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Ron Paul: Financial Reform Solved Nothing

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"The American people will never again be asked to foot the bill for Wall Street's mistakes. There will be no more taxpayer-funded bailouts. Period."
-- President Barack Obama, after passage of financial reform legislation

The financial reform bill addresses many causes of the financial crisis. Among a long laundry list of reforms, the new regulation creates a systemic risk council to address firms that may be "too big to fail." It makes rating agencies such as Moody's (NYSE: MCO  ) accountable for the ratings they issue for securities. It requires banks such as Morgan Stanley (NYSE: MS  ) and Goldman Sachs (NYSE: GS  ) to spin off their proprietary trading businesses.

But one of the complaints about financial regulatory reform is that it didn't address the biggest bailout of them all: Fannie Mae (OTC: FNMA.OB) and Freddie Mac (OTC: FMCC.OB). Now the administration and Congress are just beginning to take on the momentous task of reforming our nation's housing finance system, and opinions run the gamut. Rep. Ron Paul, R-Texas, weighed in on how he thinks we should restructure the housing finance system. He also offered his thoughts on the final version of financial regulatory reform. Paul is in favor of privatizing the housing finance system and says he thinks the financial regulation bill did not usher in true reform.

Here is an edited transcript of our conversation:

Jennifer Schonberger: How should we restructure the U.S. housing finance system? What should we do with Fannie Mae and Freddie Mac?

Rep. Ron Paul: Sell it because the majority of mortgages are probably still pretty good. But we should never have these guarantees. I argued against Fannie Mae and Freddie Mac for 10 years, saying that just the implication that there's a line of credit to the Treasury means that there will be an artificial number of houses built.

So yes, there's probably a lot of good mortgages. Find out what they're worth. But when the Fed buys these mortgages, we don't know what they're worth. As a matter of fact, even the Chinese government owns a lot of these, and they monetize them for us. So you need the market value of these mortgages [first], then people should buy them. The ones that are worthless will get wiped off the books.

But the government shouldn't be in that business. Only the market can determine these values. I have no trust or faith in the politicians and the bureaucrats that I know in Washington that know anything about value, because they can't know. Nobody's smart enough to know that. Only supply and demand and the people evaluating these mortgages will decide their worth.

The market would have a "Fannie Mae" and "Freddie Mac." People would bundle these together, and sell them, and there would probably be a private rating agency. Somebody has to evaluate them -- you'd get higher interest for the ones that are riskier. Right now, everything was thrown in a bundle, and a lot of them became worthless. Then we had the derivatives piled on. After they became worthless, the Federal Reserve buys them up at nominal value and sticks the taxpayers with these. The sooner we get that type of system behind us, the better.

Schonberger: On financial reform, do you think the newly passed regulation solved "too big to fail" and reined in systemic risk? What do you make of the legislation that has passed?

Paul: I didn't like the legislation, and I voted against it. It's sort of a bill that plans how we will sort out the pieces the next time we have a similar crisis. They didn't change policy. They just thought that if we had more regulations, and more protection, then we would take care of it in a different fashion. They're trying to patch up the old system. It can't work. It hasn't worked this go-around.

Just pretending that we can continue with the same monetary policy, the same Federal Reserve system, and all these guarantees sort of concedes that we're going to have another bubble. If we have regulations and plans for how we distribute these assets later on, it just says that nothing has changed. That's another reason why there's no confidence in the market. People realize they're just propping up a system that has already failed.

Schonberger: Do you think anything good has come from this legislation?

Paul: The best thing that has come out of it was the fact that we ended up with 320 people in the House that supported transparency of the Fed to find out what they do in secret, and that they have to be accountable to the Congress. Even though that didn't get passed, more and more people now understand that the Fed is the culprit and not the solution. They created the bubble, they're responsible for the problems we have, and they will never be off the hook. I think that is just great.

For Paul's thoughts on U.S. fiscal policy, click here.

For more on how we should reform Fannie Mae and Freddie Mac:

Fool contributor Jennifer Schonberger does not own shares of any of the companies mentioned in this article. You can follow her on Twitter. The Motley Fool has a disclosure policy.

Read/Post Comments (14) | Recommend This Article (24)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 31, 2010, at 8:17 PM, mtracy9 wrote:

    Libertarians (or true conservatives) like Rand Paul and Sharon Angle need to start their own country and show us how it's done.

    Oh wait !! ... they already have, in Somalia and Guatemala -- no income tax and no unions.

    Libertarians love the paradise of Somalia where there are lots of guns, no government and no health care.

  • Report this Comment On August 31, 2010, at 10:25 PM, ChrisBern wrote:

    @mtracy9 -- You appear to be referring to anarchism, not libertarianism. Common mistake. There is an important role for government in libertarianism. That role just doesn't happen to include most of what our government does today. It does include law enforcement, courts, and national defense, along with a few other "staples" that actually help the economy run smoothly instead of hindering it.

  • Report this Comment On August 31, 2010, at 11:51 PM, whereaminow wrote:


    Another strawman. It's obvious you know nothing of Somalia or Guatemala. Thanks for displaying your ignorance for all to see. Do yourself a favor. Go to Wikipedia and type in Somaila. Read the article. Then come back here and apologize for claiming that their problem is a lack of government,

    David in Qatar

  • Report this Comment On September 01, 2010, at 12:03 AM, ET69 wrote:

    Ya libertarians want to protect the wealth of the exploiting capitalist class and nothing else. No public health , no education - nothing except the damn military, the cops and the courts! NO THANKS!

