Bailouts and Bazookas

I know it's hard to believe but Treasury Secretary Hank Paulson is a Republican. It was especially hard to keep that in mind during his appearances on the Sunday talk shows this weekend. His stated mission was to garner support for the bailout plans of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE). I hoped that he, being of the party that supports free markets, would have instead asked why the government is involved in the real estate market in the first place. I preferred that Treasury would have repudiated any further association with the GSEs and cease to allow them to raise new capital with the backing of the government.

Incredibly, the erstwhile Wall Street executive made the case for allowing Treasury the unlimited power to purchase the GSE's debt and Equity. His reasoning was, if the bad guys know you have a bazooka on your hip you are unlikely to be called into a gunfight.

The bad news for Americans is that his bazooka will be used to destroy the U.S. Constitution. Article one section ten of the document, which he definitely doesn't comprehend, says that money should consist of only gold and silver. Our founding fathers wanted to place a yoke upon the states and those in power in order to prevent them from usurping the purchasing power of the Republic's currency. How wise they were. They knew that once in control of government, those in power would do anything they could to maintain it. Even those who espouse free market capitalism will try to abrogate the system for personal gain. And now these Republicans want to extend the powers of the Fed and Treasury, giving them a blank check to purchase even the equity portion of these failing companies. Be it stimulus checks, GSE bailouts, FDIC reimbursements or artificially low interest rates the purpose is always the same, to buy votes.

It is important to keep in mind that in whatever form they appear, all government bailouts consist of solely the ability to print money. How much in the case of Fannie and Freddie you ask? The Congressional Budget Office estimates that the bailout could cost about $25 billion. If that is the estimate from the government, imagine how enormous the actual number may be? The market understands this and that is why the U.S. dollar did not appreciate during this past week's market rally. There can be no real market appreciation unless the Fed and administration begin to take seriously their charge to provide a stable currency. Until then, we will have a stagflation nation and it will require investors to continue to own commodities as an alternate currency and real store of wealth.

Speaking of "keeping your money real," check out my podcast: The Mid-Week Reality Check!

Michael Pento
Senior Market Strategist
Delta Global Advisors
800-485-1220
[e-mail]
www.deltaga.com

With more than 16 years of industry experience, Michael Pento acts as senior market strategist for Delta Global Advisors and is a contributing writer for GreenFaucet.com. He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

Comments

[SD61]

"It is important to keep in mind that in whatever form they appear, all government bailouts consist of solely the ability to print money."

Print the money, and issue it as debt, with interest! A brilliant Ponzi scheme. There is nothing "Federal" or "Reserved" about the Federal Reserve. Just a bunch of rich, old crooks, whose brains resemble those of our ancestors -- the Hominids.

Thanks for the truth, Mr. Pento.

[truthynesslover]

Its so interesting to live in a country where people who are poor are there because they dont have a work ethic and its their own fault.When corporatons and the rich make bad decisions they need bailouts
Ironic no?

[schatsie]

and you know those big boyos managed to get their bonuses and raises before the red ink hit the papers...lovely

Republicans
Privatize the Profits (and cut the taxes for the rich before you go into the well planned war)
Socialize the Risk (stick it to the working class, where do you think the social security excess went???)

[Henry]

The government has to stand ready to purchase shares of fannie and freddie due to one stark reality that is facing the country. The inevitable increase in rates. Cenral Bank rates this country 2.0% (essentially free money), Central Bank rates in Europe 4.25%.
When the FED raises to 4.25% (from the current 2.0%) the move in rate curve will be up. As the rate curve moves up, the value of securities falls. For example a move in the 7 year UST from 3.0% tp 6.0% will "drop" $1.5 trillion of value of the $10.o trillion outstanding. Put that to the assets of fannie and freddie (who own mortgage backed securities sameas sameas) and you can see the "lower of cost or market" to their securities will portend a drop in value of a further 10% wiping out their capital position. Hank Paulson is just being a good soldier. And we can all hear that train a'comin.
Does the free market just not work at all??? Where's an educated republican when you need one?

[DavidHealy]

Section 10 of Article 1 of the United States Constitution limits the states, not the Federal government:

Section 10 - Powers prohibited of States

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.

[DavidHealy]

Section 10 of Article 10 of the United States Constitution limits the states, not the Federal government:

Section 10 - Powers prohibited of States

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing it's inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.

No State shall, without the Consent of Congress, lay any duty of Tonnage, keep Troops, or Ships of War in time of Peace, enter into any Agreement or Compact with another State, or with a foreign Power, or engage in War, unless actually invaded, or in such imminent Danger as will not admit of delay.