(Click On The Image Above To Watch As Peter Schiff Explains What The Unintended Consequences Will Be Of The Current Bank Bailouts)

"All we are doing is creating inflation...... We are not eliminationg the losses..... Banks are going to fail. They loaned trillions of dollars to americans who can't pay it back...... If we would have had a more severe recession back in 2001-2002 we wouldn't have had these problems but the government intervened, they didn't want that recession so they pushed off the problems. Now we are getting the problems in spades and now you have the politicians again who can only see as far as the next election, they don't care how much long term damage they do. This is going to destroy the value of our currency and send prices through the roof. "- Peter Schiff

By Economist Peter Schiff                                                                                     

Just three days ago, after looking at the prospect of bailing a string of distressed financial institution 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 will be 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 buyers default.

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 institution, 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 a vengeance.

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."
 

 

(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

 

Sep 17 - So how did investors in the Treasury and currency markets react Wednesday to Wall Street's continued meltdown? Government bonds bounced back strongly, sending the benchmark 10-year Treasury yield back down near the five-year low it set Tuesday morning. The yield on the three-month bill briefly sank to a level not seen in 68 years. The dollar went into a virtual tailspin as foreign investors were concerned about buying U.S. debt and assets if the government needs to dish out even more cash for another bailout. After government bailouts of Bear Stearns earlier this year and Fannie Mae (FNM, Fortune 500) and Freddie Mac (FRE, Fortune 500) last week, the government bailed out the collapsing insurance firm American International Group (AIG, Fortune 500) Tuesday night, signaling to Wall Street that the embattled financial markets still have a long road to recovery............................
 
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(Aug 16, 2007)- "The housing bubble has burst. Prices are going to collapse and sales are going to fall through the floor." -Peter Schiff 

 

Sep 14 -- Are homeowners in denial? Are they stubbornly -- maybe irrationally -- clinging to the belief that other people's homes may be losing value, but theirs isn't? How else, one wonders, to explain sellers who cling fast to pre-housing slump notions in this wacko market?  Or are they getting it -- to the point where they understand we're in a brave new world of pricing? I guess that depends on who's asking the question. Zillow is in the "They're in denial" camp: It recently surveyed homeowners about how much their properties are worth. The home-valuation website said that nearly two-thirds believe that their homes' value has increased or at least stayed the same over the last year. But Zillow says its data suggest otherwise -- that three-fourths of American homes lost value in the last 12 months........................

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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