By Economist Peter Schiff                                                                                     

 

 

With President Bush no longer threatening a veto, the subprime mortgage and Fannie and Freddie "bailout" bill is now sailing 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, 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. Paulson's Bazooka will be locked and loaded with enough fire power to blow what's left of our economy into the dustbin of history. Though 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 then the problem. As painful as the failure of Freddie and Fannie 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 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 then called me "Dr. Sun Shine". 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 this impending crises, I am even more confident now that the government has just thrown gasoline onto the fire.

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: Joel Singer Of The California Association Of Realtors 

 

 

 

 

(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 20 -  People around the world are experiencing sticker shock at the grocery store, the result of runaway economic forces that show no signs of abating. Here in the United States, the price of eggs jumped 29 percent last year. Dairy products are up more than 7 percent. And the price of corn has tripled in the past four years. It's even worse worldwide. Globally, the food price index calculated by the Food and Agriculture Organization of the United Nations rose by nearly 26 percent last year, compared with 9 percent the year before. So far in 2008, that same index has jumped to unprecedented levels. Spiraling food prices make a triple whammy for Americans, who are simultaneously being hammered by staggering gas prices and the mortgage crisis, with little meaningful relief in sight. The economic forces pushing prices are complex. Some of the bigger reasons for rising food prices include............................

(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 22 -- Lenders started foreclosure proceedings on a record number of California homeowners last quarter, the result of declining home values and the rampant spoilage of a batch of especially risky home loans made in late 2005 and 2006, a real estate information service reported. Mortgage servicers recorded 121,341 "notices of default" during the April-through-June period. That was up 6.6 percent from a revised 113,809 for this year's first quarter, and up 124.9 percent from 53,943 in second-quarter 2007, according to DataQuick Information Systems. Last quarter's number of defaults was the highest in DataQuick's statistics, which go back to 1992. "It's still very clear that most of the problems are in certain areas and in certain categories. Basically, areas that absorbed spillover activity during the end of the boom cycle in 2006 seem to be the hardest hit. Prices went too high, fueled by the availability of easy-to-get dicey home loans. An added element was speculative buying," said John Walsh, DataQuick president. "The small increase in defaults from the first to the second quarter may indicate that we're nearing a plateau..........................


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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