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Old 09-17-2008, 05:40 PM   #1
Zarathustra
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Default latest Peter Schiff comentary

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September 17, 2008

Comrade Bernanke Does it Again


By nationalizing nearly 80% of AIG for $85 billion, the Fed is doing a lot more than simply flushing taxpayer money down the toilet. The greater wrong is allowing the agency that has the power to print money to take control of a private enterprise, especially without the approval of the company’s shareholders. The move represents the largest lurch toward socialism that this country has ever seen, and signals the end of the vibrancy of America’s once vaunted free market economy. Since there is no limit to the amount of money the Fed can create, there is no limit to the number of assets they can acquire.

The “line in the sand” that the Government seemed to draw by refusing to bail out Lehman Brothers was erased in just two days by the very next wave of financial panic.

While Fannie and Freddie were arguably quasi-government agencies that deserved special protection, no such status exists with AIG. Where does the Fed get the authority to use the money it prints to take over private companies? Congress never gave such authority and, even if it had, it would be unconstitutional, as Congress itself has no such authority to delegate. What about the shareholders? Why didn’t they get to vote on this acquisition? Whatever happened to private property rights?

Where does this stop? What other troubled companies will the Fed nationalize, and how much will it cost? Why stop at troubled companies? If the Fed can buy into a sick company, why not a healthy one? Now that we have allowed the Fed to take over any asset it wants, private property rights are meaningless. When oil prices get really high, why bother with a windfall profits tax when the Fed can simply nationalize Exxon-Mobil with a few cranks on its printing press. Who needs Bolsheviks when you have the Fed?

AIG is not a bank; it is not even an investment bank. The “lender of last resort” power was supposed to apply only to banks, to prevent runs. It was not meant to apply to any company that had been declared “too big to fail”.

I suppose the Fed is trying to get around some of the more obvious illegalities by having the new AIG shares issued on behalf of the Treasury. What happened to the concept of an independent Fed? Here you have the Fed seizing a private company and ceding control to the U.S. Treasury. Rather then acting independently, the Fed and the Government are merely partners in crime.

On the economic side, the Fed expects us to believe this is a smart investment. Does anyone really think that officials at the Fed and Treasury are suddenly private equity experts? These are the guys who missed both the tech and housing bubbles, and who assured us that subprime problems were contained. I would not trust them to run a lemonade stand, let alone one of the largest insurance companies in the world.

The idea that this bailout was necessary given that the alternative would be worse should by now be fully discredited. All of today’s financial problems are the direct consequence of Fed policy that was designed to weaken the recession that followed the bursting of the tech bubble and the shock of September 11th. Of course, the tech bubble itself resulted from the Fed’s actions to sooth the pain following the collapse of LTCM, the Russian debt default, the Asian crisis, and Y2K.

I suppose the precedent for all of these actions was established back in 1979 when the government guaranteed Chrysler’s debt. It sure would have been a lot better and a whole lot cheaper if we had simply let Chrysler fail. The road to financial hell, or in this case socialism, is certainly paved with “good” intentions. Today's historic surge in the price of gold shows that at least a few investors are refusing to march in the parade.
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Old 09-17-2008, 08:01 PM   #2
martian31v
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Default Re: latest Peter Schiff comentary

schiff is a great source for economic understanding, but i think he slightly misses the point when he sees this as "nationalzing" or "socializing". the fed reserve is a private institution mascquarading as a government institution. if so, this is a private takeover. the fed seems to be revisiting its playbook via the great depression. i.e. initiating a crash, then swooping in and amassing the resources left by the unawarez. the current action by the fed is more akin to a hostile takeover, which, in this case, is worse than socialization. at least with enforced government socialism we can face our oppressors. with the fed, we cant even gain information into who sits at the top. but, we know some of the names. maybe one day they will come down and face us.
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Old 09-17-2008, 08:13 PM   #3
Zarathustra
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Default Re: latest Peter Schiff comentary

