Just about eight days ago, while looking at the prospect of bailing out a host of suffering financial institution in the country, the government stood and appeared to “draw a line in the sand”, and refused to bail out Lehman Brothers.
The Treasury and Federal Reserve clearly wanted to see how the market would react if the government stayed on the sidelines. That test failed miserably.
Immediately reversing course, the Government has decided to “throw everything, including the kitchen sink” and bail out just about every institution with financial exposure to U.S. mortgages.
Just in the last couple of days, in a very desperate attempt to stave off what those in authority have termed “a catastrophic Wall Street meltdown’, the government has announced unprecedented actions:
The First Action, President Bush, Fed Chairman Bernanke and Treasury Secretary Paulson have called on leaders of both parties in Congress to work through the weekend to develop a plan to let the government buy up bad debts from banks.
This plan may, and I say ‘May’ with emphasis, buy some large banks some time. But just like the bailouts of Freddie Mac, Fannie Mae and AIG, it does very little to change the condition of the problems in America.
There is still going to be Millions of Americans who still can’t pay their mortgages. And the value of millions of homes is still falling.
The humongous debt market that has already lead to the demise of “Bear Stearns”, “Lehman Brothers” and the collapse of 12 banks this year, not to mention “Merrill Lynch” this past week was forced to sell itself to Bank Of America, the take over of Fannie Mae and Freddie Mac and the Country's largest insurance company AIG, this debt market is still in trouble. Did I forget to mention the countless companies, consumers and governments that depend on it?
The Next Action, The Securities and Exchange Commission announced a “temporary” halt on short selling of 799 financial stocks and there is talk of adding more. This was done as an attempt to reduce the massive downward pressure on the share value of these companies.
If you know anything about how trading is done in the stock market, you know that short selling is a major vehicle that is used heavily by wise investors to reduce their risk and hedge their investments against the very dangers that we are witnessing today.
By making it more difficult for investors to hedge in those stocks, those in authority are making the problem worse. If investors can’t sell short financial stocks, they will sell short something else as a substitute for financial stocks. And there are other companies in other sectors that remain vulnerable to a credit crisis and a recession.
On the other hand, if those investors feel that those substitute hedges are not sufficient, they will resort to dumping their securities. This will make the next stock market decline much, much worse. It should be clear that the SEC, and no one else for that matter, can stop the law of gravity. And it doesn’t matter what the government does they can’t stop investors from selling.
The Third Action, The Treasury took steps to guarantee money market funds that invest in high-risk instruments like commercial paper. This move is meant to protect money fund investors from the kind of "Breaking the Buck" crisis that came up this week at Reserve Primary Fund. Again, this was done to buy some time for a $2 trillion industry in turmoil.
This will not work either.
This is big, here is why this will not work: In order to provide the funds for the Fannie Mae, Freddie Mac, AIG and new banking bailouts, it's estimated that the U.S. Treasury will need to borrow at least $700 Billion in new money from investors in the United States and from around the world.
Here is the BIG problem, by guaranteeing money funds that invest in high-risk, higher-yielding instruments; the government is actually encouraging investors not to invest in the low-yielding U.S. Treasuries.
The government is literally strangling its own funding operation. If they are going to guarantee money funds it is going to be extremely difficult for the U.S. Treasury to raise the money it will need for each and every one of its gigantic bailouts.
As I write this the figures for the Bailout is $700 Billion of your money. This is not including the $500 Billion that has already been spent and committed. There are no details as to how the plan will be implemented the Government just wants a blank check. The debate will be intense.
Even without knowing the details of the bailout plan, I can guarantee you one thing; the U.S. dollar will be destroyed beyond repair.
Take steps to protect yourself, you may want to take a look at Silver & Gold.
For my analysis of the horrible position of the American economy and U.S. dollar, read my FREE report “Fall Of The Dollar: Are Black People Prepared For The Coming Economic Collapse?”
http://www.fallofthedollar.com
Posted By: Bro Bedford
Sunday, September 21st 2008 at 6:26PM
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