Sec of Treasury Paulson wants to Commit Trillions
of Tax Payer Dollars to the Mother of All Bailouts
I am familiar with the henhouse. Let me in and I will fix it!
Just three days ago, after looking at the prospect of bailing a string of
distressed financial institution in the country, the government seemingly
drew a line in the sand, and refused to bail out Lehman Brothers. The
authorities clearly saw Lehman’s demise as a trial balloon to see how the
markets would react if the government stayed on the sidelines. That trial
balloon quickly turned into the Hindenburg. Immediately reversing course,
the Government has decided to go “all in” and bail out every institution
with financial exposure to U.S. mortgages.
Simply put, Americans will not be allowed to visibly suffer losses after the greatest asset bubble in U.S. history. But make no mistake, the losses are real and Americans will pay one way or another. Moving beyond the guided munitions of selective bailouts, the Government is now trying the financial equivalent of carpet bombing. (For AIG, Merrill Lynch, and especially Lehman Brothers, this gives new meaning to being a day late and a dollar short). To continue with the military analogies, Paulson's bazooka turned out to be a nuclear tipped ballistic
By committing trillions of tax payer dollars (not the “hundreds of billions” that treasury sec Paulson predicts), the plan will save commercial and investment banks
from certain bankruptcy. In his statement today, Paulson made clear that
Congress must pass new legislation to allow the Government to acquire even
those loans too poorly collateralized to currently qualify for GSE or FHA
absorption. The losses baked into these mortgage products, which Wall
Street has been reluctant to even estimate, will now be borne wholly by taxpayers.
In his press conference, Paulson assured us that this plan was designed to
safeguard our savings. But in typical government fashion, the plan will
have the reverse effect as savings is wiped out through inflation. He also
claims that the plan will safeguard home equity by keeping real estate prices
high. Since when did high home prices become a strategic national priority? If
the plan succeeds, the gains for home sellers will simply be matched by losses
for homebuyers, who end up paying inflated prices, and taxpayers, who get
stuck with the losses when those buyers default.
Paulson’s distress and confusion was clearly evident when he fielded
questions from reporters. The first asked Paulson to describe his fears
regarding the probable economic consequences of government inaction.
Paulson provided no answer and promptly exited stage right.
When the U.S. government owns all mortgages, the real estate market will be
completely subject to political, rather than financial, concerns. Will
foreclosures be outlawed? Will loan term easements and principal reductions
become standard campaign issues?
While it is dizzying to predict how this plan will be implemented, it is
fairly simple to foresee the macroeconomic consequences. The U.S. dollar
will be shattered beyond repair. The government simply has no means to make
good on the trillions of new liabilities. Interestingly, while both Paulson
and President Bush acknowledge that the plan will put “significant amounts
of taxpayer dollars on the line,” they did not mention any tax increases.
Given the politics, no such move is forthcoming. The printing press is
their only solution.
The government has also decided to insure all money market funds, adding
trillions more in unfunded liabilities to the Federal balance sheet in the
blink of an eye. Of course, since bad real estate loans are not the only
toxic assets on the balance sheets of financial institution, we will also
need to absorb other classes of asset-backed securities, such as those
backed by credit card debt and auto loans. So while the move ensures that
depositors will not lose money, is does insure that the money itself will
lose value. Is the trade-off really worth it? Washington thinks so.
Further, since I assume the plan will apply to all mortgage debt, U.S.
taxpayers will also be on the hook to bail out foreign institutions that
loaded up on the financial sludge. However, once the government takes them
off the hook, do not expect them to re-invest the windfall back into other
U.S. dollar denominated assets. This get-out-of-jail free card will likely
scare them straight. The global mass exodus from the U.S. dollar and
Treasury debt is about to begin: do not get caught in the stampede.
Although gold initially sold off as the apparent need for a financial safe
haven ebbed, look for a spectacular rally to commence as its traditional
role as an inflation hedge returns with a vengeance.
For a more in depth analysis of our financial problems and the inherent
dangers they pose for the U.S. economy and U.S. dollar denominated
investments, read my new book “Crash Proof: How to Profit from the Coming
By Peter Schiff who you will remember is a WALL STREETER.
who has investment newsletters* * * * * * * * * * * * * * * * * * *<=== BACK TO THE FRUGAL TIPS and CHEAPO LIFESTYLE WEBPAGE
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