Money Morning
From Money Morning:
By Peter D. Schiff
With President Bush no longer threatening a veto, the subprime mortgage and Fannie Mae (FNM) and Freddie Mac (FRE) "bailout" bill sailed through Congress. In anticipation of its enactment, Congress had the foresight to raise the national debt limit to $10.6 trillion. Who says that politicians don’t plan ahead?
Once signed into law, which should happen sometime this week according to a White House spokesman, the budget busting legislation will hand the Administration a blank check to prop up the ailing home lenders. The ultimate cost is anybody’s guess. I believe that the price tag will be higher than just about anyone imagines. Treasury Secretary Henry Paulson’s "Bazooka" will be locked and loaded with enough firepower to blow what’s left of our economy into the dustbin of history.
While the government and Wall Street assure us that these bold moves will save the housing market, and the economy as a whole, from collapse, the reality is that the solution is far worse than the problem. As painful as the failure of Freddie Mac and Fannie Mae would have been, bailing them out will hurt even more.
In other words, it’s not the disease that will kill us but the cure.
Ironically, while government is rightly criticizing mortgage lenders for ditching lending standards during the boom (well after the horses had left the barn), the new law will actually encourage lenders to be even more reckless then before. By taking all of the risks out of mortgage lending (provided of course that the loans are conforming), the government is telling lenders not to worry about the loans they make, because if borrowers do not repay, the government will.
Since this bailout eliminates all market-based deterrents to reckless lending for conforming loans, the only checks remaining will be those imposed by Freddie and Fannie themselves through the criteria they set for those loans. And although they have taken some steps over the past few months to tighten their minimal "standards", the political agenda behind the bailout will cause this nascent effort to lose steam. In essence, the government’s main goal is to prop up home prices. Since American homes are still overvalued given the fundamentals, their prices can only be pushed up with reckless lending and inflation.
As a result of this bailout bill, the share of mortgages owned or insured by Freddie and Fannie will likely swell from near 50% today to over 80% within a year or two, turning a $5 trillion problem into a $10 trillion fiasco. If the government succeeds in keeping real estate prices propped up, it will only do so at the cost of sending all other prices through the roof. More likely, real estate prices will continue to decline despite government efforts to levitate them, compounding the problems and the eventual losses.
The grim reality is that trillions of dollars were borrowed and spent that will never be repaid. No government program can alter that fact. Someone is going to have to pay the piper for all those granite counter tops and plasma TVs. The price tag is staggering and for all the bailouts and stimulus packages, all the government can do is exacerbate the losses and shift the burden through inflation. Nor can the government resurrect bubble home prices and the fantasy of real estate riches that went along with them. One way or another, rational home prices will be restored and the myths of our asset-based, consumption-dependent economy will be finally discredited.
CNBC once nicknamed me "Dr. Doom", but compared to what I see coming now, they should have been calling me "Dr. Sunshine". Take a look at a presentation I made back in November 2006, at the Western Regional Mortgage Bankers Conference. There are eight clips in total, and though the entire presentation is worth watching, most of the real estate comments begin with the 4th clip. Click here to watch the video on YouTube. Every real estate prediction I made at that conference, which was considered outrageous at the time by those in attendance, has already come true. As confident as I was then about these impending crises, I am even more confident now that the government has just thrown gasoline onto the fire.
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This article has 13 comments:
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Alan von Altendorf
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357 Comments
My Website
Jul 29 06:13 AM-
chanel
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3 Comments
Jul 29 07:23 AM-
BigBagel
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3 Comments
Jul 29 07:39 AM-
BS Detector
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300 Comments
Jul 29 08:29 AMIF the federal government were not to forcefully state that it would back the FNM and FRE loans, the MBS market would have continue its death spiral, and it would have taken down most if not all of the firms which have had writedowns to date. A market-based solution, yes, but one which would have also crippled the financial economy in a way not seen since the early 1930s.
I see, as I hope others do, the government's action as one of providing breathing room. The real solution is not here yet, but there is now time to develop it.
