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Gold had quite a run,
from the $740 low on 9/11/08, to $924 a scant week later.
"Gangbusters" was our phrase, subsequently picked up by Stewart
Bailey of Bloomberg.com in his reporting on the flight to gold
this week: Bloomberg.com
We had roller-coaster ups and downs, rises and falls, government
interventions, surprises of all stripes, and a continuation of
the theme established back when the Credit Crunch began in
August 2007 - the unsettling prospect of untold hundreds of
billions of dollars in government bailouts, rapidly assembled
with the most expeditious urgency, a necessity, we are told, in
unprecedented times of financial crises such as we are currently
experiencing.
Not that we would doubt that our august keepers of the public
purse and monetary supply are doing the absolutely right things
and at the lightning speed that such crises requires. To even
think about quibbling, in such an action-packed scenario, is of
no use whatsoever, because it's too late, too late, the die is
cast.
Even as I type these words, Congress is being implored to make
sure that even more things, the right things for this historic
crisis, albeit monstrously expensive things that were just
cooked up a couple of days ago, will be sure to happen faster
than the speed of thought.
To think that all of this expensive intervention is coming to
the rescue of what were once called, without irony, free
markets. The lesson in all this must be that most timeless moral
of all - nothing is free.
Unregulated financial shenanigans have a cost, and that cost is
not going to be paid by retroactively retrieving the past few
years' bonuses paid out to Wall Street's resident geniuses who
cooked up this whole state of affairs - it's going to come from
you and me, and every other US taxpayer or US dollar holder. The
paradox of de-regulated financial markets is that extraordinary
risks were taken for private gain, and we the people are now
expected to provide the safety net.
Even the money market funds where Americans currently have
parked some $3.4 trillion are in trouble. Some $50 billion is
being proposed to 'backstop' such funds so that they don't fall
below their face value, an increasing risk in some funds today.
Such intervention has problems. What's to prevent money fund
managers from this day forward taking enormous risks to goose
their (potential) yields, thus drawing more money from
return-starved investors, with both the investors and the fund
sponsors knowing that while gains will be private, risks, even
risks going forward, will be borne by the public treasury?
But the big Kahuna of intervention at this time is the question
of the $700 or $800 billion, or possibly a $trillion that the
Treasury will spend in the purchase of financial toxic waste
from cash-strapped financial institutions. One major
consideration, brought up by many who have written knowledgeably
this week about the rescue efforts which popped up like
mushrooms after a rain, is the question of how are those pools
of sludge to be priced?
For taxpayers to pay full face value clearly is unfair, so can
we look for a price closer to the 22% of 'face value'; that
Merrill Lynch dumped such junk a mere couple of months ago? In
other words, if we the US Treasury are going to buy this junk to
help make enormous institutions more liquid, shouldn't we at
least be getting a transparently good deal for paying out money
up front, so to speak? We cannot let this just be a no-harm,
no-foul playover for these Wall Street firms - there has to be
some equity there for the taxpayers, some chance at future
profit, if the doors of the Treasury are to swing wide open in
exchange for some highly dubious (read: currently unsaleable)
assets.
Finally, let's have a charitable word for the legions of
Americans who are currently living in homes for which they
simply owe more money on their mortgage that their particular
castle is actually worth in today's market. After, all, the
fundamental underlying root cause of all our troubles since the
beginning of the credit crunch back in August 2007 is that a
huge swath of people, foolishly or innocently, acting under the
top-down encouragement of the 'ownership society,' bought or
refinanced their house in the last four years.
At this time, many of these households are underwater and now
owe more than their house is worth. Many have been foreclosed
on, and many more will be in the next two years. A fundamental
problem for the majority of American homeowners is that the more
foreclosures and 'walk-ways' we have, the longer and deeper
prices for American homes will continue to sink.
Here's a small but possibly useful proposal: a general
residential real estate bailout for the one-house family. Let
the Treasury offer to assume up to 25% of any such mortgage that
was taken out by anyone in the last few years, with a ceiling of
say $100,000 per mortgage on an owner-occupied property. On the
remaining 75% balance, the Treasury could mandate a 5% ceiling
on a fixed 30-year loan. The Treasury, in essence, would hold a
second mortgage on the property of up to 25% of its original
loan amount. If the homeowner agrees to such a 'bail-out,' any
future profit from the sale of the property would accrue to the
Treasury up to the 25% level. Any profit over 25% would go to
the homeowner.
This would have several good results. First, it would make the
mortgage loans of Fannie and Freddie, which our government has
already assumed the risk for, possibly a lot less risky and even
ultimately potentially profitable. Second, it would de-toxify
many of the bundled mortgage vehicles which comprise much of our
credit problems today. And although taking on, say, ten million
mortgages at $100,000 apiece does come to a nice round $Trillion
itself, doing so would reduce the proposed $700 billion to one
$Trillion bailout proposal to a more manageable figure, and
rescue tens of millions of Americans who find themselves holding
the short end of the stick on their home mortgage. It would be a
tremendous shot in the arm for the residential real estate
market in this country, and a boon for millions of working
homeowners.
In this latest burst of socialism for the rich, it only seems
fair to offer something to the financially less-sophisticated
people who are actually suffering hamburger-or-beans type of
household budget decisions as a result of the meltdown in
residential real estate values. To do otherwise is simply to
reward the creators of the credit crunch, while ignoring the
millions of people whose only alternative, increasingly as the
months go by, is personal bankruptcy.
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