Friday, January 9, 2009

Geithner's Opening Act

As we continue to hear about the front and center news of President Elect Obama's plans to destroy our country, behind the scenes his new treasury secretary Tim Geithner is concocting plans of his own.

Reports tell us that he has been working night and day to re-tool the TARP program to figure out a use for the remaining $350 Billion. He is working on a plan that will provide support to municipalities, small businesses, homeowners, and other consumers.

He needs a new plan of action due to the now obvious misuse of the original $350 Billion given to major investments banks. His new plan will focus on "the people," and the $350 will be just the beginning. I would expect to see TARP 2 before we reach the half way mark of this year.

The treasury now has the ability to focus its support on "the people" because behind the scenes over the past few months major investment banks such as Goldman Sacs and J.P. Morgan have now become depository institutions. This is important because the Federal Reserve can now just send them money directly, without having to go through a cumbersome TARP programs.

The major banks will be sent hundreds of billions all year to stay solvent, and the early favorite for the most tax payer money flushed down the toilet looks to be Bank of America as they continue to crumble under the disastrous acquisitions of Merrill Lynch and Countrywide. The amount of support sent to this company behind the scenes directly from the Fed could easily top AIG's $200 Billion and counting.

Keep your eye out for Geithner's new plan for Massive Economic Destruction of Wealth, code name MEDW or TARP 2.

Thursday, January 8, 2009

The Loan Modification Program Arrives

I talked on Tuesday that the next plan to come from the government would be mortgage loan modifications. Just two days later we get word that the program is going into action, with news announced today that Citigroup will be the first bank to participate.

Our economy is a train speeding faster and faster to the edge of a cliff, and this new program will do its part to get us there even faster.

In a healthy real estate market you have private capital purchasing real estate loans. Let's say you are a Chinese citizen that had $400,000 saved up back in 2005 . You decided to take your money and give it to an American to purchase a home. It is a fixed rate mortgage of 5.5% for 30 years. This means that investor is planning on getting paid $1,833 in interest every month on his investment.

He gets a telegram in the mail on January of 2009 letting him know that the American government is now stepping in to change his loan. They tell him that a judge has decided that the borrower now only owes $300,000 on the house and his new monthly interest payment is only $1,375. The note comes with an apology and a brochure to buy new mortgages in the future.

Now, in a real market if this happened no one would invest again in real estate mortgages. Why? Because they would be afraid that our government would just change what was owed if the homeowner didn't make their payments. There are two problems with this:

1. They are breaking contract law
2. In order for investors to take on the risk of investing in US mortgages with this possibility, mortgage rates would go sky high to offset the risk.

This doesn't matter to the United States, however, they just shrug it off. You know why? Our Federal Reserve now buys our mortgages. Why do we need private capital to help homeowners pay for homes? Our Federal Reserve will just print as much money as necessary, and they will buy the debt.

The other option they can pursue would be to have the government cover the $100,000 difference in the mortgage loan. It is kind of laughable, but do you know where they will get the $100,000 to cover the difference? They will borrow it from another Chinese person, or perhaps the same one.

Two major headlines hit the news wires this morning in the articles that I was reading:

1. "Obama announces that we need to get used to $1 Trillion deficits for years to come, and that our best goal to get out of our current economic hardships is to increase government spending"

2. "China is starting to lose its appetite for US debt"

Uh oh.

We have two major buyers remaining to purchase our debt. The first is China and a few other foreign countries. The second is the Federal Reserve.

Once the first option finally gives way, that will only leave option two: Ben Bernanke. This means hyperinflation and the final destruction of our currency, economy, and the world we now know.

How long can the rest of the world prop us up? How much longer will they want to? That's the question you need to ask yourself every day, because every day you hold dollar denominated assets you are playing russian roulette with your life savings.

Tuesday, January 6, 2009

Much Anticipated Optimism

The news continues to be pretty terrible out there. Lowest housing starts on record, manufacturing numbers crumbling, auto sales are sluggish, and job losses continue to mount.

However, the much expected optimism to start the year is in the air. People are excited to hear our new leader is already cooking a monumental stimulus program.

Obama is coming out with guns blazing announcing massive tax cuts, state support across the board, and a huge fiscal stimulus.

His partner in stimulus, Ben Bernanke, announced this week the Fed's first purchase of Fannie Mae and Freddie Mac mortgage securities. This will continue until interest rates fall to the stated goal of about 4 to 4.5%. This will have a tremendous effect on loosening lending standards to take us as close as possible to the reckless lending we saw only a few years ago.

No Income, No Asset, loans are only just around the corner. A job, or down payment, will once again not be necessary to purchase a home because a bank will be able to immediately sell that loan to Fannie Mae and Freddie Mac. They will then immediately be able to sell those loans to the Fed.

Of course the Fed is saying that it will only buy "top quality" loans from Fannie and Freddie, but that will change as the economy continues to crumble.

That will take care of new buyers coming into the housing market. But what about the people already underwater? Obama will be coming to rescue them. The government is already working on a huge program to refinance loans to an "affordable" level. This means if you owe $500,000 on your house but it is only worth $300,000, the government will cover the $200,000 difference allowing you to refinance.

Where will the money come from to pay for huge tax cuts, state bail outs, checks sent to Americans in the mail, Fannie Mae loan purchases, and home loan modifications? Well, I think you know the answer to that by now.

A better question is, who cares? No one in America cares, except for a few strange people like myself, who still believe in supply and demand, economics, and all that nonsense.

Apparently people outside of the country are starting to take note. This came from an Asian newspaper this morning:

"Asia now understands that the increase of money supply decreases the intrinsic value of a currency. That is why China is seeking a possible and rational attempt to decouple Asian currencies from the dollar, as recent news stories report.

In practice, China is trying to make its currency convertible and give it a role as a reserve currency. The first experiment is limited to transactions between Hong Kong and the neighboring provinces. It is also proposed that the yuan renminbi be used in 8 neighboring countries, including Russia. With these countries, agreements have already been signed for the settlement of contracts in the Chinese currency.

Perhaps it is no coincidence that the news was released on Christmas Day, when Western markets are closed, reducing the impact on the dollar. In addition, the first weeks of January are usually fairly quiet. This means that although for now the trial is limited, China is preparing to establish full convertibility of its currency to all other currencies."