Sep 19, 2008
Just three days ago, after
looking at the prospect of bailing a string of distressed financial
institutions 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 are
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
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 institutions, 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
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 book "Crash Proof: How to Profit from the Coming
Economic Collapse." Click here
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More importantly, don't wait for reality
to set in. Protect your wealth and preserve your purchasing power
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my free, on-line investment
Sep 19, 2008
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
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
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.