Rep. Paul: Banks must fail before housing market returns

Rep. Ron Paul (R-Texas) said Monday that the only way to bring back the U.S. housing market is to liquidate all the bad mortgage debt, which would require many banks to fail.

"Banks holding substantial mortgages or mortgage backed assets must face the music and adjust their balance sheets to reflect today's reality," Paul said in a post on his website Monday. "Undoubtedly this will force many banks into immediate insolvency, but such banks must be allowed to fail without receiving another nickel of taxpayer money.

"Banks took the risks and made money during the bubble years; those who exercised bad judgment must now accept the consequences of their actions."

Paul said the government artificially propped up the housing market for years, and he blamed "inane legislation" like the Community Reinvestment Act, which he said forced banks to make loans to bad credit risks. He also blamed mortgage giants Fannie Mae and Freddie Mac, and his favorite target, the Federal Reserve, which agreed to hold billions of dollars worth of bad mortgage debt as the crash unfolded.

Paul said a basic rule of economics is that the supply of goods will equal demand of goods as long as markets are permitted to operate. But he said government intervention skewed that rule in the United States and unwinding the government's role will involve necessary pain.

"[O]nly by allowing the housing market to clear can we hope to rebuild our shattered economy from a stable foundation," he said. "Clearly there will be pain in the short term, but we owe it to younger Americans and future generations to allow the reemergence of a rational housing market."

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