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On Thursday right before CNBC reported on rumors of
the bank bailout plan, Ben Bernanke was meeting with lawmakers and selling
the plan to them. Inside a conference room that is part of Speaker of the
House Nancy Pelosi's office he was meeting with the Congressional leadership.
According to the Washington Post he told them that if they don't pass the
plan "it will be nothing short of disaster for our markets." He
claimed that stock market would crash and money market funds would get wiped
out.
In a conference call with Republicans on Friday Bernanke said, "many of
your constituents hold money in money markets — those funds are losing
money" and now the "critical issue is what do we do about these bad
assets clogging up our credit system.”
And the Congressional leadership caved in. Bernanke who once spoke about
helicopter money drops to pump the economy is now using B-52 carpet bombing.
The banks will be saved, but in the end the US economy may be destroyed. This
weekend the Treasury Secretary submitted a $700 billion dollar bailout plan
for the banks. The bill will authorize the Treasury Department to simply
print Treasury bonds to pay for it. The effect of this will be to end the
insolvency crisis for banks and turn that crisis into an eventual dollar
crisis.
Over the next two years you can expect to see the value of the dollar drop,
bonds drop, and gold skyrocket. The question we need to ask ourselves now is
how bad will the inflation get? Will it turn into a hyperinflationary
explosion that will totally destroy the value of the dollar and wipe out the
savings of millions of Americans? Will the Fed one day say we must fight
inflation by raising interest rates to 20% or beyond like the Fed did in 1980
or will the Fed let the value of the dollar literally go to zero. These are
the end game scenarios we are now headed to. I don't know what will happen in
the end, but am going to be prepare myself for either possibility.
Now Bernanke and Paulson said that if there were plan was not enacted the
economy would collapse. On Saturday I watched FOX News do a morning special
on the crisis hosted by Neil Cavuto. Bush gave a radio address in support of
the plan and Cavuto's attitude seemed to be "Bush is a great leader. If
we don't do this plan there will a Great Depression. We must support Bush so
trust him and obey." Hank Paulson appeared on Sunday's Meet the Press
and in response to serious questions about the plan basically said this is a
crisis and this is the only choice we have. The talking points seem to be we
must accept this plan or we will have a depression.
Well none of this is true. There are alternatives to simply buying all of the
bad debt off the balance sheets of all of these banks. Not every bank in the
country is bankrupt, but the problem is that so many of the largest banks are
saddled with bad debts - and losses that are hidden due to accounting tricks
- that banks have ceased to lend to one another. That is the essence of a
credit crisis. There is a problem of confidence, but this is not the only way
to solve it.
A banking crisis happened in the beginning of the Great Depression, but
Franklin Roosevelt and the government did nothing like what is being proposed
today. They did not bail out the banks. What Roosevelt did was declare a
banking holiday. He shut the banks down for about a week Then he had
officials go into all of the banks and look at their financials to determine
which banks were truly bankrupt, which were fine, and which could be saved
with a little bit of money. When the bank holiday ended the banks that were
bankrupt did not open back up and the ones that were fine did.
Confidence was restored, because depositors now knew if their bank was fine
or not - and it didn't require putting the financial future of the entire
country at risk to do this. It cost hardly a dime. Yes some people lost
money. A lot of banks went under, but the dollar didn't go to zero and future
generations weren't saddled with debts. The credit freeze ended in a week.
The same thing could be done now as an alternative. But this is not a plan
that Goldman Sachs or Morgan Stanley would like. And the bankers own
Bernanke, Paulson, and the Congressional leadership . They are the top
contributors to both John McCain and Barak Obama. In a time in which there
are alternatives to what is being done none are being presented to the
American people. It is a lie to say the only choice we have is to do what
Paulson and Bernanke propose or we will have a Great Depression.
What is being planned does not have to happen. And we can solve this crisis
without bailing out all of the banks and putting the solvency of the entire
country at risk. We need real leaders and not pretend leaders. We need people
to speak out. We need you to pick up the phone and call your Congressmen. You
need to right a letter to your local newspaper. You need to act right now.
Saturday the Treasury Secretary presented his plan to Congress and put a
"fact sheet" up on his website. I haven't heard anyone comment on
this, but inside of the plan is a request for total immunity from lawsuits.
The plan states, "Decisions by the secretary pursuant to the authority
are non-reviewable … and may not be reviewed by any court of law or any
administrative agency."
This is absolutely outrageous, as it puts the Treasury Secretary above the
law. Even the President can be taken before a court - remember Bill Clinton.
Nixon had to be pardoned so he wouldn't have to go to court. Our whole system
of government is based on checks and balances, but this bill takes all of
that away when it comes to the Treasury Secretary. It is a mad power grab.
Who knows what measures he may propose or carry out in the future with these
new powers?
This is the dangerous road that the government has now put us on. The
politicians and Federal Reserve are willing to put the savings of every
American at risk to protect the banks.
