What a Mistake with this Next Housing Bailout

By Michael Lombardi, MBA — Today’s Profit Confidential column

The statistics are startling:

  • According to Moody’s, 15.0 million American homeowners owe more money on their mortgages than their homes are worth.
  • There are 3.6 million homes for sale in the U.S. — an 8.6-month supply, according to the National Realtors Association.
  • The Senate Banking Committee says that over 7.0 million U.S. homes have been foreclosed upon over the past three years
But have no fear.After the Federal Reserve bought $1.3 trillion in securities backed by U.S. residential mortgages, after the government took over Freddie Mac and Fannie Mae, it now has come up with a new plan to help up to 4.0 million homeowners avoid foreclosures.The more of this I see, the more upset I get.Where was the government when mortgage companies were giving loans out to people who did not qualify for them? Why was the government oversight of banks so poor as to permit the credit bubble from happening in the first place?

Taxes on hard-working people…taxpayers’ money…continue to be used to bail out homeowners who took mortgages that they should have never taken…to help banks reduce the foreclosure burden that they originally created.

Some economists may argue that the government is borrowing money for its home aid plans. But, in the end, it is the taxpayers and their children who are left with the burdensome national debt.

It doesn’t take rocket science to look back at the financial statements of the largest American banks to see the billions of dollars that they made in the period from 2000 to 2005. Bank of America Corporation alone made a $30.0-billion profit after tax in the combined fiscal years of 2004 and 2005.

Let’s face it; the banks don’t want to foreclose on any more homes because each time they foreclose on a property, it costs them money.

The banks made billions by giving consumers loans that they should not qualify for and then we needed to bail those banks out of their messes? Doesn’t make sense to me.

Let the banks pay for their own bad business decisions in the same way that any small business owner has to pay for mismanagement.

Michael’s Personal Notes:

Loyal readers know that I’ve been recommending gold-related investments since gold bullion traded below $300.00 an ounce back in 2002. (My wife loves that call.) Today, I’m as bullish on gold as ever. Friday, we saw bullion close at a new four-month high of $1,161.90 an ounce. Gold stocks are up across the board.

The next target for gold is $1,200 an ounce. Yes, we will get there. It doesn’t matter if we are going to see a slight pullback from gold’s recent four-month high or if we go straight past $1,200 from here. The bottom line for me is that $1,200 an ounce for gold bullion is
only a short period of time away.

My prediction for gold is more aggressive than most gold bugs’: $2,000 or even $3,000 an ounce? Yes, this is what I eventually see. As time passes, and before the bull market in gold is over, $1,000 an ounce for gold bullion will be looked back upon as a bargain.

Rising interest rates; total government debt predicted to be $20.0 trillion by the end of this decade; years of interest rates that are low spurring inflation…how can the U.S. dollar not falter? And what other currency can investors eventually run to? The euro? I just got
back from Europe, and the euro, in my opinion, is destined to falter. My dear reader, gold is the currency of the future.

Where the Market Stands:

I guess my prediction doesn’t sound so stupid anymore. The prediction I’m talking about was the call I made a few months ago about the Dow Jones Industrial Average going over the 11,000 level. This morning, the Dow Jones opens only 2.65 points away from breaking through 11,000.

My view remains the same as it was first declared in the spring of 2009: a bear-market rally is upon us that will take stocks higher before the second leg of the bear takes hold. Enjoy the stock-market gains while you can.

What He Said:

“Consumer confidence does not change overnight. In the U.S., 70% of GDP is based on consumer spending. And in my life, all the recessions I have seen or studied have only come to an end when consumers started spending. With consumer sentiment getting worse, and with the U.S. personal savings rate at near record lows, it may take two or three years for consumers to start spending again.” Michael Lombardi in PROFIT CONFIDENTIAL, February 25, 2008. By the end of 2008, the rest of the world was realizing that the recession would be much longer and deeper than most other economists had realized.