Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan
Gold Price Back Below $1,800! - 10th Sep 21
The Inflation/Deflation debate wears on… - 10th Sep 21
Silver Price seen tracking Copper prices higher - 10th Sep 21
The Pitfalls of Not Using a Solicitor for Your Divorce - 10th Sep 21
Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
This Boom-Bust Cycle in US Home Ownership Should Give Home Shoppers Pause - 9th Sep 21
Stock Market September Smackdown Coming Next? - 9th Sep 21 - Monica_Kingsley
Crazy Crypto Markets How to Buy Bitcoin, Litecoin for Half Market Price and Sell for TRIPLE! - 8th Sep 21
Sun Sea and Sand UK Holidays 2021, Scarborough in VR 180 3D! - 8th Sep 21
Bitcoin BTC Price Detailed Trend Forecast Into End 2021 - 8th Sep 21
Hyper Growth Stocks - This billionaire is now using one of our top strategies - 8th Sep 21
6 common trading mistakes to avoid at all costs - 8th Sep 21
US Dollar Upswing, S&P 500 and Nasdaq Outlook - 7th Sep 21
Dovish Assassins of the USD Index - 7th Sep 21
Weak August Payrolls: Why We Should Care - 7th Sep 21
A Mixed Stock Market - Still - 6th Sep 21
Energy Metals Build Momentum; Silver & Platinum May Follow - 6th Sep 21
What‘s Not to Love About Crypto Market Fireworks - 6th Sep 21
Surging US Home Prices and Gold – What’s the Link? - 6th Sep 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Incompetent Paulson Talks Up Price of Mortgage Backed Securities

Interest-Rates / Credit Crisis 2008 Sep 20, 2008 - 11:10 PM GMT

By: Michael_Pento

Interest-Rates Best Financial Markets Analysis ArticleI hope those who want to sharpen their skills at the art of negotiations are watching Hank Paulson and learning exactly what not to do. Rule number one when entering into a bargaining agreement to purchase an asset is: DO NOT commit to purchasing the asset before negotiating a price. Makes sense, right?


I mean, if the counter-party knows you have committed to the purchase, you have lost your bargaining power. For example, when a prospective home buyer enters into the haggling process to purchase a home, it would be insanity to tell the seller that you must buy the property. By clearly stating to Wall Street his intentions of using the Treasury to place a bid for these distressed assets, Mr. Paulson cannot now back down without causing instant calamity in the markets.

Lo and behold, what happened to prices of mortgage-backed securities on Friday? They surged, meaning Treasury talked up the prices of the very assets it now intends to buy. This must have shocked no one, except perhaps the folks in D.C.

A much better approach would have been for Treasury to have placed very low bids for these assets and let the banks decide to what extent they would get involved in the deal. In that scenario the taxpayer would have been more protected and banks would have been compelled to sell their distressed assets at a price that would have allowed them to suffer some pain, as well.

Now, I'm very sure that Treasury has no idea what these assets are truly worth, whereas banks have a much better idea what is in their level three septic tanks. That will enable them to push for a much better deal because they will only sell to Hank what they feel they could not unload on the free market at a better price. And since the onus is on him to consummate a deal, this plan sticks the taxpayer with an overvalued asset that will be carried on the books of this new RTC for years to come.

The problem will come when the reality hits the government that the skyrocketing obligations of the Treasury outstrip their ability to tax the American public to pay off the debt. Annual deficits are already approaching $500 billion while the national debt registers an eye-popping $9.6 trillion. According to estimates made by Barclay's Capital, the annual deficit could climb to $700 billion-$1 trillion in 2009 due to the increased borrowing of the various rescue plans enacted by the government. Annual deficits of that magnitude could increase interest rates to a level that mandates the Fed purchase the debt directly from the Treasury in order to keep borrowing costs in check. The end result would be rampant inflation and soaring commodity prices.

The administration is probably unaware of the consequences of its actions. Their intentions are all well and good, but elected officials get lost in the panic to put a finger in the dyke rather than to enact a potentially painful, austere, long term fix. By replacing illiquid assets with cash, Treasury will encourage banks to make more non-performing loans to consumers who are already overburdened with debt. Since the free market was abrogated and government has prevented home prices to fall to a level that consumers can afford, the ramifications will be the formation of another even bigger bubble down the road. Only the next time it will be more pernicious because banks and the consumer will be much more leveraged and the financial condition of the country will be much more unstable.

*Please check out my podcast, The Mid-Week Reality Check

Michael Pento
Senior Market Strategist
Delta Global Advisors
800-485-1220
mpento@deltaga.com
www.deltaga.com

With more than 16 years of industry experience, Michael Pento acts as senior market strategist for Delta Global Advisors and is a contributing writer for GreenFaucet.com . He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

Michael Pento Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in