Saturday, July 26, 2008

The Titanic Congressional Bail Out

Congress is using our check book to bail out Fanny Mae and Freddie Mac to the tune of one trillion dollars plus. There is something, hidden here, have you figured it out?

Right now, Freddie Mac and Fannie Mae are hot potatoes. A government guarantee doesn't make them smell any better. The general mantra is, “Let someone else own this crap.” Interest rates could jump to more realistic levels. That in turn could move the housing market into the deep end of the pool.

Some Republicans changed over to vote for the bill, indicating the situation is far worse, than anyone is letting on. This is nothing more than a “Hail Mary Pass for the End Zone.” Big money is moving for the exits. The losses are real, and still only the banks have lost money, the depositors have not (careful you can choke on that sentence). The financial system is in need of a massive injection of liquidity. The 150 billion dollar stimulus package was insufficient to do the job. We are looking at 17 trillion dollars worth of savings that are linked by fractional reserves to the hedge funds and Fannie Mae. The phrase “House of cards” comes to mind for some reason.

The world’s financial markets are contracting. Other nations don’t have our deep pockets (it’s their money in our pockets), few have government backing.

Are we playing a waiting game? Which country’s banking system will collapse first? Italy and Spain can feel the pain. China is also suspect; Communism and entrepreneurship make strange bed fellows. The failure of the Chinese banking system would “teach” their citizens a lesson; “Free enterprise sucks, socialism rocks!” Naturally we would be blamed for the misery created.

We could be looking at a worldwide financial meltdown. This financial contraction will reach everywhere. Our banking system can survive if people believe that their money is safe in a FDIC insured bank and leave it there. The trouble is, many people with US investments are foreigners. Leaving it as a deposit might not be an option especially if it’s over 100k. The first people in line will get their money; the last people in line get an education. So it kind of works out for everyone.

We have just started a game of musical chairs. Half of the deck chairs are gone and the band is still playing. I guess I'll sit back and enjoy the life boat races.


Sackerson said...

Hi, Jim: are you truly that pessimistic? Do you predict massive deflation (Karl Denninger's latest says bonds and stocks are due a heart attack)? If so, are you mostly holding hard cash?

Jim in San Marcos said...

Hi Sack

I think that the banks will survive. Stocks and bonds will trade at some price. I still can't call whether we are going into inflation or deflation. One trillion dollars for a bailout suggests inflation.

What is lost here is the retirement savings of a whole generation.

A house has value, it will shelter a family. If a stock decreases in price, it has very little effect on the company. If interest rates take off, bonds could lose 3/4th of their value.

The retirement funds haven't had to mark anything to market. Even if they did, very few are baby boomer's are drawing against the plans.

My hard assets are in gold silver cash T-bills and a Rental. The other 50% or so is stuck in retirement funds which I consider vulnerable.

Since we can't really be certain how this will play out, my setup is pretty well diversified.

I wouldn't consider myself pessimistic. If you went in for open heart surgery and the surgeon showed up with a chain saw, wouldn't you question his technique.

The absurdity of a 150 billion dollar bail out and now a Trillion dollar Carte Blanche shows that we have some real dimwits at the wheel.

Real earned money was spent. The numbers in some retirement fund ledger are a measure of what was. It can't be papered over.

Reality is around the corner, we will get there, I'm just not sure how.

Let me get my morning coffee and I'll check out Denninger column. Thank you for your comments

Anonymous said...

Jim, This bailout may seem outrageously irresponsible and dimwitted on the surface, but logic is not the reason they are doing it. It seems fairly obvious that they are looking for -anything- that will postpone the inevitable. At least until after the election. I think it would be great if whomever wins the election keeps Paulson and Bernanke in their same positions so they can suffer the consequences of the shallow decisions.

Jim in San Marcos said...

Hi Anon 4:42

It may seem like I am talking out of both sides of my mouth, but I agree with you.

The situation is very dire. There is nothing to lose by this last fling.

But to quote you, "postpone the inevitable" pretty much sums it all up.

Government can't get us out of this financial mess, but they can make it worse.

If everything got marked to market tomorrow, we could be back up on our feet in 6 months. The trouble is, government will "help" you to maintain your status quo by way of the printing press. That ain't going to work.

Personally, I don't think we can blame Bernanke or Paulson for our present problems. There is really nothing that they can do to fix the damage.

It really doesn't matter who wins the election. There isn't a damn thing that they can do to fix this mess. Somebody lost a hell of a lot of money. They need to mark it to market.

Thank you for your comments