What you have is a picture of broken economic systems that are operating on life support," Mr. Prince says. "We're in a secular leveraging that will probably take 15 to 20 years to work through and we're just four years in. - Robert Prince, co-chief investment office, Bridgewater and AssociatesI mentioned yesterday that the head of the NY Fed, Bill Dudley, was going around lobbying for fiscal and monetary "stimulus" for the housing market. Really in effect what this "stimulus" would end up being is a bailout for the Fed's member banks who still have massive exposure a housing market that gets worse by the day. Already Freddie Mac is letting deadbeat borrowers go a year without making mortgage payments: LINK People, the cost of this is coming from YOUR pocketbook.
The problem is actually pretty simple: too many homes were built during the last decade in response to the demand created for homes, which was enabled by the money printing and lending policies spear-headed by Alan Greenspan and later proliferated by Ben Bernanke. The political leaders signed off on this whole-heartedly because it meant re-election votes. But the housing bubbly frenzy created a huge illusion of demand that was never there. Even worse, it put millions of people into homes for which they over-payed and could not afford to keep.
So now we have a system that has substantially more homes in supply than there is rational economic demand. This economic imbalance will extend for at least a decade, probably longer. This housing stock was financed with debt, a large part of which remains on bank balance sheets and trillions of which are guaranteed by you, the Taxpayer, in the form of $7 trillion in agency debt issued by agencies that are now owned outright by the Government. The golden truth is that we are looking at the slow-motion collapse of the housing market in terms of true valuation and the massive defaulting on probably close 1/3 of the $7 trillion in Taxpayer funded agency debt and $100's of billions of private-label debt sitting on bank balance sheets or guaranteed by bank servicing companies. This is a serious disaster that was made worse by the monetary and fiscal programs enacted by Bernanke and Obama in 2009.
Now the same people who are responsible for creating the massive problem in the first place are now pushing hard to have "new" policies enacted that will help bailout the big banks who are sitting on $100's of billions of real estate and housing exposure, rendering them de facto insolvent even before figuring in other bad assets like foreign Government and bank exposure and off-balance-sheet OTC derivatives.
Six days ago Bernanke sent a letter to Chairman of the House Financial Services Committee in which he stated that the housing market was a roadblock to economic recovery and in which he offered proposals for "stimulating" the housing market. His primary solutions would entail mortgage principal reductions and Government subsidized refinancing programs. Of course Bernanke's fancy paper does not identify at all the cost of implementing his proposals. I would suggest that looking at the amount of delinquent and defaulted but not foreclosed debt at banks and the mortgage agencies would suggest that ultimate cost of Bernanke's proposals would fall somewhere between $500 billion and one trillion. We know from "trial balloons" that have been floated that the Fed has been looking at implementing a $500 billion mortgage purchase program. Now it's Obama's turn to throw hard taxpayer money into the bank bailout kitty.
Here's a copy of Bernanke's letter: LINK
Let's face the golden truth. The housing market is part of a larger overall debt accumulation problem in this country that will take decades to fix, just like it took 6 decades to create the problem. If the free market is allowed to do what it does, the problem will fix itself over time and the ultimate consequences and destruction to our system will ultimately be a lot less severe than if the Federal Reserve and Government take action to further push the problem into the future.
The strategy being floated by the policy makers will do nothing more than place a lot more of the burden of this problem on those left in the middle class who pay taxes, unfairly subsidize those who made poor borrowing decisions and, worst of all, bail out the banks and bankers who created the problem.
Jim Sinclair did an interview today in which he said, in reference to the move in gold and silver overnight, that "something is taking place [behind the scenes] that is not obvious." He referenced "quiet" buying going on in the metals. I have noticed a lot of volume coming into the extremely undervalued junior mining shares yesterday and today. But, I would suggest that part of what is taking place is that the savvy investors who understand the difference between gold and printed fiat currency are moving printed fiat currency into the metals ahead of what is going to be big year for QE and fiscal spending, deficits and Federal debt accumulation.