Peter Schiff: Stimulus is Sedation

In the first of two new videos, Peter Schiff discusses Bill Gross, of PIMCO, and his proposed complete nationalisation of Fannie Mae and Freddie Mac and how Mr Schiff thinks this will benefit Bill Gross and cost everyone else, as yet more resources are poured into consumptive house construction and therefore taken away from the building of new factories and other productive facilities.

Mr Schiff also predicts a second bankruptcy for General Motors, immediately following its unloading by the US government in a new IPO.  Schiff’s Austrian-based advice is to stay away from this IPO:

In a second video, recorded in Indianapolis, Mr Schiff discusses the deteriorating US unemployment figures and why this process will continue to deteriorate, as greater government stimulus leads to yet greater economic sedation.

He also examines the über-rosy assumptions which lie behind the Obama administration’s economic ‘plans’ (such as they are), with strong predicted economic growth this year at 2.5%, rising to growth of over 4%; interest rates staying almost permanently at 0%; and inflation also staying low. Schiff states that these are the economic assumptions of fantasy land. He predicts instead a weakening US economy, high interest rates, and high inflation, with all of this starting in either 2011, or 2012 at the outside.

Other topics he brings into his video blog are the importance of savings rather than spending, to grow an economy, and how many of America’s banks will go bust when interest rates rise, due to the continuing machinations of the US government in the housing market:

To supplement the video above, here is the article Peter Schiff wrote two years ago on how the US government takeover of Fannie Mae and Freddie Mac would pan out, which the mainstream stated at the time would be an enormous success:

Paulson’s Quick Draw

By Peter Schiff
Monday, September 8, 2008

Treasury Secretary Henry Paulson, the man who said that subprime was contained and that the Bazooka in his pocket would never be used, now assures us that the bailout of Fannie Mae and Freddie Mac will be costless to taxpayers. Despite the near euphoria that the plan has sparked on Wall Street, the move will go down in history as the biggest policy blunder of all time, and will be credited as a pivotal point in the financial collapse of the American economy. The ultimate cost to Unites States citizens will be in the range of hundreds of billions of dollars, perhaps more.

The original idea that gave birth to Freddie and Fannie, which is to make housing more affordable to average Americans, should now be seen as farcical. Their new goal is to keep housing prices high. Absent Freddie and Fannie, housing prices would fall sharply and the mortgage market would stabilize. Americans would once again be able to buy affordable houses with mortgages they could actually repay –just like their grandparents did. Instead they will keep overpaying for houses, burdening themselves with excessive payments in the process, and ultimately sticking taxpayers with the bills when they default.

In contrast to Paulson’s continuous misreading of the market, I have consistently predicted the failure of Freddie and Fannie. I did so in my book Crash Proof, and in numerous speeches, commentaries and television appearances. I also was quick to point out that Paulson’s Bazooka would not remain holstered for long.

There is absolutely no substance to Paulson’s insistence that based on the government’s first claim on the future profits of Fannie and Freddie, the plan offers protection for taxpayers. There will be no future profits, just more heavy losses. Americans will now have unlimited ability to continue to overpay for houses and commit to mortgages they can’t afford. In fact, the plan insures that eventual public sector losses will vastly exceed those that would have befallen the private sector in a free-market resolution.

Paulson claims that his goal is to stabilize the mortgage market. But the best way to do so would be to allow housing prices to fall to a market clearing level. As long as home prices remain artificially high, the risks of mortgage lending will keep credit tight, and the high costs of mortgage payments will keep potential buyers on the side-lines. With private lenders justly cautious, the government intends to hold open the lending spigots, without the pesky concerns over losses or financial risk. The hope is that the new lending will prevent home prices from falling further. It won’t work. The government “solution” will simply delay the fall of artificially high home valuations and temporarily preserve the illusion of prosperity.

In order to preserve current home prices, the government will be forced to maintain the lax lending standards that got us into this mess in the first place. Since all the losses will now be borne by taxpayers, those lax standards will be much more problematic. The moral hazard that existed prior to this bailout has become that much more hazardous. Every mortgage now insured by Fannie and Freddie is the equivalent of a U.S. Treasury bond. This allows anyone to borrow on the full faith and credit of the U.S. government so long has the money is used to buy a house. In addition, mortgage lending will now be a government function, run with Post Office-like efficiency.

Of course the biggest collateral damage caused by Paulson’s bazooka is the large hole ripped through the already tattered U.S. Constitution. If the government can do this, does anyone believe there is anything it can not do? In effect the Federal government now has absolute power to corrupt absolutely.