Bailouts and Bazookas
by Michael Pento, Delta Global Advisors, Inc. | July 25, 2008
PrintI 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 you've got a bazooka and people know you've got it, you may not have to take it out" (as cited in Peter G Gosselin, "Paulson Is a Reluctant Dragon," Los Angeles Times, 25 July 2008).
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!
Copyright © 2008 Michael Pento
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Bio: 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.
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Michael Pento | Senior Market Strategist, Delta Global Advisors, Inc.
Phone: 800-485-1220 | Email | Website
The opinions of FSU contributors do not necessarily reflect those of Financial Sense.
