I know it's hard to believe but Treasury
Secretary Hank Paulson is a Republican. It was especially hard to keep that in
mind during his appearances on the Sunday talk shows this weekend. His
stated mission was to garner support for the bailout plans of Fannie Mae (NYSE:
FNM) and Freddie Mac (NYSE: FRE). I hoped that he, being of the party that
supports free markets, would have instead asked why the government is involved
in the real estate market in the first place. I preferred that Treasury would
have repudiated any further association with the GSEs and cease to allow them
to raise new capital with the backing of the government.
Incredibly, the erstwhile Wall Street
executive made the case for allowing Treasury the unlimited power to purchase
the GSE's debt and Equity. His reasoning was, if the bad guys
know you have a bazooka on your hip you are unlikely to be called into a
gunfight.
The bad news for Americans is that his
bazooka will be used to destroy the U.S. constitution. Article one
section ten of the document, which he definitely doesn't comprehend, says that
money should consist of only gold and silver. Our founding fathers wanted to
place a yoke upon the states and those in power in order to prevent them from
usurping the purchasing power of the Republic's currency. How wise they were. They
knew that once in control of government, those in power would do anything they
could to maintain it. Even those who espouse free market capitalism will try to
abrogate the system for personal gain. And now these Republicans want to extend
the powers of the Fed and Treasury, giving them a blank check to purchase even the
equity portion of these failing companies. Be it stimulus checks, GSE
bailouts, FDIC reimbursements or artificially low interest rates the purpose is
always the same, to buy votes.
It is important to keep in mind that in
whatever form they appear, all government bailouts consist of solely the
ability to print money. How much in the case of Fannie and Freddie you ask? The
Congressional Budget Office estimates that the bailout could cost about $25
billion. If that is the estimate from the government, imagine how enormous the
actual number may be? The market understands this and that is why the U.S.
dollar did not appreciate during this past week's market rally. There can be no
real market appreciation unless the Fed and Administration begin to take
seriously their charge to provide a stable currency. Until then, we will have a
stagflation nation and it will require investors to continue to own commodities
as an alternate currency and real store of wealth.
