The socialist housing bail out and how I see this week playing out
The housing bail out passed this Saturday as the senate had a rare weekend session. Unfortunately, this is not a problem that throwing more money at can solve. There’s just one thing I’d like to ask Mr. Paulson. How does giving the federal reserve an empty line of credit to the US treasury supposed to put confidence back into our financial markets? If anything, such drastic measures being taken monied interests that run this country would instill less confidence.
The moral hazzard created by this legislation is unprecedented. What’s going to happen is that the loans that are most likely to default are going to be written down and sold at 90% appraised value to freddie/fannie (read: the tax payer). This benefits the lender big time as they no longer have to continue writing down over valued assets and the government puts in a bottom for them regardless of what the property is actually worth. Yes, the government will set the back stop for the lenders, but home values will continue to decline, and the quasi government agencies that bought all of this toxic paper from the very people who made these loans to begin with will have no choice but to realize the losses. Of course, this will be paid by tax payer through inflation as the federal reserve has to create new debt to pay the existing debt. Dollars are toxic people. Trade them for hard assets now unless you can find stocks that can beat the real rate of inflation (there are a few good ones out there).
As for how I see this week playing out, it all depends on what happens Monday. If we have a good day and the S&P can get back to the critical 1260 area, we could be all set for a continuation of the rally. With GM reporting earnings before the bell Tuesday and the S&P/Schiller Home Price Index coming out, this bottom that we are retesting may not hold and could send us back down big time, with financials leading the way. I just don’t know man, but I’m betting on some major disappointments from GM weighing on the market, much like Ford did last Thursday. Add in some bearish housing numbers, and this rally could be dead in the water. Then again, this socialist lender bail out might spark the market to rally and buy financials that can foot their bad paper to freddie/fannie.