  • Report this Comment On September 01, 2010, at 12:08 AM, whereaminow wrote:

    "the exploiting capitalist class"???

    Can you put down your copy of Fourier for a moment and use your own brain?

    What part of American society collects anywhere from 35-50% of every dollar of wealth created (probably higher than that), without producing anything of value expect bombs and spy cameras?

    Whose exploiting who, Saint-Simon?

    David in Qatar

  • Report this Comment On September 01, 2010, at 8:49 AM, BMFPitt wrote:

    The problem with winding down Fannie & Freddie si that once you've attached the full faith and credit of the US Government to something, you can't take it back. Obviously we have to start by not making the problem worse - stop insuring new mortgages right now. From there, I'm not really sure how how you can get out from under the ones we already have in such a way as to minimize losses. Any way I look at it, we'd probably sell the "good" ones at below fair value, and we'd end up holding the bad ones. The good news, if you want to call it that, is that it would only take about 5-7 years to get through the bulk of the losses, because when a mortgage goes bad it usually goes bad early.

  • Report this Comment On September 01, 2010, at 12:30 PM, CTCZ wrote:

    I support Ron Paul and believe he is one of the few (or only) people in Washington who fight for We The People. The sole purpose of government is to secure our liberties and freedoms, not to provide health care or bail out banks and businesses. Ron Paul has been correct in his economic predictions and we really need to be listening to him.

  • Report this Comment On September 01, 2010, at 12:31 PM, CTCZ wrote:

    Audit The Fed





  • Report this Comment On September 01, 2010, at 12:34 PM, ChrisFs wrote:

    I'm unsurprised that Ron Paul thinks financial reform did nothing. Despite being in government, he believes in no government. Sadly, the crisis came about due to lack of regulation, and his solution is simply to let the same crisis happen again and again as it's simply the free market.

    There are many rebuttals to his concepts of selling Fannie Mae and such. However even Alan Greenspan has stated that the lax, laissez-faire approach failed. It's only Ron Paul's ideological blinders that prevents him from seeing the failure.

  • Report this Comment On September 01, 2010, at 1:36 PM, SundayRider wrote:

    ChrisFs, it's a typical media-generated idea that "the crisis came about due to a lack of regulation" as you say. The truth is more complicated. Yes, there was the biggest example of this idea in the removal of the Glass-Steagel regulations back on Clinton's watch. Since the government was already guaranteeing deposits, which allows banks to get money at a lower interest because the depositor is guaranteed, removing the limitation of what the banks could do with that money (like "open a derivatives casino") was a stupid thing to do. And they haven't yet reversed it, even with the new regs.

    But the underlying problem is that the government is engaged in "un-leveling" the playing field, not only in this way but in a myriad of other ways. If they didn't get involved in the first place, there would be fewer "casinos" all over the place distorting the marketplace. People would evaluate where they would put their money based on real risk, instead of knowing that they can risk everything for the big payoff and the government will cover them if they lose big-time--i.e. extorting money from taxpayers to pay them back. Is this really either a sensible or moral way to run a country?

  • Report this Comment On September 01, 2010, at 1:46 PM, damilkman wrote:

    Ron Paul has some interesting ideas. I agree with other posters that he does have some ideological blinders, like his stubborn belief in a return to the gold standard. However his premise that the source of the problem is not fixed, I agree.

    On the flip side those liberals who believe a libertarian believes in no government are also misguided. As I tell my ultra liberal brother in law, if you do not know your enemy your doomed to fail.

  • Report this Comment On September 01, 2010, at 1:47 PM, SundayRider wrote:

    Also, Ron Paul doesn't believe in "no government" as ChrisFs asserts. He believes in a "limited government", i.e. limited by a constitution in what it can do, both generally and also to its citizens--who are more important than the government. In this he is in the company of such "radicals" as George Washington, Thomas Jefferson, Benjamin Franklin, John Adams and many others.

  • Report this Comment On September 01, 2010, at 3:33 PM, doublearon00 wrote:

    You guys are doing great, David in Qatar and co. Ron Paul is a incredibly intelligent man.

    Some of the people commenting on these boards against Libertarianism have no understanding of what Libertarianism is. Those who are cursing capitalism, what the hell are you doing on this website anyways? This is capitalism at its best!! Post your garbage on Huffington Post!

  • Report this Comment On September 07, 2010, at 9:56 AM, Jermo wrote:

    If we were to view the financial markets like a tree we'll find that the roots of a tree define and establish it's strength.

    In the US financial markets the roots are weaker and have been damaged by the enroachment of well intentioned politics. Government should stick to what it's intended for and not become involved in the private affairs of individuals. The problems we've recently encountered with our failing economy are all directly related to government intervention and entanglement (albiet well intentioned).

    The US Goverment shall not cause through comission or omission any citizen to accept or deny a financial risk they would or wouldn't otherwise accept. For our Government to do otherwise does long term harm to our economy and our country as a whole.

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