What will it be? Hopefully, we'll see the government drastically reduce the scope of the government-backed mortgage program, putting in very high lending standards for those guarantees (if there are any at all), and pushing FNM and FRE into a logical, risk-based market for mortgage insurance, where the government does NOT guarantee the majority of loan balances.
Could it be done? Overnight, no, but gradually it certainly could. Should it be done? By all means. The mortgage interest deduction does plenty to encourage home ownership; guaranteeing the loans on top of that incentive is unnecessary and, as it turns out, dangerous.
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investor88
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755 Comments
Jul 29 08:35 AM-
friend
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17 Comments
Jul 29 09:51 AMThe enemy side has the nuclear weapon of unlawful naked shortings .
The naked shorters has access to sell astronomic amounts of phantom shares in creating drastic falls in pricings and thereby draws panic sales .
The naked shorters may cover their short position by buying shares from panic sales , at fire sale prices to make huge profit .
The naked shorters may cover their short position by buying new issues at depleted price in huge volumes , to make huge profit .
The average investors may lost their hard earned savings under panic sales or their equity being diluted .
The defender side is devastated to a disarray of firearms where buyers against the naked shorters are left with small or no cash .
The poor defenders await in despair for the " central army " to hold back the invasion by means of the rescue plan as well as destroying the enemy's nuclear weapon base by effectively eliminating the unlawful naked shortings .
The enemy is seeding confusion by predicting " future doom " as oppose to an immediate curing measure to the faltering economy .
The more nasty remarks coming from those who promotes economy destruction , the more effective the curing measure would be when implemented .
The life of USA base on oil and finance .
First , there came huge amounts of subprimes which may be fraud related .
Values of houses pumped up by inflated appraisals while such houses were mortgaged to banks under some bad credited individuals .
The houses were mortgaged in amounts over and above the respective market values , right from the start .
The huge volume of subprimes surfaced may tell one that such malicious acts were well organized .
Then , manipulations that are determined to push up oil pricing and to deplete financial equity . All of the said falter US economy .
I say , most Americans would have invested in the considered safe financial stocks .
The naked shortings have created numerous panic sales on all financials causing heavy losses to most people since October , 2007 .
People might have lost all of their savings in short times and subsequently unable to upkeep with their mortgage payments .
True , the rate of foreclosures climbed more than 100% since October , 2007 .
The houses under foreclosure are no longer those from subprimes but those from home owners who were once well to do .
The naked shorters made huge profits in expense of the misery of the average investors or USA .
USA would lay down a solid foundation to fight back effectively in this financial war by legislating the rescue plan and by eliminating effectively the naked shortings .
The measures to curb naked shorting must be applied to all brokerage including all market makers , to be effective .
Otherwise , naked shorters can get their unlawful manipulation done through the exempted market makers .
The naked shorters equipped with the unlimited amount of phantom shares to sell , are fully capable to deplete the financials to any lows even when the rescue plan is being legislated .
Such manipulated depletion would destroy confidence locally and world wide .
Should naked shorting be eliminated , the real shares available for borrowing would be in limit amounts .
The bulk of investors invest in the future , would not sell at this low pricing times especially when the rescue plan is being legislated .
The finanacials or the US economy would then be stabilized .
Time would then be made available for an economy recovery .
Legislate the recue plan , curb effectively naked shortings .
USA , fight effectively to defend against the economy destroyers .
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robert.b.ferguson
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70 Comments
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Jul 29 10:26 AM-
John Pseudonym
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232 Comments
Jul 29 10:29 AMThank you!
Keep up the good work!
I appreciate your insight; or should I say clairvoyance?
Thanks again,
John
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thku4grace
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20 Comments
Jul 29 10:58 AM-
iThinkBig
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1068 Comments
My Website
Jul 29 11:27 AMBusiness and government is now about stealing the remaining wealth from shareholders whether it be at a corporation or the American people itself. Enron, Fannie/Freddie/Country... no energy independence, devalued currency creating inflation but Federal government won't cut spending, oh no that is for the little guy to do! Well all the little guys equal 300 million people. A cure is investment back into our infrastructure creating skilled jobs.
