In 2006-2007, there were a handful of economist, pundits and politicians who were able to read the signals in the market which spelled out a housing “correction”. Ron Paul was not one of them. While he did accurately predict the collapse, there is documentation to show that he did so as early as 1999. His prediction, based on monetary policy and government interference in the marketplace, also included an eerily accurate portrayal of how the government would react, i.e bailouts and an expansion of the money supply.
While many who are aware of Dr. Paul’s prediction believe that he first predicted the collapse in the early part of the 2000′s, we have found a reference to it in his book, A Foreign Policy of Freedom. The book is a collection of foreign policy speeches he has given on the House floor beginning in 1976. The following quote is from a speech he gave on February 2, 1999 (incidentally he also predicts the crashing of the stock market bubble):
“The conviction that stock prices will continue to provide extra cash and confidence in the economy have fueled wild consumer spending and personal debt expansion. The home refinance index between 1997 and 1999 increase 700 percent. Secondary mortgages are now offered up to 120 percent of a home’s equity, with many of these funds finding their way into the stock market. Generous credit and quasi-government agencies make these mortgage markets robust, but a correction will come when it is realized that the builders and the lenders have gotten ahead of themselves”.
Congressman Paul understood then that the Federal Reserve’s policy of printing new money for banks to lend out based on regulation passed down from the federal government through the Community Reinvestment Act, coupled with manipulation of interest rates would cause a housing frenzy which would drive up costs and eventually lead to a bust. He also knew that once that collapse came, that the government-agencies of Freddie Mac and Fannie Mae would be bailed out.
Here he is on the House floor in 2001, giving a speech on the above referenced reasons for what would be at that time, the coming housing collapse:
Some may say that while it is nice to see that someone was able to put the pieces of the puzzle together in order to warn us about impending disaster, what did he do to stop it? Congressman Paul did not simply warn us, and he did that as often as possible, but he also introduced legislation in 2002 which would have eliminated some of the threats to the bubble. At that point, it probably would not have stopped an eventual correction, but it may have steadied the downturn making it easier to recover. The legislation he proposed was titled the “Free Housing Market Enhancement Act”. Here are a few lines from the speech he delivered on the house floor when introducing the bill:
“Mr. Speaker, I rise to introduce the Free Housing Market Enhancement Act. This legislation restores a free market in housing by repealing special privileges for housing-related government sponsored enterprises (GSEs). These entities are the Federal National Mortgage Association (Fannie), the Federal Home Loan Mortgage Corporation (Freddie), and the National Home Loan Bank Board (HLBB). According to the Congressional Budget Office, the housing-related GSEs received $13.6 billion worth of indirect federal subsidies in fiscal year 2000 alone.
One of the major government privileges granted these GSEs is a line of credit to 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 these GSEs in times of economic difficulty helps them 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.”
As mentioned, he issued any number of warnings leading up to the burst. In the following video he gives an interview to Joe Scarborough on “Morning Joe”. Joe reads from a transcript of a warning Dr. Paul gave to the House Banking Commission. Both Joe and his co-host Mika are blown away by the “prohpetic” nature of his comments made back in 2003:
His ability to use his understanding of the free-market and the flawed approach of central planning is worth noting because there are others who are currently seeking the office of the Presidency, who decried and mocked the media as they reported on the softening of the market as late as 2005. There are also those to this day who would deny the causes which the Congressman has spelled out and would place the blame solely on the banks. Those same people are still trying to prop up the bubble through more bailouts, more manipulation and more inflation. They have obviously not heard Ron Paul’s warnings or choose to ignore their accuracy.