Why Does Treasury Secretary Paulsen
Look So Frightened?
by William Schmidt, Ph.D.
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Will the nationalization of $5.5 trillion dollar worth
of home mortgages stop the decline in the stock market
and shore up the weakening housing market? So much
liability without safeguards! Dangerous. Given the spending
imprudence of this Administration, one should be very
skeptical. Economic and financial conditions must be
very bad for the Republican Treasury Secretary to take such
Most talking-heads saw that something had to be done.
It looks like electioneering to me. But the policy makers
would have been attacked more for doing nothing. The
TigerSoft charts of the SP-500, Home-Building and
Finance Stocks should be watched closely now. The
government has made a very big gamble with the money
in the US Treasury that, in theory, belongs to all of us.
Finance Stocks broke their 12 month downtrend today.
They did not
make 2 month highs. They closed off well their highs. Blue positive
Accumulation is shown.
Home-building broke its downtrend line. But it did not close at it
daily high. It still shows bearish red Distribution.
What Will It All Cost?
Three hours before the market's opening, the US
Treasury Secty was on TV explaining this nationalization
of Freddie Mac and Fannie Mae. The interviewer first asked
what it would cost the US Treasury and the tax payer.
Paulsen would not or could not answer this obvious question.
That IS scary.
If housing prices continue to decline, because people
are tapped out and unemployment is rising sharply, the
US Treasury will be down that percentage times $5.5 trillion.
With an 11 months' housing inventory now existing,
and wealth the most concentrated it has been since 1915,
except 1928(!), it is very likely that housing prices will fall
another 10%, as the Yale economist Schiller predicts.
and judge for yourself.
The US Government
- led by Bush who has never
felt a need to ask who will pay for his $3 trillion war
in Iraq or the endless use of zero-competition government
contracting to his campaign contributors
- will now save
the bankers from half their bad mortgage debt, The US
government will, if necessary, buy back upon request one
half of all of home mortgages in the US, about $5.5 trillion
dollars worth of mortgages. It will do this as because
it now owns Fannie Mae and Fredde Mac, who are expected
to stand behind the mortgages they guarantee. In effect,
the American taxpayer will now guarantee all these loans,
some $5.5 trillion worth of them. This takes Fannie Mae
and Freddie Mac back to their status before they went private
back in the 1960s.
If housing prices fall another 10%, the
could easily have to come up with $550 billion. Another
10% as Yale economist Shiller thinks is likely by 2012,
the US taxpayer will down $1.1 TRILLION dollars.
" An influential economist who long predicted the housing market bubble
cautioned ... that the slump in the U.S. housing market could cause prices
to fall more than they did in the Great Depression and bailouts will be needed
so millions don't lose their homes. Yale University economist Robert Shiller,
pioneer of the widely watched Standard & Poor's/Case-Shiller home price index,
said there's a good chance housing prices will fall further than the 30 percent
drop in the historic depression of the 1930s. Home prices nationwide already
have dropped 15 percent since their peak in 2006, he said.
CNBC asked Paulsen about this.
(CNBC) How much will it cost taxpayers?
(Paulsen) "We obviously don"t know that yet".
It depends on how long before housing prices to
stabalize...."It may not take too long."
(CNBC) But, there must be some analysis of the amount it
will cost. "$10s billion? $100s of billion? How much
are you prepared to pay?"
(Paulsen) "Ah. I don't. Ah (stammer) There is no
specific analysis. This was not...(stammer) This was....
(stammer) We didn't sit there and figure this with a
calculator. This was about our financial markets.
This was about confidence in our financial markets.
Confidence in our economy and the availability of
(CNBC) Did Foregn central banks
threaten to stop buying
(Paulsen) Yeah. Ah (Stammer) I ... (Stammer) Nothing like
that. (Stammer) Some had stopped buying. There
was some selling. What is... This was just obvious.
There was grave concern...Not the major driver.
There was concern. Housing is at heart of the
problems. These companies are so big and
Compare Paulsen's befuddled answer here with his befuddled answer
back in April when
asked what would have happened if he had not provided JPMorgan $30 billion
to buy out Bear Stearns.
(Paulson:) Im not going to speculate and go through
I am going to say is we always when you go through a period like this that
policy makers need to balance various consequences and the right decision
here Im convinced was the decision that the Fed made which was to ah to to
do things, to work with market participants to minimize the disruptions
The fact is that these hypotheticals were the
heart of the problem. He refused to
comment on the central problems in the matter. As someone properly said in the
York Times, "Just once, Id like a reporter when faced with the we
on hypotheticals phrasing ask
You say you wont speculate on the
consequences of your actions. Is that because you havent thought through the
consequences of your actions? Or is it because the consequences are likely to be so
bad that you dont want to get blamed when what you expect to happen, does happen?
Not that the Democrats can be
trusted. Three months ago,
Senator Dodd said there was no problem at Freddie Mac
Fannie Mae. They had ample resources. He also knew these
companies do their best to avoid timely reporting of their
foreclosures, sometimes waiting two years. He knew these
companies cooked their books and that they had run afoul of
regulators a few years ago and their CEOs had to be fired.
