the Government played as a backstop.”
The reason is they were parcelling these mortgages up and selling them on – they made a quick profit whether these were repaid or not. Of course there was a great incentive to sell bad mortgages. The parcels were dressed up with fancy terms, the models assumed that the default rate would be about the same (they forgot about “feedback”), so they thought they had eliminated the risk. The ratings agencies and regulators were using the same models, so they didn’t pick it up. It all happened with no thought of the Govt. as backstop. It was always going to be a problem as soon as the lender could sell on the loan without worrying about collecting on it.
Lots of people called this one, including my colleague Larry White. But as you say, no one listened.
“Lots of people called this one, including my colleague Larry White. But as you say, no one listened.”
And, they’re still not listening.