US Braces To Nationalise Housing Market

Adrian Ash - Mon 03 Sep, 2007

Short of organising double-digit inflation, in fact, there seems little the authorities can do to revive confidence in no-income borrowers with bad credit records. And lo! President Bush will announce just that in a speech later today. "The president wants to see as many homeowners who can stay in their homes with a little help be able to stay in their homes," a senior official told the Wall Street Journal overnight. "We're not looking for an industry bailout or a Wall Street bailout. The focus here is on the homeowner." Put another way, the US government is about to nationalise the housing market. If that sounds dramatic, then how exactly did you expect the Great Money Bubble to reach its climax?

- What to do, what to think? Dan Denning emails us from
Melbourne, wondering whether to liquidate everything –
stocks, bonds, property – before the summer ends today
and the markets get back up to speed after the US Labor
Day weekend on Tuesday.

- If that's the right play, then time is running short,
gentle reader. Did you call your broker yet?

- "Once everyone gets back from their vacation and
starts to focus on what's really going on in the
investment markets," as Paul Tustain writes for
BullionVault, "we may be in for a torrid few months of
volatility and losses. I believe the current lull could
offer a good opportunity to defend yourself with gold
bullion before the real trouble begins."

- "Since the end of June there has been huge damage done
to the finances of hundreds of organisations worldwide,"
Paul goes on. "But much of this pain is still hidden
inside investment funds holding obscure financial
instruments which are now unmarketable.

- "Too many investment professionals have been backing
the same short-odds gamble – residential housing – and
the aggressive financial arrangements they set up are
unravelling a little more every day."

- Short of organising double-digit inflation, in fact,
there seems little the authorities can do to revive
confidence in no-income borrowers with bad credit
records. And lo! President Bush will announce just that
in a speech later today.

- "The president wants to see as many homeowners who can
stay in their homes with a little help be able to stay
in their homes," a senior official told the Wall Street
Journal overnight. "We're not looking for an industry
bailout or a Wall Street bailout. The focus here is on
the homeowner."

- Put another way, the US government is about to
nationalise the housing market. If that sounds dramatic,
then how exactly did you expect the Great Money Bubble
to reach its climax?

- Asian equity investors leapt on the news, pushing the
Japanese market 2.6% higher for the day. Hong Kong
stocks reached a new all-time high. In London, the
FTSE100 put on 0.45% during the first hour of trade,
even as Barclays – the UK's third largest bank –
admitted it had to tap the Bank of England for an
emergency $3.2 billion loan on Wednesday. It had
already tapped the Old Lady for a $630 million loan only
last week.

- Over in Tokyo, Japanese gold futures traded 1.1%
higher to equal $673.90 per ounce, while the Yen
continued to slip back on the currency markets. But US
Treasury bonds? The "safe haven" of choice for large
institutions during the turmoil of August – fell back
in price.

- The US government already owes nearly $9 trillion.
Who's going to bail out Washington when its creditors
stamp the word "subprime" across its loan application?
Dollar deposit rates in Tokyo jumped 45 points to 5.65%
overnight – and the cost of borrowing looks set to
become mighty expensive for George W.Bush and his
successor in the White House.

- Dubya likes to be known as "The Decider" according to
Bill Gross, head of Pimco, the world's biggest bond fund.
Gross begged George W.Bush last week to step into the
subprime disaster – "write some checks, bail 'em out."
Or rather, bail out the mortgage-backed bond market.

- Come Monday, Larry Summers of Harvard University
joined the call. "Now is not the time for the
authorities to get religion and discourage the provision
of credit," he wrote in the Financial Times.

- Hence Dubya's three-pronged plan. "The Decider" is
going to spear anyone caught holding US government
bonds – the "safe haven" of choice, remember – three
times over.

- First, said Washington's overnight briefing to
reporters, the Federal Housing Administration is going
to guarantee loans for delinquent US borrowers. Set up
during the Great Depression, the agency already insures
mortgages for low- and middle-income borrowers. Now
anyone more than 90 days behind with their payments
will get government finance at lower, more favourable
lending rates.

- In other words, it's to print money to stop repossessions.

- Second, Bush is going to ask Congress to suspend – but
only for "a limited period" according to the Wall Street
Journal – a US tax provision that penalizes borrowers
who reduce the size of their loan by refinancing, or who
lose their homes to repossession.

- In short, it's going to cut tax receipts.

- Third, the US government – through an initiative led
by the Treasury and the Housing & Urban Development
department (HUD) – will identify home-buyers at risk of
defaulting between now and 2009, and create "more
favourable" loans for them by working with private
lenders and insurers.

- Put another way, Washington is going to underwrite the
next two years of subprime re-financing, actively
seeking out defaults before they happen. Meaning more
new money printing still.

- "Treasuries should get shellacked now that Bush has
proposed the nationalisation of the subprime market," as
Dan Denning puts it. Because that double-digit inflation
in the cost of living - the only remedy left to prevent
a genuine deflation led by the US housing market - now
looks a shoo-in for US consumers.

- Printing and spending the new money needed to keep
subprime home-buyers inside homes they could never
afford – but which idiot lenders let them buy with dirt-
cheap loans - is going to mark the very top of the Great
Money Bubble we've all been living through since Alan
Greenspan arranged the bail-out of Long-Term Capital
Management in 1998.

- Called your broker yet? Time is running out. Dubya
will make his speech just after lunchtime UK time... 

Regards

Adrian Ash
For The Daily Reckoning

Adrian Ash is head of research at BullionVault.com the world's fastest-growing and best-value gold ownership service.

http://www.bullionvault.com/from/dailyreckon