Re: CNN - Bush wants OK to spend $700B

Bush wants OK to spend $700B (http://money.cnn.com/2008/09/20/news/economy/bailout_proposal/?postversion=2008092012)

Aside from being generally disgusted all around by this plan, I wanted to address the fundamentals of the plan and give my reasoning for why it is a bad idea and will not work. Also, I'm sure I'm going to oversimplify this a bit. I feel that is what needs to happen so people can understand what is going on and form an opinion on the issue.

"President Bush has asked Congress for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis."

So, in idiot terms; our government wants to buy risky assets from risk taking institutions to "stabilize" those institutions which would allow them to get back to operating as normal (should they be?). The question is, how will this help you and the distressed home owners? I mean...surely your representatives are looking out for your best interests, right?

Well, the administration feels that by letting these banks get back to business as usual, we will avoid a recession or depression. This obviously ignores value of U.S. currency, and the formerly stated importance of the housing economy. What I mean is that, years ago, the "ownership society" created by easy credit was touted for much of the strength of the U.S. economy. That's all gone now, so where does that leave the U.S. economy? Hmmmmm. More obvious is the fact that creating $700B from thin air is going to cost someone. That someone is all of us living in the U.S.

Next, many of you who have been following this crisis-in-slow-motion may remember when folks first started talking about how the housing issue was "contained." One of my favorite financial analysts said at the time, "Yes, contained to earth." Since then three of the five largest U.S. investment banks have gone the way of the dinosaur. Thus, I'll have a hard time believing this master plan will be the one that seals the deal.

Lastly...$700B. That's a big number most people can't grasp. So I want to put it in perspective. First we should tack on the other billions for Bear Sterns, AIG, liquidity, etc. Just for fun, we'll skip that part. If we take $700B and divide it by the number of citizens in the U.S., we get $2293. So...that's your share. That's your wife or husband's share. That is your children's share. Share of what exactly? Troubled mortgages. Once again, this is a classic example of fighting the symptoms rather than the causes. The cause is that people cannot afford their homes, so...the government's solution to fix the visible symptom is to simply buy those un-payable mortgages so that banks can keep doing business as usual.

As an aside, I feel it would be better to let those risk taking banks fail - to cleanse the system of the risk takers. It would also be better to let those souls who can't afford their homes to leave them. This would allow the home values to reset to reasonable levels. The reason I advocate this painful serum is because that is what is going to happen anyway. Well, maybe not the banks part. The point is, our economy still sucks, those people who cannot afford their homes now will not suddenly be able to afford them after this plan is implemented. Simply, the at risk mortgages that the govt is buying will most likely fail. (Remember that is why these banks are failing!) Nevertheless, the home owners will most likely still lose their homes. The difference under this plan is that when the mortgages fail, the government will be the bag holder rather than the investment houses who took inappropriate risks. Hmmmmmm. I would much rather have seen $700B contributed towards infrastructure, jobs, or perhaps a program that would let people refinance their home loans at fixed rates or let them leave their homes and get a new loan - for a reasonably priced house - at a fixed rate. Surely that would be better than a blanket bank bailout.

"The legislative proposal - the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression"

Remember, the government keeps telling us everything is fine, that the economy is fine. Every emergency step they've taken thus far was supposed to fix the "isolated" problem. "most sweeping...intervention...since the Great Depression." Does that sound like everything is OK, or will be soon?

"officials have said in recent days that the lack of easy credit between banks and other financial institutions threatens to inflict serious damage on the economy if not addressed immediately."

Wait...I though easy credit created this problem? So...more easy credit will fix it? Hmmmmm.

"The aim is for the government to buy the securities at a discount, hold onto them and then sell them for a profit."

We're not talking about holding onto baseball cards here. Again, I reiterate that I'm not sure how this will happen if folks still can't pay their mortgages. If any of you have ever loaned money on a wide scale, you will know that it doesn't take too many defaults to start eating into the principal you originally loaned. The cause is the inability of the people to pay their mortgages, the symptom is failing banks. We are fighting symptoms.

"The administration's proposal also requests that Congress authorize an increase to the nation's debt ceiling. Currently, it's set to rise to $10.6 trillion for fiscal year 2009 - which runs from October 2008 through September 2009. But the proposal requests that limit be increased to $11.315 trillion to allow for the purchases of mortgage-backed assets."

