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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 missile.
By committing trillions of tax
payer dollars (not the “hundreds of billions” that 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 Economic Collapse.”
Click here to order a copy today.
More importantly, don’t
wait for reality to set in. Protect your wealth and preserve your
purchasing power before it’s too late. Discover the best
way to buy gold at www.goldyoucanfold.com. Download my free Special
Report, "The Powerful Case for Investing in Foreign Securities”
at www.researchreportone.com. Subscribe to my free,
on-line investment newsletter, “The Global Investor” at http://www.europac.net/newsletter/newsletter.asp.
Peter D. Schiff
President/Chief Global Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax: 949-863-7100
www.europac.net
pschiff@europac.net
For a more in depth analysis of the tenuous position of
the American economy, the housing and mortgage markets, and U.S. dollar
denominated investments, read my new book "Crash Proof: How to Profit
from the Coming Economic Collapse." Click
here to order a copy today.
More importantly take action to protect your wealth and
preserve your purchasing power before it’s too late. Protect your
wealth and preserve your purchasing power before it’s too late.
Discover the best way to buy gold at www.goldyoucanfold.com
, download my free research report on the powerful case for investing in
foreign equities available at www.researchreportone.com
, and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
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