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The Gangbusters Week of Billions and Trillions
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(September 21, 2008) A lot happened this week. Gold, for instance, soared from $778 on Wednesday's close to Thursday's after-hours high of $924, its biggest one-day price gain since 1980. Lehman, AIG, Merrill Lynch, and much of what used to be, no longer is. Gold sales are just gangbusters.

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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