According to the Wall Street Journal, "the central bank is taking on a
potentially big risk: If these assets fall in value or default, it may be on
the hook, because the Fed cannot claim anything other than collateral as
repayment. Officials say the assets are safe and the move is a temporary
measure to provide liquidity to the market."
In other words the Fed could totally destroy its balance sheet and bankrupt
the country - the Fed could risk putting the US dollar into a
hyperinflationary death spiral.
We need to think ahead to this possibility and that is something that I am
going to spend time thinking about this week. In short though you want to
protect yourself by being out of US dollars and in other assets that will
appreciate in value if the dollar declines - of course that means gold, and
physical gold if it is possible. It also means stocks, foreign currencies,
and even real estate - although I wouldn't be a buyer of real estate until
real estate bottoms, perhaps next year. And as for stocks in a
hyperinflationary environment investing in foreign stocks would be better
than investing in US stocks. What you don't want is cash in savings accounts
and money market accounts. That type of money should be in physical metals.
Even if the worst case scenario doesn't happen you can surely bet there will
be a continued decline in the dollar, rise in inflation, and increase in gold
prices over the next two years. Position yourself for that and you will
benefit no matter what happens.
I have had a very uneasy feeling about the financial markets the past few
days. One I've never had before. The feeling isn't a fear of it dropping, but
that somehow a lot of integrity has been taken out of the markets.
It is almost like you can't trust the markets now, because of what the
government has done and how it has acted in the past week. I almost no longer
feel comfortable investing in the United States. By setting up this bailout
plan and suddenly banning short selling in bank stocks the government has
shown to me that it can and will do anything for the banks, will change the rules
of investing with no notice, and is incompetent. This is very disturbing.
Let's just take the short selling restrictions on bank stocks for instance
the SEC announced last week. It seems like short selling is being used as a
convenient scapegoat to distract people from the real cause of the banking
crisis - incompetent management at the banks that made stupid investment
decisions, a government that encouraged their reckless behavior, and a SEC
that allowed them to play games with their balance sheets for years. People
warned that Fannie and Freddie were doing accounting games for years and the
regulators sat there and did nothing.
The truth is short sellers play a positive role in the market, by providing
liquidity. Short selling is used by options traders, market makers, and
long/short funds to hedge positions. For instance a lot of times when you buy
an option a floor trader or market maker will have a short position on the
other side to cover the option they created and sold for you. By banning short
selling the SEC blew a lot of these guys up and for some reason I doubt
they'll get a bailout. But not only that they will take a lot of liquidity
away from the bank stocks by banning short sales.
If bank
stocks end up dropping again after this rally there will be no shorts to buy
to close their positions on the way down. Another drop in bank stocks would
end up being faster and much sharper than the one we have just seen. By
banning short selling the SEC has made the financial markets even more
dangerous and has proven itself to be totally incompetent. It doesn't appear
to understand markets and doesn't know what it is doing.
After making its short selling announcement the regulators then announced
that it was going to almost double the margin requirements for gold futures
contracts. In an instant they changed the rules in the gold game.
It makes me feel very uncomfortable about investing and trading in the US
markets when the SEC does something like this. Who knows what rule changes
could happen down the road. It is almost as if they are taking the integrity
away from the stock market. I'm short US bonds right now, having entered the
position right on the gap up of last week, but if bonds go into a death
spiral who is to say that the SEC won't ban short selling of bonds?
It is very difficult to make investment or trading decisions in this type of
environment. It's like trying to go to bat with a blind umpire.
In the future I plan on buying more stocks outside of the United States. Many
of the stocks I buy are mining stocks that also trade in Canada. In the
future when I buy them I am simply going to buy them directly off of the
Canadian exchanges instead of on one the US exchanges - mainly because of the
potential danger of a falling dollar. There are also ETF's on exchanges
outside of the US that track the S&P 500 and individual stock sectors. If
you live outside of the US you would be better off buying them in the future
than buying US ETF's.
By owning foreign stocks if the dollar declines in value against the currency
of that country then I will benefit from a decline in the dollar. If I were
to simply keep buying everything in the US and then one day in the future the
dollar went into a hyperinflationary spiral I would be screwed. It is
important to begin to diversify out of US dollars and securities.
Now there are many brokers in the US that allow Americans to buy stocks
directory from foreign exchanges. Etrade now has this capability. Penntrade
and Mytrack allow their customers to buy from the Canadian exchanges, while
Interactive Brokers gives access to virtually every single major world
market. If your broker doesn't allow you to do this then you may want to
consider moving to one of these brokers. As for foreign money markets and
CD's you may want to check out Everbank.com. It may even be worth considering
opening up a foreign brokerage account to protect yourself from the risk of
one day having to face capital controls.
Mike Swanson
Editor, Wall Street Window
Disclaimer: Michael
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