Quote:
Originally Posted by martian31v View Post
schiff is a great source for economic understanding, but i think he slightly misses the point when he sees this as "nationalzing" or "socializing". the fed reserve is a private institution mascquarading as a government institution. if so, this is a private takeover. the fed seems to be revisiting its playbook via the great depression. i.e. initiating a crash, then swooping in and amassing the resources left by the unawarez. the current action by the fed is more akin to a hostile takeover, which, in this case, is worse than socialization. at least with enforced government socialism we can face our oppressors. with the fed, we cant even gain information into who sits at the top. but, we know some of the names. maybe one day they will come down and face us.
M,

You make great points. Where the terms "nationalization" and "socialization" can be used correctly is in reference to the fact that the burden of repaying the funds "created" by the Fed to perform these bailouts will be shouldered by the common taxpayer. Jim Rogers phrased it excellently when he referred to these criminal shenanigans as "socialization for the RICH". That encompasses both angles.
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Old 09-29-2008, 01:01 PM   #4
Zarathustra
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Default 9/26/2008

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September 26, 2008

Making a Deal with the Devil


Just yesterday, Henry Paulson’s “bailout” bill, with only a few anti-Wall Street, pro-Main Street fig leaves slapped on by Democrats, appeared ready to sail through Congress on a bi-partisan tide. But something funny happened on the way to the printing press. It appears as if some conservative House Republicans are reluctant to sell their souls and ditch any remaining pretense towards American-style capitalism.

What’s left of the Barry Goldwater wing of the Republican Party, which maintains its natural tendency to trust the markets and not government, has dug in its heels. But, Bush, Paulson and the Democrats have argued that our problems are so dire that free enterprise principles must go out the window. The struggle is historic, but the Congressmen are fighting a losing battle. Sadly, Americans now appear willing to abandon their economic heritage at the first sting of financial pain.

Although passage does seem inevitable, it is nevertheless the wrong thing to do. Central government planning did not work in the Soviet Union and it will not work here. Only free market forces are capable of sorting through the mess. Political meddling will make the problems worse.

In selling the bill to Americans, many are pointing to the Resolution Trust Corporation as an example of similar intervention that worked in the past. However, there is no proof that RTC actually helped as we have no way of knowing what might have happened had the government stayed out.

Missing in this discussion is that the Savings & Loan crisis of the 1980’s, much like the current crisis, was a byproduct of government interference in the free market. By insuring bank deposits through the FDIC, the government created a moral hazard that resulted in extreme risk taking among member banks, whose depositors sought only high yields, without any regard for the risks that the banks were incurring. Banks that refused to take big risks lost deposits to those banks that did. Absent FDIC insurance, depositors would have considered risks as well as rewards, and the S & L crisis never would have happened in the first place!

The urgency for passing this bailout bill is based on the claim that the American economy will collapse if nothing is done. If the government were to stay out, and allow the market to function, there will certainly be a great deal of economic pain. Companies will go bankrupt, banks will fail, real estate and stock prices will keep falling, and many people will lose their jobs. However, government action will not prevent any of this. At best, it will merely delay the inevitable, but only at the cost of increasing the severity of the underlying problems, thus making their ultimate resolution that much more painful to endure.

The bottom line is that there is no way to resolve our economic problems without a severe recession, and our politicians need to level with the public. As a nation, we gambled on the alluring riches of real estate and we lost. The price must be paid. Contrary to the Bush Administration rhetoric, the fundamentals of our economy are not sound. If they were, we would not be in this mess. Recessions are meant to restore balance, purge excess, and liquidate mal-investments. On that score we have a lot of work to do.

We are being told that this plan will help the economy by keeping the spigots of consumer credit flowing. However, to really address the fundamental problems, those spigots must be tightened. Since we have already borrowed and spent ourselves into bankruptcy, the last thing we need is for consumers to borrow more.

Our leaders maintain that without this bailout consumers will not be able to borrow money to buy cars. So what is wrong with that? We already have plenty of cars, and if we are broke, why do we need to buy more? Instead, we need drive our old cars longer, pay off our underwater auto loans, and produce more cars for export. It is also argued that without access to credit parents will not be able to borrow money to send their kids to school. That’s fine by me as it will force Universities to reduce tuitions to levels families can actually afford. They will either have to cut out all of that bureaucratic fat, or go out of business for lack of customers.

