 Bailout a-Go-Go
Peter Schiff
Dec 2, 2008
Keeping track of the ever mutating
bailout debate is becoming increasingly difficult. With the Federal
money spigots now thrown wide open, and with no one of influence
advising restraint, the only debate is where to direct the torrent.
During the past week, the talk began with Detroit and Citigroup,
but by Friday had shifted to a massive "stimulus package"
to bail out consumers. The early buzz includes some very large
figures. But first, a bit of a recap:
On Monday, the $300 billion
Citigroup bailout took center stage. Once again Henry Paulson
decided to throw taxpayer funds into a bottomless Wall Street
money pit. Shockingly the Citigroup plan did not seem to demand
any serious curtailment of lavish salaries and bonuses. Paulson's
shameless largesse to his Wall Street friends has elevated financial
industry bonuses to entitlement status.
"Remember Lehman"
now seems to be the rallying cry to justify any and all financial
bailouts. But Lehman's demise is in no way responsible for our
current problems, and the decision to let them fail is the only
bright spot in otherwise consistent record of policy mistakes.
We bailed out Bear Sterns and AIG, and what did that get us?
The Citi bailout greatly increases
the chances for a similarly misguided auto industry bailout.
After all, if taxpayers ensure multi-million dollar bonuses for
Citi executives, how can they refuse similar help for eight-figure
auto executives and $70 per hour unionized auto workers?
It was inevitable that the
size of these bailouts would up the ante for an economic stimulus
package aimed at consumers. Not missing a beat, Barack Obama
announced a $700 billion dollar fast-tracked package that will
likely exceed $1 trillion before passage. (Trillions are the
new billions.) The plan must be sending shivers down the spines
of our foreign creditors who are expected to foot the bill. Add
this cost to the hundreds of billions of prior stimulus and bailout
packages, and the cost to our creditors is quickly heading into
the multi-trillion dollar range. It can't be long before they
cry uncle and repeat the words of prizefighter Roberto Doran
"No Mas."
With so many familiar faces
on his new economic team, Obama signaled his intention to "hit
the ground running." With the possible exception of Paul
Volcker, all of his top appointees share the view of the Bush
administration that the root causes of our economic problems
lie in the reluctance of banks and other financial institutions
to lend. As a result, we can expect a virtual continuance of
current policy.
It is no surprise therefore
that both Democrats and Republicans offered healthy "huzzahs"
to Henry Paulson's latest bazooka: $200 billion to purchase securities
backed by auto, student, and credit card loans. It is hoped that
with this transference of risk to taxpayers, lending institutions
won't be so cautious, and the credit-fueled American economy
can thrive anew. This is unalloyed insanity that can only lead
to total ruin.
Paulson stated clearly that
he would like the Fed to print as much money as it takes to revive
the economy. Unfortunately the only industry likely to be revived
by such policies is printing itself. But even this will not help
the United States as the majority of our printing equipment is
imported from Switzerland.
But what if the root of our
financial problem is that American consumers have already taken
on too much debt? By trying to force feed even more credit down
the throats of already overly indebted Americans, Paulson's plan
will only weaken the economy further.
Building on the groundwork
laid by Paulson, the massive stimuli that will likely be pushed
through by Obama and an overly eager Democratic Congress will
further impede any real recovery. By swallowing up all available
capital, spending to create government jobs will destroy far
more private sector jobs. Rather than expanding government and
increasing the national debt, policy makers should be thinking
about doing the opposite.
The brutal truth that no one
in Washington dares acknowledge is that our systemic economic
problems can only be solved by a reduction in consumer borrowing
and an increase in savings. We must repair our national balance
sheet and a painful recession is the only path to achieve this.
By interfering with the market's attempts to bring this necessary
change about, all the proposals currently coming from Washington
or bubbling up from think tanks and Nobel prize-winning economists,
will only exacerbate the imbalances and lay the foundation for
even greater losses and a larger crisis.
A short-run reduction in GDP
is a sacrifice we must be willing to accept. If we swallow this
medicine now, in the long run we will have a sustainable rise
in GDP as higher savings leads to increased capital investment,
greater productivity, and eventually a lasting increase in consumption.
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Dec 1, 2008
Peter Schiff
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
1 800-727-7922
email: pschiff@europac.net
website: www.europac.net
Archives
 Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
County Register.
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
321gold Ltd
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