The inflation and subsequent collapse of the residential real estate market was facilitated by the Federal Reserve over nearly a decade. From the late 1990’s when the technology bubble burst until early 2007 when investors began to realize how much bad debt had actually been created in the housing market, interest rates were kept artificially low, while capital poured into suburban sprawl and subprime mortgages.
The leader of the Fed and manipulator-in-chief of the economy during the primary boom years was Alan Greenspan, who once believed in things such as the gold standard, the impossibility of sustaining a housing bubble, and speaking to Congress in riddles and financial jargon. His main adversary in the Congress was Ron Paul, who still believes in things such as the gold standard, the impossibility of sustaining any manufactured market bubble, and is a master riddle-solver himself with a strong Austrian economics background.
One of the great mysteries of the Greenspan legacy has been his rumored doctoral thesis for New York University, compiled and written in 1977. Certain revealing parts of the 180-page thesis have been reported on by Barron’s news organization. The parts reviewed by Jim McTague at Barron’s show that Greenspan most likely understood and could have predicted all of the events he was putting into motion by inflating a massive housing bubble.
A most intriguing quote from the article shows how the master manipulator knew what would happen when the dotcom bubble burst and all that capital needed a new home in residential housing. “Greenspan also broke new ground in the introduction to his thesis, where he noted that homeowners were refinancing for larger amounts than their original mortgage, in essence monetizing increases in their home’s market value and spending the excess cash on goods and services or putting it into savings.” This was long before double-digit rises is home values, subprime mortgages, no-doc loans, Home Equity Lines of Credit (HELOCs), and inflatable-value McMansion-burbs, but is a perfect representation of what happened during the real estate boom of the late 1990’s and early 2000’s.
Ron Paul, as well, understood the consequences of the housing bubble. In a speech made into the Congressional Record on September 6, 2001, he stated, “Refinancing especially helped the consumers to continue spending even in a slowing economy.” The same monetization of rising property values that Greenspan was concerned about became Greenspan’s policy when looking for a new bubble.
Neither Paul nor Greenspan believed that a continual cycle of rising home prices and refinancing could continue, however. As Greenspan himself claimed in his doctoral thesis, “There is no perpetual motion machine which generates an ever-rising path for the prices of homes.” Paul, in the same entry into the Congressional Record as referenced above, agreed: “This, too, will burst as all bubbles do.” And the more inflated the bubble became, and the more capital was misdirected into it, the greater would be its fall.
Who, though, could have predicted such a large crash of the real estate market, with property values falling to lower than the replacement costs of the buildings? Well, Greenspan, for one. A “break in prices of existing homes would pull down the prices of new homes to the level of construction costs or below, inducing a sharp contraction in building,” he wrote in the thesis that earned him a well-deserved Ph.D; well-deserved due to his uncanny ability to predict the consequences of policies he would set in place and disclaim responsibility for later on.
Paul also knew that malinvestment caused by government intervention in any sector of the economy would lead to disaster. Making a statement before the Financial Services Committee of the House of Representatives in September of 2007, Paul said, “The housing boom was caused by the Federal Reserve’s policy resulting in artificially low interest rates. Consumers, misled by low interest rates, were looking to consume, while homebuilders saw the low interest rates as a signal to build, and build they did.” The larger the bubble, the more malinvestment would occur, and the more severe the correction would have to be.
Most joking aside, the example of Alan Greenspan as Federal Reserve chairman should serve as a strong warning against putting anyone in power who believes they understand how the economy works. Greenspan understood and believed in libertarian ideas of economic manipulation and Austrian economics, and then spent nearly two decades at the Fed working against every one of those principles.
It is not so much that he went back or overturned what he believed in to become the most successful bubble-inflator in history — far worse than that, he used his understanding of how a free market can work in order to further the cause of socialism. In fact, it would probably have been far less destructive to have someone in charge of the Fed who had admittedly no understanding of how markets work at all, rather than someone who understands free markets and the prosperity they help engender but psychopathically worked in the opposite direction.
Ron Paul, on the other hand, stood by his principles and had the audacity to challenge supposed libertarian and Austrian economics advocate Greenspan. For this and his continuing adherence to traditional American beliefs of individual liberty and free trade, and his opposition to government manipulation and corporate welfare, he has been marginalized by mainstream media and colleagues in Washington.
Using the economy as a laboratory of how to turn a firm understanding of the economy on its head and foster socialism and corporatism, mad scientist Greenspan has further impoverished us all to enter into and direct the economy from the sacred halls of the financial elite. Paul, by advocating true freedom and less government, has been shunned by the government-corporate media and the brainwashed masses, but his ideas and influence are being embraced by an ever-expanding group of people waking up to the evils of government manipulation and psychopathy of power.