Understanding today's unprecedented financial
August 08, 2008
1:00 am Eastern
Recent events in the financial markets have renewed concerns that should
be considered by any American who has worked, paid taxes, invested and
saved for the future.
It is no secret that America is swimming in debt. Currently the U.S
national debt is $9.6 trillion. That is $47,000 for every adult or $94,000
for couples. One can only imagine the future burden that will put on
taxpayers as the politicians continue to print money to pay off everything
from health care to foreclosed mortgages. No level of taxation
will support this kind of unbridled spending.
We are now spending money at a rate that is ridiculous and there is no
end in sight. Predictions are that by the end of 2008 America will be
running a $500 billion deficit and soon the national debt will exceed $10
trillion. And while this level of debt should have every American demanding
the immediate halt to most spending, it has not. In fact, more and more
Americans are looking for the government to spend more money
fixing their personal problems.
In an unprecedented move, the Federal Reserve, in cooperation with the
Treasury Department, bailed out the investment bank Bear Stearns in March.
For the first time ever, the Fed opened the discount window to an
investment bank issuing $35 billion of financing for the beleaguered
institution. Then in the dark of Sunday night, the Fed, with the complete
cooperation of the Treasury, set up a sale of Bear Stearns to a commercial
bank, JP Morgan, with all assets being applied to JP Morgan's balance sheet
while only increasing liabilities for the first billion in potential
But it gets worse.
Within weeks, the confidence in the financial system and American banks
in particular had so dramatically deteriorated, the head of the Securities
and Exchange Commission adopted a rule that forbade naked short-selling of
financial stocks such
as JP Morgan, Wachovia, Bank of America, Citibank, HSBC and Well Fargo,
just to name a few. This meant an investor who had no confidence in a
financial stock could no longer sell the stock in a short sale expecting
its value to drop – at which time they would buy it at a lower price
and fill the sale.
Keep in mind, this was still a perfectly acceptable practice with other
stocks – just not the "financials." If that single move did
not send shivers up every American investor's spine, then it's hard to say
The market was so vulnerable to a massive sell-off and further
deterioration of bank-stock values that the free market was abandoned for a
government-controlled market and the folks were almost grateful that a
crisis had been averted.
Grateful? We should have been outraged. But then again, many in America
don't really want free markets. They want the government to
protect their assets. Do we believe the government has been so successful
in managing the finances of government that we now want them to manage the
Weeks later, Congress passed H.R. 3221, "The Housing and Economic
Recovery Act of 2008." This allowed Congress to bail out the 400,000
homeowners who are facing foreclosure, while saving Freddie Mac and Fannie Mae, the government-sponsored
enterprises, or GSEs – the same companies that arguably caused most
of this mess to begin with.
The president, who vowed to veto the bill, caved and signed it. It
allows, by statutory limit, the spending of as much as $800 billion, which
will bring the national debt to potentially $10.6 trillion.
Again, more government spending to save whom? Homeowners who
fell on tough times? Or speculators who were trying to play the game and
the banks that financed them? You got it. The banks and the
This bill will do nothing more than bail out the very people who created
the mess – at taxpayer expense. What homeowner in their right mind,
if given the choice to walk away from a home that has dropped by 40 percent
in value or refinance it at the original value, will opt to refinance? This
bill will directly place billions of dollars into banks in order to clean
up and rehab foreclosed properties which will be put right back on the
market at reduced prices. Once again, all at the taxpayers' expense.
It will be a virtual repeat of the Resolution Trust Corporation bailout
in the late '80s – with one difference. There was a standard held for
credit in the '80s. This last loose-money binge was created by lending
anyone who could breathe and sign the paperwork cheap money to buy a home
– regardless of the reason why.
The bottom line: To "save" the system that was clearly melting
down as a result of plummeting real estate values and frozen credit
markets, the Fed and the Treasury Department will allow the creation of
billions and billions, if not trillions, of dollars which will be added to
the national debt. This will further deteriorate the long-term value of the
U.S. dollar and ultimately threaten Americans' quality of life through
increases in the cost of living. Once again, the American taxpayer and
saver will foot the bill – all the while watching the price of
everything from food to college tuition increase at an alarming pace.
The markets are well aware of the effect these moves will have on the
dollar and have prepared accordingly. The international markets have long
ago lost their appetite for American debt. The days of foreign countries
and businesses lending us the money necessary to survive have ceased. Now
they look to buy our businesses, our real estate and other assets. They are
not willing to take a promise to be paid in the future with dollars that
are constantly diminishing in value.
With the stock market
having experienced six minus-300-point rallies, it is clear we are in a
bear market for stocks. Bull markets never experience such rallies
according to the chief economist at Merrill Lynch. Such rallies are
inherent in bear markets and this market is clearly in a bear mood.
Earnings are shrinking, unemployment is increasing and raw material costs
are through the roof. Not to mention skyrocketing energy and healthcare
The once-free American markets that were the envy of the world have
become government-controlled markets, out of necessity for the time being.
The powers that be at the Fed and Treasury can ill-afford a breakdown of
the system. News reports of runs on the Indy Mac bank were reminiscent of
the 1929 crash and were quickly bandaged to stop the bleeding of public
confidence. And while the immediate symptom received treatment, the
underlying disease was ignored. All shareholder equity, for those who
invested in Fannie and Freddie, should have been wiped out. The market
should have been left to heal on its own. But instead, the Fed placed the
government version of a Band-Aid on a hemorrhaging wound. Real treatment of
the problem would have been more than the market could bear.
In the last week or so, we have seen the U.S. dollar strengthen against
most world currencies. Oil prices have subsided back to the $116/barrel
level, but make no mistake about it: It will not last. The long-term
prospect for the dollar remains tenuous at best and the moment the
factories go back to work in China after the Olympics, oil consumption will
return and the lower dollar and higher oil scenario will be back in full
swing. Any relief in either of these areas is an opportunity to get
So don't go out and pop the corks on the champagne bottle just yet.
Remain vigilant. In the 1990s, one could place profit ahead of liquidity
and safety. Today, that would be financial suicide. Liquidity should be the
No. 1 priority: Can I get my money if I want or need it? Second is
safety: Are my investments in a relatively safe area of the market? Are
they insured if they are in the bank? Third, look to see a profit. Low
interest rates are a sure loss, but then, you are paying for safety and
The best advice I can offer right now is to stay very well diversified.
The long-term portion of one's money can be in stocks. A portion in real
estate. A portion in mutual funds. A portion in bonds and
cash. However, a key investment component would be holdings in gold,
knowing this is an investment in your control, not a bank's, one that's
private, portable and potentially very profitable, and one that has long
been a reliable anchor in a financial storm and insurance against an
As Will Rogers once said, "I am not as concerned about the returns
on my investment as I am the return of my investment."
Future writings in this space will discuss the geopolitical events that
may change things at a moment's notice. For instance, the threat of Iran
taking control of the Strait of Hormuz – and 30 percent of the
world's oil supply – is real. Russia, China, India and Brazil (the
so-called "BRIC" economies) and their growing economies are fully
ready to compete and win in the battle against America for world
Are we prepared for all this, and more?
These are very uncertain times, most of it out of your control. That is
why the only investment strategy that will provide a good night's sleep is
one strictly based on a well-diversified financial portfolio. (If I can end
with a quick commercial, please feel free to speak to one of the
representatives at Swiss America, who can help inform you on all the latest
trends and options, so your hard-earned dollars are protected against all