Now this is something I can sink my teeth into. $11.315 TRILLION! Not 6 zeros, not 9 zeros, 12 zeros. Unfathomable huh? Well, your share is $37,072! That's is your current tab of the irresponsible spending of YOUR government. My question is, do you feel live you've gotten your #37K worth? Sure, we have paved streets, public schools, etc and I can't downplay our great society, but that is not your share of what they've spent....that is your share of how much they have OVERSPENT! So...if you or your government can't cut that $37K check...well....the meter is running, the interest is building, and you can bet your ass china will collect. Surely you can see how this is quickly becoming a national security issue.

...and I used to think Grandma was crazy

My grandma on my dad's side grew up in England during the war. We've never really seen a war on US soil, so it's hard to fathom what it would be like to live in a war zone. At night, Grandma used to have to keep all the lights out so the bombers couldn't see the town. There wasn't a whole lot of money and resources were scarce. then, during the day, she and her family would scavenge the streets looking for...well...anything. All of this eventually led to grandma being a quite the pack-rat, which I never really understood till today. But, we'll get to that.

When I was growing up and visiting grandma's house, I used to get into everything. I remember cupboards full of plastic bags, junk, trinkets, coins, everything. I mean stuffed to the brim. You couldn't even open the drawers and junk would come flying out at you when you tried to opened a cabinet.

There was one secret stash I'll never forget though. In the laundry room, there was a cabinet filled with glass coffee jars. Rows and rows of glass jars with red folgers lids. It wasn't the jars granny was keeping though...each one was filled with copper pennies. Not those crappy pennies like you get today, but real copper pennies, each one minted before 1983. You see, grandma realized that when the government starting taking copper out of the pennies, they were debasing the currency and trying to give her the shaft. So she kept the copper ones and spent the new ones like the fiat trash they were.

Being young and stupid, I couldn't figure out why grandma didn't just cash out. Well, that was before today. Nor did I know that the government would one day declare it illegal to ever use that copper for anything other than those very pennies.

Today, the government lowered the interest rate to the cheers of the misinformed. You see, lowering rates makes money "cheaper" to acquire and cheaper overall. If money is cheap, businesses can borrow more easily and grow more easily. So how could this be a bad thing right?

INFLATION!

If the US dollar gets "cheaper" it makes the money in your wallet and in your bank account worth less. There is also less incentive for foreign governments to hold investments based on that currency. Less incentive for governments to hold US dollars period. Therefore they may begin to sell those dollars making them...even cheaper. The only way to stop inflation is to slow flow of new money. To make it more scarce and more valuable. Today we did just the opposite. Which brings me back to grandma.

Grandma had seen this before. She had seen paper money become worthless before her eyes and knew how to "hedge" fiat currency with hard assets that were universally valuable. Today US is relearning that lesson. So now let me give you the facts.

As I write this, the dollar is sitting at a historic low (from 1992) and still dropping. Ordinarily inflation wouldn't be a big deal, and I wouldn't care. However, this year alone, the dollar has lost 10% of it's purchasing power compared to other currencies! Have you tried to take a trip to Europe lately? Filled up your car? Today, when those spineless pawns at the fed lowered rates...the dollar dropped another 3/4%. IN ONE DAY!

Now if you're china and you're sitting on a few trillion dollars worth of greenbacks and you're only makin' 4-5% interest and some government jerk strips 1% of that value in ONE DAY, you're not going to take it for very long. You're gonna get pissed, stop buying and maybe even start selling.

POOF! SUDDENLY ALL THAT CHEAP CRAP YOU BUY FROM CHINA IS 10, 20, 30% MORE EXPENSIVE. Could that really happen?

Dollar - 15 year low - http://www.sharelynx.com/chartstemp/free/chartindCRUvoi.php?ticker=FUTDX

Oil - all time high - http://www.sharelynx.com/chartstemp/free/cots/cots4cncnrcl.php

Gold - 26 year high - http://www.kitco.com/LFgif/au95-pres.gif

So either, I'm a tyrannical nut case lying to you, or the government is lying to you by telling you how they're helping you again. Don't take my word for it, go look at the charts. After all, I'm just an idiot with no mortgage, no car payment, cash in the bank and a big pile of copper pennies....