"September 20th, 2008
We’re All Homeowners Now: 10 Reasons to be Cautious About This Housing Rescue Plan for Motherland USA
I’m shocked, shocked to find that gambling is going on in here!” -Captain Renault, Casablanca
Many of our elected officials were “shocked” and astounded to realize that the entire economy has turned into a glorified casino. Ironically, the quote above comes from Casablanca which translated into English means Whitehouse. How appropriate given the circumstances. How the economy can go from fundamentally sound earlier in the week to flat out meltdown mode where Hank Paulson had to not only use his bazooka, but also had to use his rocket propelled grenade with a nuke tip while jumping out of a window launching ninja stars and slapping the markets with brass knuckles is really amazing. This goes to show how quickly we can adapt our thinking. Remember long ago on the weekend of September 6th and 7th 2008 when most Americans were only coming to terms with the largest bailout known to humankind of Fannie Mae and Freddie Mac? As it turns out, it only took 2 weeks before we ended up pushing the easy button:
Well as it turns out, we’re all homeowners now. We went overnight from a tough stance of no bailouts letting Lehman Brothers go into bankruptcy this weekend to the biggest socialist intervention into the markets on Thursday. I’m just calling what occurred by its true name. This was the biggest socialistic move into the markets ever and will put the U.S. taxpayer at risk to the tune of probably $1 trillion. It makes the $30 billion pumped into Bear Stearns look like pocket change. Sure makes the $100 billion in proposed healthcare spending look like a bargain! We all will need healthcare after people realize the magnitude of this market intervention.
I understand that the politics of the situation forced both parties to concede to the current moment. They really had no choice and given that this is an election year, I have already braced myself for such a move. Think about it for a second. The ad hoc bailouts were simply not solving the problem and Americans were seeing their home prices fall off a cliff. The systemic risks were not being addressed. That is, until the United States decided to go socialistic. In fact, it was a tumultuous week all over the world. In Russia, the Micex and RTS exchanges were closed on Wednesday and Thursday after epic losses. That is right. Russia flat out decided to shut down the market. They also decided to inject liquidity into the market since they had fallen by 55% from their May peak. Yet we do things bigger here.
In conjunctions with the massive new bailout which I will discuss in detail later, the SEC also decided to ban short sellers on 799 financial stocks. Looking at the list is like looking at a FBI Wanted List of the most responsible for the housing mess. My take on the strategy of all this is as follows: