The Big Bailout of 2008
by Michael J. Kosares
The chickens come home to roost
You get a sense that America’s chickens have come home to roost. Instead of learning from our past mistakes though, as the idiom above is meant to suggest, the nation appears intent on compounding them. The Great American Bailout of 2008 is simply more of the same — more debt, more easy money, more moral hazard, more taxpayer responsibility, and more government intervention. Quite literally, the government has once again applied a band aid, papered the problem over and delayed once more what will certainly be an even worse day of reckoning. Yes, the chickens have come home to roost, but for all the roosting all we have gotten is more chickens.
Post-bailout, there remains a sense of unease at the juncture of Wall Street and Main, a feeling that the other shoe is about to drop. “If money isn’t loosened up,” warned the president during negotiations on the bill, “this sucker could go down.” One wonders how much our prospects have improved now that the money has been loosened up, i.e., whether or not “this sucker” might go down anyway.
Conclusion: Already Wall Street has cranked-up the media propaganda machine to pound home the idea that the now $810 billion bailout (up from the original $700 billion once the pork was added) might not be enough. CNBC reported late Friday, after the stock exchange had closed, that the 475 point swing from intraday top to bottom reflected a growing feeling that more capital would be needed to deal with the financial crisis. Saturday’s Barron’s magazine warned after the bailout measure that “further action is required to get credit markets working correctly again.” It went on to advocate a coordinated global central bank effort to lower interest rates, a suspension of mark-to-market portfolio valuations and more central bank capital injections through the banks. In other words, Wall Street is calling for the world central banks to throw in the towel on monetary discipline. This has become a familiar pattern. How long before Wall Street is back pounding on the government’s door for another bailout?
Recommendation: Don’t think that the worst is over, or that suddenly this mess is going to find resolution. Wall Street is now on the dole, and Main Street is paying for it — a shotgun wedding likely headed for a bad ending. Remain vigilant. Add to your gold holdings if warranted. Something tells me we are more at the end of the beginning than the beginning of the end.
No one really knows how much of the past, present and future bailouts are going to end up on the federal government’s balance sheet. Even before the bailouts are truly figured into the national debt, the government’s fiscal year has ended in a train wreck. Nearly one trillion was added to the national debt over the past year — nearly double the political deficit widely quoted in the mainstream media — and the gross national debt just went over the $10 trillion mark.
Conclusion: The aptly named Troubled Asset Relief Program simply adds to an already bad budget situation — a new government program that will take its place alongside entitlements, military spending and interest on the national debt as a prime budget item.
Recommendation: Don’t look for Washington to mend its ways any time soon. The Beltway is part of the problem, not part of the solution. A large segment of the population has entered the gold market realizing that the financial crisis will not be quickly or easily resolved. Gold coin and bullion volumes are at record levels. The gold industry itself has moved toward a World War II rationing system to cope with the problem. At some point things will settle down, but a large number of gold market experts believe that it is going to take a $1200 gold price to clear this market.
It was bound to happen. Too much of the nation’s capital had been concentrated in the hands of too few financial market operators for too long. And a good deal of that capital was highly-leveraged and locked-up in assets of dubious value. At some point, the few would have taken down the many simply on the basis of Murphy’s Law alone, i.e., if something can go wrong it will. Had investment decisions been widely disseminated throughout the population as was the case 25 years ago, this level of abuse and trashing of fiduciary responsibility would have been impossible to achieve. As it is, Wall Street has done grievous harm to Main Street, and Charles Mackay’s “extraordinary popular delusions and madness of crowds” was reduced to the delusions and madness of a select few — a small financial commune based principally in London and New York.
Conclusion: The government has sponsored something of a merger with Wall Street, and now a contingent of these very same people who brought us the financial crisis are moving into new digs at the U.S. Treasury Department. No doubt they will bring their culture with them, the very same culture that got us into this mess in the first place. We all know that once some new government bureaucracy is introduced to Washington, it is not long until it is entrenched. This one will likely set new standards for funding requirements given the black hole the financial crisis has become.
Recommendation: Don’t think that the era of privatizing profits and socializing losses is over as a result of this latest bailout. TARP, in effect, is the epitome of that doctrine, and it swings into action starting next week. Keep in mind, though, that the federal government has just gone into the investment banking business, and, as we have all learned so painfully over the past year, you can lose a great deal of money in that line of work. The ultimate question becomes: Who will bail out the federal government if it goes the route of Fannie and Freddie, AIG, Bear Stearns and Lehman Brothers? Ben Bernanke’s helicopter economics comes to mind. Insulate your portfolio accordingly.
In my 2008 gold price forecast published in this Market Update back in January, I mentioned gold’s rehabilitation in the public consciousness and that this would prove to be a very important market factor as the year progressed. A few months later, in an article titled “Golden Gut Check,” I forecasted a gold shortage based on the same line of thinking. Little did I know just how voracious the public appetite for gold would become.
Conclusion: You always know that things are getting dicey in financial markets when the press begins to belittle gold owners. A few days ago the Financial Times editorialized that “some retail depositors are so spooked as to turn to gold, not as an investment, but [God forbid] as a store of value.” Since that sentiment is the core theme of my book — The ABCs of Gold Investing: How to Protect and Build Your Wealth With Gold — that comment did not escape my eye. I feel forced to ask: “What else comes to mind when you think about a secure store of value these days? Bank deposits? Bonds? Stocks?” FT goes on to ask, “What’s next? Baked beans?” I would remind Financial Times that gold owners, a group of people I have come to know quite well in my now 35 years in this business, are certainly not the backwoods, gun-toting, end-of-the-world-as-we-know-it types that the press sometimes paints them. To the contrary, the gold owners I know are our physicians and dentists, our nurses and teachers, plumbers and building contractors, business owners and professors — the middle class, if you will — even bankers and brokers. It’s Main Street, dear editor. That’s right. The very same people that Wall Street just asked for a bailout.