In the end it is impossible for the American economy to be rebuilt on a sounder foundation of savings and production without a lot of economic pain. Government efforts to reinforce the shaky foundation of borrowing and consuming will result in the entire structure falling down around us.

For a more in depth analysis of our financial problems and the inherent dangers they pose for the U.S. economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.”
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Old 10-03-2008, 07:59 PM   #5
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October 3, 2008

Liquidity is in Eye of the Holder


We are being told loudly and repeatedly that the gargantuan mortgage bail-out package is necessary because illiquid mortgage-backed securities are clogging our financial arteries, threatening the economic equivalent of cardiac arrest. The idea of the plan is to transfer these supposedly valuable, but currently unmarketable, assets to the government so that private institutions can freely lend once more. The monumental flaw in this argument is that the mortgage backed securities are in fact highly liquid, just not at the prices the owners would like to receive.

Mortgage bonds are just like houses. They won’t sell if the owners stubbornly refuse to drop the price. However, they can find buyers if they acknowledge reality, and lower their expectations accordingly.

The government tells us that if these assets are held to maturity their full value will eventually be realized, and that it is only because of a lack of current liquidity that their value is not reflected in the market. However, as many private transactions have shown us in recent months, these assets will find buyers at the right price. These are not overly exotic assets but relatively straight forward mortgage obligations. The inability to find buyers is not a function of liquidity but simply of price. The government is seeking to “create liquidity” by overpaying.

The government’s assumptions about the “held to maturity” value of these mortgages completely understate the likelihood of widespread default. Some of the “illiquid” assets represent tranches of mortgage-backed securities that will be completely wiped out. Even the higher quality tranches will suffer severe losses due to mortgages that will inevitably go bad.

For example, take a $500,000 adjustable rate mortgage on a condo in Las Vegas that has a current value of only $250,000. To assume that this asset can be safely held to maturity is absurd, when in all likelihood the borrower will default shortly after the rate re-sets, even if the borrower has not yet shown signs of distress. Of course such a mortgage would be completely illiquid if one tried to sell it anywhere near par, but would be extremely liquid if priced to reflect a more realistic value; say 35 cents on the dollar. But if the government pays prices that fairly factors in likely defaults, it will bankrupt the very institutions it is trying to bail out.

Another factor that has not yet been considered is that that the government has already indicated that it will try to avoid foreclosures by reducing the principal and interest rates on the loans it acquires to levels current homeowners can afford. This will immediately eliminate the delusion of the government recouping its “investment” as even if held to maturity the mortgages will never be worth anything close to what the government pays.

Also missing in the discussion is the concept of the time value of money. Even if a substantial percentage of the $700 billion is eventually recovered, it will still represent a huge loss for taxpayers who theoretically have to come up with the cash today to buy the mortgages. Further, the inflationary nature of the bailout ensures a substantial rise in long term interest rates. This will further suppress the present values of the low coupon mortgages the government will be restructuring.

The moral hazard implicit in the government’s willingness to re-write troubled mortgages ensures that the plan will spark a wave of new delinquencies by borrowers looking to cash in on the windfall. Since troubled loans will no longer be foreclosed by lenders but instead sold to the government, the rational choice for many homeowners will be to stop making their mortgage payments and wait for a better deal from the government. This reality will eventually push the cost of this bailout well above $2 trillion.

In addition to the government bailout, distressed lenders are looking to the suspension of “mark to market” accounting rules as a means of salvation. These rules require institutions to value their mortgage assets according to the most recently traded price. However, suspending these rules will not make the losses go away. Rather it will simply allow lenders to pretend that the losses do not exist.

Armed with such fantasies, banks could pretend that their mortgage assets had more value, and that their balance sheets were well capitalized. They would not need to raise more capital in order to fund new loans. But, just as a person with no sensitivity to pain runs the risk of catastrophic injury, such a move would encourage financial institutions to take greater risks which, in the end, will produce more bankruptcies and greater losses.

In fact, the Senate version of the bailout bill, which authorizes a suspension of mark- to-market, also increases the dollar limit on FDIC insured deposits from $100,000 to $250,000 (with no extra money budgeted to fund the increased taxpayer liability). Only in Washington would a bill pass which simultaneous makes banks more likely to fail while increasing taxpayer exposure when they do!
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Old 10-13-2008, 01:33 PM   #6
Zarathustra
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Default 10/10/2008

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The Party is Over


More than just a mere liquidity or credit crisis, the current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow and spend culture that has all but defined us for a generation. Our long ride on the global gravy train is finally coming to an end, and once it does nothing will be the same. The sooner we come to grips with this the better.
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Old 10-20-2008, 12:55 PM   #7
Zarathustra
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Default 10/17/2008

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October 17, 2008

Not Your Grandfather’s Depression



....With Barack Obama now waiting in the wings to conjure a newer New Deal, far larger than even FDR could have imagined, and at a time when we cannot even afford the old one, this will not be your grandfather’s Depression. It may be much worse....
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Old 10-20-2008, 04:25 PM   #8
Myplanet2
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Default Re: latest Peter Schiff comentary

just curious, (and haven't read thread) but is this Schiff a relation to the schiff's of 13 family fame?
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Old 10-20-2008, 06:38 PM   #9
Zarathustra
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Originally Posted by Myplanet2 View Post
just curious, (and haven't read thread) but is this Schiff a relation to the schiff's of 13 family fame?

To my knowledge, no.
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Old 10-20-2008, 07:36 PM   #10
Love/Light 13
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Lightbulb Re: latest Peter Schiff comentary

Z-

I always appreciate your informative posts. Not sure about Shiff's assessment of Obama, i have not yet formed an opinion of Barack. Could go either way with him i guess. Found an interesting article about Obama's close confidant, a man by the name of Michael Signator. Any thoughts?

http://news.aol.com/elections/articl...999x1200735375



L/L 13

********************************

may WISDOM guide COMPASSION

"out of MANY, we are ONE"
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Old 10-27-2008, 08:16 PM   #11
Zarathustra
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Default 10/24/2008

www.europac.net

...Insanity is often defined as repeating the same action while expecting a different result. Recent Congressional activity to push through this year’s second economic “stimulus” package certainly indicates that many of our political leaders may have special needs....
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Old 10-31-2008, 08:48 AM   #12
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Default Re: latest Peter Schiff comentary

Peter Schiff on BLOOMBERG 10/28/2008

United States is Broke!

http://www.youtube.com/watch?v=TP_aJ7LcAAA&eurl=http://www.gcnlive.com/
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Old 11-08-2008, 01:25 AM   #13
Zarathustra
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Default 11/7/08

www.europac.net

...In 1980, when the U.S. economy was last in serious trouble, Ronald Reagan offered the correct diagnoses that government was the problem and not the solution. His message resonated with voters, propelling him into the White House to implement an agenda of lowering marginal tax rates, reducing government spending and business regulations, restoring sound money, abolishing entire government departments, and basically allowing free market vibrancy to unshackle an economy burdened by big government. Though in practice much of the Reagan revolution never materialized, at least in theory his basic premise was sound...
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Old 11-08-2008, 02:13 AM   #14
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Default Re: latest Peter Schiff comentary

Quote:
Originally Posted by Myplanet2 View Post
just curious, (and haven't read thread) but is this Schiff a relation to the schiff's of 13 family fame?
I don't think he is. He's on CNBC once in a while and he is very much against the NWO and all the other stuff.
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Old 11-15-2008, 10:11 PM   #15
Zarathustra
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Default 11/14/08

www.europac.net





Before the current economic crisis became apparent to all, the most popular fable used to describe America’s uncanny economic resiliency was the story of Goldilocks. It was argued that our economy was skipping down a sunny path of moderate growth, low inflation and rising asset prices. However, a much better parable for our economy over the last decade would have been the story of Humpty Dumpty: a bloated, fragile shell perched on the top of a dangerously high stone wall. This week, all the government’s horses and all of its men scrambled to put Humpty Dumpty back together again. Here is a look at some of this week’s highlights:
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