Education on moral values such as accountability, sacrifice, kindess (this is not PC, that has been a disaster) is also critical. The lessons of how our nation began and were successful such as "Give me your tired, your poor, your downtrodden" are part of our Judeo-Christian value system. These are trashed constantly now as secular push occurs for a seperation of church and state that was never an issue it seemed since the counter-culture emerged in the 1960's. The counter-culture was funded by propoganda by communists. The investment made by the commies in the late fifties and early sixties apparently has paid off in spades. Many of us are afraid to proudly proclaim we are Christian or Jewish these days. Having a standard of proper values to be willikng to die for one another is confused with fanatical idol worship and moronic decisions when it is exactly the opposite. What is good has become bad and what is bad has become good.
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bearfund
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547 Comments
Jul 29 11:47 AMThere are several problems with your analysis. For starters, let's make it clear that we agree that naked shorting is illegal and unethical and needs to be prohibited. I have suggested in the past that firms that fail to deliver should simply lose their exchange seats. That would put an immediate stop to naked shorts. However, while naked shorting is troubling, it is not the cause of America's economic problems.
For one, the market cap of financial companies does not affect their capital adequacy. What matters are cash on hand (liquidity) and shareholders' equity relative to total assets. At worst, a short-selling storm can degrade confidence, making it more difficult for the firm to do business. But if everyone is suffering at the same time, what difference does it make?
Next, we might want to see whether stocks in the "SEC 19" have been over the Reg SHO threshold recently and for how long. If naked shorting were the cause of their declines, we would expect to see this. Guess what? They aren't on the list. Nor were they on July 15. No Fannie. No Freddie. No Citigroup, no Lehman, no Merill, no Goldman, no Bank of America. Not even Wells Fargo or WaMu or Wachovia. None of those heavy hitters have met the naked shorting threshold. You know what's near the top of this hall of naked shorting shame, with 275 days on the list? USO - a long oil futures ETF. I don't see anyone crying about that and I sure don't see the SEC doing anything about it.
The fact is, America isn't in trouble because of naked shorts. It's in trouble because it has too much debt and too few quality assets. Sounds boring and old-fashioned, I know. As to your civil war notion? I rather agree. But I don't see the armies quite the same way that you do. On the one side I see the forces of debt and debasement: the Treasury, Congress, the Fed, and the big banks. They are trying to deal with too much bad debt by printing more money and issuing more debt, most of it backed by collateral they do not own (if that's not naked selling, what is?). On the other side, the vanishing middle class: savers, investors, people who have acted prudently, taken on little debt, and stuck to quality assets they purchased at reasonable prices. Someone is going to have to pay off that debt someday. The poorest half of Americans have less than 3% of the nation's assets. They can't pay it (indeed, the bad guys are busy handing them some of the money they raise from selling debt in order to obtain their votes). The richest 1% are the very people making these laws and issuing the debt on our behalf; you think they're going to pay it? Really? The debt will be paid by the people who have enough money to pay it and too little power to protect themselves. Whether they will be taxed to death or inflated away makes little difference, since it's the same people in either case who will pay.
Forget the naked shorts. Forget the "oil crisis" too. Those are distractions. The debt-fueled bailouts and associated inflationary policies are the real problem.
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User 234259
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1 Comment
Jul 29 02:17 PM-
msgtb
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48 Comments
Jul 29 03:42 PMThe SEC has chosen to turn a blind eye to the law and let problem groups continue to brake the law.
The US Governments involvement in the stock and futures markets have helped create the huge problem that we find ourselves in. The US Government is sending good money after bad trying to manipulate the markets. The Market will have the final say. This is taxation without representation. Paulson is not an elected official. The recent housing bill is going to waste away generations of American treasure and leave our children with unbelievable debt. Where were US Government Regulators, the Federal Reserve, Secretary of the Treasury, Chairman of the SEC, US Congress, US Senate, and The President of the United States for the last eight years? Federal Reserve Governor warned Greenspan but was told to shut up and color? Shame on the US Government.