By Economist Peter Schiff                                                                                     

 This week, with the nation's financial infrastructure crumbling before our very eyes, the nation's top two economic policy makers made their way to the Congress for an extraordinary episode of political theater. Fannie Mae and Freddie Mac, the quasi-government entities that form the backbone of America's gargantuan mortgage market, appeared to be cracking. To the somewhat bewildered members of Congress, Ben Bernanke and Henry Paulson offered radical remedies to save the lenders. Despite the fact that the proposed policies would thoroughly redefine America's supposedly capitalistic pedigree, the moves were presented as wholly inevitable, and in the end, benevolent and costless.

If you are looking for a new chapter in American history, it has just begun.

The most memorable moment in the episode came when Secretary Paulson explained that the best way to minimize the chances that Fannie Mae and Freddie Mac will need a government bailout would be for Congress to grant the Treasury unlimited authority to lend to the two institutions. His analogy: When the bad guys see a bazooka on your hip, you are less likely to be challenged to a gunfight.

At its heart Paulson's argument assumes the GSE's problems are simply a function of confidence. He believes that if the U.S. Treasury signals that it will stand behind both firms to the bitter end, then investors would have no reluctance in buying their bonds. But assuring that creditors will be repaid (albeit with cheaper dollars) does nothing to address the root cause of the problem, which is that both firms are losing money on their loan portfolios, and on the loans that they insure. Paulson's plan actually assures that Fannie and Freddie's losses will be even larger, and puts American taxpayers, or more precisely wage earners and savers, directly on the hook. The longer these two entities remain in business, the more bad loans they will buy or insure, and the more money taxpayers will lose.

In theory, Fannie and Freddie were originally created to help provide affordable housing. In reality, like all government programs, they achieved the opposite. Rather than making houses more affordable, they merely enabled buyers to overpay for them. The result is that American homeowners are now saddled with staggering amounts of debt, as easy credit made it possible for buyers to bid prices to dazzling heights. So while a record number of Americans now own homes, they have bankrupted themselves in the process.

Without the help of Fannie and Freddie, and now the full faith and credit of the United States, American home buyers would be facing much steeper mortgage interest rates. This is particularly true given that our ability to borrow is now dependent on access to the global savings pool. Without the implicit, and now explicit, government guarantee, foreigners would be much less willing to extend cheap credit to Americans. If we had to rely solely on our shallow domestic savings pool and individual credit worthiness alone, rates would be significantly higher. Since home prices are a function of the ability of buyers to pay, higher interest rates would mean lower prices, thus making houses themselves more affordable.

Even the tax deductibility of mortgage interest has achieved a similar result. By subsidizing home buying, and encouraging renters to become buyers instead, the government has artificially increased demand for houses, causing prices to rise. In the end, the benefits of the mortgage tax deductions are limited to those who benefit from inflated home prices. This includes realtors, who earn higher commissions, governments that collect higher property taxes, and those who owned their homes prior to the loophole being enacted who cashed in on the gains.

At present, the best the government can do for housing and the economy is to leave both alone, cease interference in the free market, restore sound money, and allow capitalism to work.

Unfortunately, the laws of capitalism are now demanding that home prices continue to fall precipitously. But, based on the speed in which our government, public and financial institutions are willing to abandoned free market principals at the first whiff of economic pain, the likelihood that this impulse will take hold is increasingly remote. So hunker down as the United States finds itself on the express track to state socialism with Paulson's Bazooka locked, loaded and pointed right at us. When the government pulls the trigger the blast will blow the dollar, and what's left of our capitalist economy, to smithereens.

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." 

 

 

 

July 19, 2008: Scott Whaley President Of Real Wealth Expo 

 

 

 

 

 

(Sep 18, 2007)- "If the dollar loses value too quickly, it could wreak havoc on the economy and financial markets - driving up interest rates and inflation and slashing Americans' purchasing power" -Peter Schiff 

 

(Sep 19, 2007)- "People keep talking about Fed bailouts as if there is no cost. All the Fed can do is create new dollars. What that does is diminish the value of all the dollars everybody already has. They try to socialize the losses among all the holders of dollars" -Peter Schiff

 

July 17 -  Inflation is racing through the economy at a pace not seen in years, touching even the medical gloves used by hospitals, as manufacturers cope with high oil prices. The cost of living in June shot up at the fastest rate in 17 years, with the Labor Department reporting Wednesday that consumer prices jumped 1.1 percent, a much faster clip than anticipated. Inflation is corrosive to paychecks, cutting deeply into consumers' earning power, but the phenomenon hurts even more in an economy struggling to maintain growth. Inflation also hurts companies when they can't pass on higher costs because of competitive pressure. Much of the inflation pressure now is due to oil prices, and its impact is most obvious at the gas pump, though high food prices are also hurting shoppers at the grocery store. While oil prices have dropped steeply the past two days, they remain at historically high levels............................

(Aug 16, 2007)- "The housing bubble has burst. Prices are going to collapse and sales are going to fall through the floor." -Peter Schiff 

 

June 17 -- Double-digit drops in median home prices hit every Bay Area county in June, even the ones that had seemed Teflon-coated. Across the nine counties, the median price paid for resale homes, new homes and condos in June plunged 27.1 percent from a year ago to $485,000, dipping below the half-million-dollar mark for the first time in four years, DataQuick Information Systems of La Jolla (San Diego County) reported Thursday. Among resold homes, bank-repossessed foreclosures - which usually are discounted - accounted for 28.7 percent of all existing-home sales, up from just 3.5 percent in June 2007. Solano County, with foreclosures at 57.7 percent of all resales, had the highest percentage; San Francisco, at 3 percent, had the lowest. Affluent areas such as Marin County and San Francisco, which until now had resisted most price erosion, saw existing single-family home median prices fall by about 11 percent. Including new homes and condos, the Marin County and San Francisco medians fell about 12 percent to $846,000 and $726,750, respectively.........................


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(Sep 21, 2007)- "With the Federal Funds Rate cut, the Fed revealed that it has no interest in defending the dollar or containing inflation. This kind of irresponsibility is all gold needs to move higher from its current levels unless the Fed somehow finds its backbone within a year or two, then gold has a good chance to take out its inflation-adjusted high of nearly $2,000 per ounce within this decade." -Peter Schiff

 

 

(July 31, 2007)- "It's going to soon hit $90 and go north of $100 next year. We should see $150 to $200 oil in the next two to three years because of the drop in the dollar.'' -Peter Schiff