Paulsen says the "The Housing Down-Turn is at
the heart of the problems of our economy." Should
we trust those in the Administration and at the
Federal Reserve that caused the housing
bubble to fix it? These are the
same ones who
allowed banks to get into non-banking businesses
and package mortgage loans so there could be no
transparency or accountability? The FED who
allowed housing to be bought zero-down and
on a "stated income" basis?
Should we now trust Paulsen?
Back in April 2007, he declared
that the housing crisis
had reached "bottom" and that the subprime problem
was largely contained. He was wrong. A year later, he refused
to let the chips fall where they may with Bear Stearns. $30 billion
of taxpayer money was given to JPMorgan as a prod to buy
out Bear Stearns. It stemmed the tide
for 2 months.
Key Banks, he mused, were too big to be
fail. No matter that giving them this kind of support
would encourage them to take more imprudent
risks and more dangerous loans to one another.
Paulsen sees his job to be saving the stock market, at
all costs. For Main Street this looks a lot like socialism for
Banks like Bank of America and Wells Fargo are the
biggest beneficiaries. Suddenly the home loans that used
Fannie Mae and Freddie Mac are safe and risk-free! It is said that
Bank of America wrote a draft that became the new Housing
Bill. Their stock shows how much political clout they have.
See - http://www.tigersoftware.com/TigerBlogs/5-7-08/index.html
Will mortgage rates go down if profit
not a consideration? Will these loans be more
available? Will loan savings to banks be passed
along to home buyers? Will the new US-FNM-FRE
help the depressed housing markets? Without
a better job market, who will be able to buy a house?
Will the terms of mortgages be changed ot help
temporarily distressed homeowners? Will it only be
the rich who want to rent it out? Will it be consortiums
of home-buying investors? Will only insiders benefit?
The devil will be in the details.
And most important... With this bailout, will not
each industry demand equal treatment?
After This Rally, Things Can Get Much
Will it now be much harder, to bail out
Motors or a Lehman Brothers? We're going to find out.
Below is the chart for LEH. It is on a Sell, shows
heavy (red) distriubution and a falling Closing Power.
Professionals do not trust it.
On 9/9/2008 Lehman fell 40% in one day. Its talks with a Korean bank
to raise capital has fallen through. This is the fourth largest investment bank.
This wipes out $4 billion of market value.
====================== GM =====================================
GM is on the edge of making a serious break below its support line.
The Public, as measured by TigerSoft's rising Opening Power is bearish.
are bearish, as seen in the declining Closing Power. Usually professionals prove
to be right. The steady red Distribution in Tiger's Accumulation Index is also
a big warning. I fear what would happen if GM should fail. Democrats in the US
House of Representatives are discussing an emmergency $25 billion government
backed loan to automakers to make more efficient cars.
Now McCain is now ahead in the poles. Obama has no
His supporters are having doubts, big ones. If McCain wins
in November, there will probably be political grid-lock. There will be
little change in the policies that brought us into this mess.
Phil ("You're all a bunch of whiners!" ) Graham is McCain's closest
financial advisor. He brought us unregulated energy speculation.
I fear for us. McCain has
admitted he does not understand
the economy. The Issue Of Economics Is Not Something Ive
As Well As I Should but, Ive got
he assured the audience. Early in 2008, McCain said:
I dont believe were
headed into a recession, he said,
I believe the fundamentals of
this economy are strong."
"A nation of
whiners". That's what McCain's ex-chief economic
advisor called the millions of unemployed, underpaid,
and home-owners about to lose their mortgage.
So out of touch!
McCain, with his 7 houses, will not allow his rich buds to be taxed.
50% of the increase in the US budget deficit under Bush owes to his
tax cuts for the rich. 35%of the increase int he US Debt owes to Bush's
war in Iraq. See Jared Bernstein:
Why McCain's Wealth Matters and
Video I saw recently. Jared Bernstein -
CRUNCH - Why Do I Feel So Squeezed?
McCain will not cut back his beloved military. He may even start
a war with Iran. ("Bomb, bomb, bom, bom, bom"). WIth McCain
there will be no big public works program paid for by ending the
war and taxing the rich. Without that, the economy will continue to worsen.
There will be no trickle down. Unemployment will worsen. The jobless
will just have to wait and wait! Cities and states will run out of money.
A recession deeper than 1973-1974 becomes a grim possibility.
Batten down the hatches. Gold will probably rise as the dollar declines.
Typically news like this delays the eventual decline, rather than preventing
it. All Paulsen wants to do is delay the big decline until after the
November Presidential Election. .
Compare the Market Now with 1971
after Nixon announced his new Economic Policy To Control Prices.
After a rally, we should expect more new lows. Perhaps, October will
produce a selling climax. It has that reputation. In 1971 the decline
continued until November.
Peerless Chart of 1971 Peerless Stock Market Timing: 1915-2008