Statement before the US House of Representatives Financial Services Committee, Humphrey Hawkins Hearing on Monetary Policy, July 16, 2008

Mr. Chairman, today we find ourselves on the verge of an economic crisis the likes of which the United States has not seen in decades. Our economy is very clearly in a recession, and every time someone tells us that the worst has passed, another serious event takes place, as we saw once again last week and early this week. Everyone now realizes that the situation is dire, yet either no one understands the cause behind the credit crisis, or no one is willing to take the necessary steps to ensure as orderly an end to the crisis as possible. Instead, we hear talk of further bailouts. The Fed-brokered takeover of Bear Stearns, a supposed one-off incident, has now been joined by a potential bailout of the Government-Sponsored Enterprises, Fannie Mae and Freddie Mac.

The two GSE's have been disasters waiting to happen, as I and many others have warned over the years. It was bad enough that Fannie and Freddie were able to operate with significant advantages, such as lower borrowing costs and designation of their debt as government debt. Now, the implicit government backstop has turned out to be an explicit backstop, just as we feared. The Greenspan reflation of the economy after the dot-com bust pumped additional liquidity into an already-skewed housing market, leading to an unsustainable boom that from many accounts has only begun to unravel. With a current federal funds rate of two percent, and inflation at over four percent, the Fed is currently sowing the seeds for another economic bubble.

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