The Writing is on the Wall
This week, Larry Kudlow and
others strongly chastised Bernanke for his failure to read the
writing on the wall and urged the Fed Chairman to quickly slash
the Fed Funds rate. Methinks the pundits doth protest too much.
For years, Kudlow, who practically coined the term "Goldilocks
economy," has dismissed with scorn suggestions that the
American economy was anything less than ragingly healthy. If
our economy is really so strong, why does he call so loudly for
the artificial stimulus of a significant rate cut?
A record percentage of our GDP is comprised of consumer spending. The source of this spending was the housing bubble. Would our savings rate really be negative were it not for housing related "wealth?" Could consumers really have spent as much as they did without the benefits of temporarily low teaser rates and the ability to extract equity from their homes? How many service sector jobs are directly related to that extra spending? When the low mortgage payments and home equity disappear, so too will the spending and jobs they engendered.
Those who feel that the economy will keep growing must believe that discretionary consumer spending is unrelated to wealth or expenses. In other words, they believe that individuals will spend as much with no home equity and $3,000 per month mortgage payments as they did with $200,000 in home equity $1,500 monthly payments. Factor in other rising expenses; such as food, energy, insurance, and taxes and discretionary spending will not just slow, it will completely collapse.
With the ugly truth laid bare, many now prod Bernanke and Bush for solutions. Unfortunately there are none. Based on absurd assumptions about real estate, we simply borrowed more money than we can ever hope to pay back. There is no magic elixir we can swallow to cure what ails us. The free market is the only force that can fix this mess. Unfortunately, the fix won't be pretty. Prudent lending standards will return, guaranteeing that real estate prices collapse. This is an important connection that very few have made. There is no way the average American can afford to buy the average house at today's prices with a mortgage he can afford. Assuming that the lax standards of 2005-2006 do not return, the only way this can happen is if real estate prices collapse, which is exactly what is happening.
The financial institutions
that are calling most loudly for a bailout claim the Government
must act to protect homeowners. However, the most severe losses
will not be born by homeowners but by those who loaned them the
money. Therefore any bailouts will ultimately go to lenders
not borrowers. Homeowners who offered no down payment and who
have no equity in their homes will in reality lose nothing in
foreclosure, except perhaps a debt burden on an overpriced house.
In addition, even those homeowners who made down payments likely
extracted larger sums in subsequent refinancings or home equity
loans. With plenty of available foreclosed homes on the market
to rent it is unlikely that these former homeowners will become
In the final analysis, though it was Wall Street that served the punch, it was the Greenspan Fed that spiked it in the first place. Just as Fed policy enabled Wall Street to flood the world with worthless dot.com stocks it enabled an encore performance with subprime mortgage-backed securities. My guess is the Fed's bubble blowing days are over. Once the inebriates sober up this time, the hangover will be so severe that no one will drink a drop of Wall Street's punch again, meaning any more inflation the Fed creates will go strait into consumer prices.
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Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange