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Why Mega-Bailout Is Destined to Fail

By: Rick Ackerman, Rick's Picks

-- Posted Sunday, 21 September 2008 | Digg This ArticleDigg It! | Source:

Rick’s Picks

“Phenomenally accurate forecasts”


Resolution Trust Corp II will buy the government some time – if only to pray – but there are some powerful reasons why the plan is likely to fail.  For one, American investors are not know for their patience, to put it mildly, and they are going to want to see a payoff right away.  This is simply not going to happen. For two, investors outside of the U.S. are not nearly as gullible as the dingalings who drove up the Dow Industrials by more than 1000 points on Thursday and Friday.  


The idea of creating a government holding company for toxic mortgage paper may have been sufficient to trigger a powerful short-squeeze on Wall Street, but it will not be nearly enough to entice foreign investors to plow their hard-earned savings into America’s broken economy. European and Asian investors are in fact running the other way, and the huge sums that they have loaned us in recent years to sustain the U.S. consumer economy and our government’s overspending have suddenly become unavailable. The withdrawal of foreign investors is likely to become even more pronounced because Europe and Asia are themselves beginning to sink into recession.


Housing Bust Far from Over


Concerning the notoriously impatient U.S. investor, when the new weeks arrives, the clamor will begin for reassurances that neither Paulson nor Bernanke can provide. For starters, investors (and taxpayers) will want to see home values start to rise, since that is where the catastrophe is rooted and where consumer confidence has failed most egregiously. The problem is, even with home and condo prices already down by as much as 40% in some regions, the worst of the housing bust still lies ahead. The locus of the coming disaster will be New York City, where $2 million studio apartments became the norm during Wall Street’s halcyon days.


More recently, New York’s financial economy has not been merely weakened, but irreparably destroyed. The implosion began with massive layoffs by Merrill Lynch earlier in the year, but those days will be recalled with nostalgia before the blight has run its course. For it is no longer layoffs that are plaguing the city’s financial sector, but the virtual disappearance of the very firms that had long dominated the global banking business. A result, thousands of very highly paid employees at Bear Stearns, Lehman Bros. and hundreds of boutique firms have become not merely a glut on the market, but virtually unemployable.  These erstwhile Masters of the Universe are now jobless, and their once-inexhaustible spending power will no longer be there to support the Big Apple’s consumer economy. But don’t expect the thousand out-of-work investment bankers to show up as statistically unemployed, since going on the dole would prevent them from taking “consulting jobs” on the payrolls of friends who have so far cheated death.


Gold Bugs, Take Heed!


In the meantime, one barely mentioned aspect of the mega-bailout looks like the go-ahead that gold bugs have been waiting for. We are referring to a provision that would but taxpayer backing behind the money markets. We see this as the first explicit step the government has taken in the direction of hyperinflation.  We wouldn’t have much noticed it ourselves, if not for an interview on Fox by Shephard Smith. He was talking on Friday with one of Fox’s cub reporters, a brainless blonde twit who seemed pretty impressed by the Government’s explicit promise to not let a single dollar invested in a money market fund go unreturned. “The government is actually guaranteeing that you can’t lose,” the brainless little twit said. When Smith pressed her for the source of the money to back up that promise, she drew an embarrassing blank. We can be absolutely certain that the news media’s understanding of this crisis will never rise above that of the brainless little blonde twit. And that can only spell opportunity for gold bugs, who understand with perfect clarity where the money would come from.




Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2008, Rick Ackerman. All Rights Reserved. 

-- Posted Sunday, 21 September 2008 | Digg This Article | Source:


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