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STOWE,
Vt. (STOWE, Vermont (Casey Research
Advertorial) -- Sunday, Sept. 14: Secretary Paulson finally makes a
brave decision; enough is enough, let Lehman go bust. After all, the federal government
shouldn’t be rescuing every financial institution that stumbles…
or should it?
Monday, Sept. 15: The financial
markets react badly to the news, and the Dow suffers its biggest drop since
9/11/2001.
Tuesday Sept. 16: The Fed succumbs to
political pressure and promises to write a check for an $85 billion rescue
package for AIG, hoping to bring some relief to the markets.
What is wrong with this picture?
First, Bear Stearns, then Indie Mac,
then Freddie Mac & Fannie Mae, now AIG…
Where does it stop?
When will the country’s
taxpayers cry “Enough”?
Can our federal government bail out
the entire U.S. financial sector?
And what about our troubled auto
industry (save Main Street instead of Wall Street!)?
And the airline industry (critical to
the functioning of our economy and the beat-up victim of oil speculators)?
Are these measures further steps
toward a centrally planned economy? Where is the triumphant capitalism of the
post-Cold War era?
I spent six years as a business
turnaround consultant. I’ve seen the good that comes from letting
private companies deal with their own problems – either face up to
mistakes or suffer as they get worse. After bankruptcy, if that’s what
happens, comes a fresh start. But government rescue efforts sabotage that painful
but healthy process. The longer the government delays the unwinding of the
current financial bubble, the greater will be the cost and uncertainty for
our country, its economy and its taxpayers.
Keep in mind that the government
isn’t run by wizards, geniuses or even people with ordinary, practical
experience. It was our government that sponsored the disastrous housing
bubble by forcing interest rates to artificially low levels (negative real
rates), by deregulating financial institutions while continuing to guarantee
their liabilities and, finally, by encouraging the FHLB, Fannie Mae &
Freddy Mac to loosen credit standards and make it easy for a homebuyer to get
in over his head.
Without knowing what it was doing, the
federal government offered irresistible incentives for crafty financiers to
use dare-devil leverage to pile up huge profits for as long as the government
could keep the system going.
The consequence of the reckless
mismanagement that government incentives pleaded for is a huge overhang of
derivatives -- over $500 trillion, or more than 10 times the market cap of
the all of the world’s public companies.
Does the Fed honestly believe that
handing out another $85 billion in capital will solve a $500 trillion
problem? The Fed is continuing to reward bad behavior and is delaying the
inevitable. There is a time-tested rule, whether with employees, children, or
even pets; rewarding poor behavior results in more of the same. Financial
managers respond in the same way.
No matter what the consequences might
be, the faster we get through this crisis, the better off we will all be. A
fresh start is what we need at this point, no matter how painful!
Instead, our government will bail AIG
out of its troubles, changing the rules of the game once again. Instead of
letting the bankruptcy court distribute AIG’s assets based on
established creditor claims, the Fed is stepping in, becoming a secured
creditor and de facto owner without the consent of existing shareholders and
creditors.
In the restructuring world, this is
called “preference” and is usually thrown out by bankruptcy
courts, since it is contrary to established rules for “cramming
down” new debt on the stakeholders of distressed companies. Disregard
for the rule of law by our own government using authority granted in the
Federal Reserve Act isn’t going to reassure the foreign holders of
trillions of U.S. debt – a particularly inconvenient fact when we need
their support more than ever.
Our Chief Economist Bud Conrad
provides a picture of how fast money is already leaving our country.
A great and inevitable deleveraging of
financial excesses is underway. Our dollar will be collapsing, investors will
be running for the exit, and panic will be moving in.
The AIG and any subsequent bailouts
may delay the pain, but that is the best they can do. Our recommendation to
investors is to use the little time they have left to find refuge in real,
tangible money -- specifically gold -- and in the stocks of companies that
produce gold and other commodities the world uses, especially food and
energy.
Olivier Garret
Caseyresearch.com
Doug Casey is chairman of
Casey Research, LLC., one of the nation’s oldest and most respected
organizations dedicated to providing independent investors with unbiased research
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