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We
are pleased to present the following
excerpt from the book
The Little Book of
Bull Moves in Bear Markets: How to Keep
Your Portfolio Up When the Market Is
Down
by Peter Schiff
John Wiley & Sons -
October 2008
Why We Should Take a Solutions
Approach to the Crisis
and Look at Some Things
Differently
I don't think we're going to see any
light at the end of the tunnel until we
have a clear, objective understanding of
how we got into this mess in the first
place. There is a tendency whenever major
problems occur in the economy to place
blame on external factors and to assume
that the external factors can be prevented
from causing similar problems in the
future by expanding the government's
regulatory powers. The problem I have with
this kind of thinking is that it makes
government bigger and more intrusive
without ever getting at the root of the
problem, which is usually the government
itself. The other thing it does is reduce
the sphere in which market forces move
freely and would otherwise prevent the
problem from recurring. Finally, as we
face the challenge of rebuilding an
economy, whatever lesson might have been
learned from the government's role in the
problem is lost on us because it was never
brought to light in the first place.
The real estate meltdown provides an
excellent example. Here we are about to
give the Federal Reserve Board new powers
to regulate mortgage lenders, appraisers,
and other parties to a crisis that would
never have occurred if the Fed hadn't
taken upon itself the responsibility,
better left to the free market, of
determining what interest rates should be,
particularly true with the absurdly low
rates set after the bursting of the tech
bubble and the tragedy of September 11,
2001.
The Fed's decision to set rates at
artificially low levels to stimulate
activity and growth in the real estate
sector was directly responsible for the
environment that naturally spawned such
innovations as teaser rates, negative
amortization loans, and other variations
on adjustable-rate mortgages, which in
turn had consequences that were extremely
problematic. But the mortgage brokers and
lenders weren't responsible for the root
cause of the crisis, nor were the
investment banks that securitized the
mortgages, nor the hedge funds and
institutions that purchased them. The
Federal Reserve was. Yet the Fed is now
being rewarded with additional powers to
regulate Wall Street as well. So the fox
ends up guarding the henhouse, which is
bad enough, but anybody looking for the
guiding lesson of the crisis probably
wouldn't find it. The real lesson is this:
Interest rates represent the price of
money (or more precisely, the price of
credit). A government agency has no more
business deciding what the price of money
should be than it has deciding the price
of a pair of tennis shoes. Why are we so
surprised that central government planning
works no better when it comes to setting
the price of money than it does in setting
prices for other goods?
The price of oil is being blamed on
speculators, big oil companies,
environmentalists, and other external
factors -- but never on the Federal
Reserve, which created the inflation that
debased the dollars in which oil is traded
and is thus principally responsible for
increased oil prices. Priced in gold,
which adjusts for inflation, oil has
actually changed very little in price.
What worries me most, however, is the
almost automatic backlash that attributes
the present economic collapse to a failure
of capitalism and free-market economics
and turns it into an argument for expanded
government. Never mind that government
created a crisis that the free market
would have avoided altogether; the problem
with this case of mistaken identity is
that it almost certainly will result in
expanded government, much as the New Deal
did during the Great Depression. Of
course, the greater problem today is that
we can barely afford the old New Deal, let
alone the modern version we're about to be
dealt!
The approach we need to take to our
present crisis is not to expand
government, but rather to understand
government's role in creating the problem.
The solution is to limit and control the
power of government, not to create more
unnecessary regulation to interfere with
the free market forces that would have
prevented the problem.
Thoughts on the Upcoming
Presidential Election and How It Might
Affect Our Economy
I think what we've learned from this
historic economic breakdown is that it
represents a colossal failure of
government planning. When you have the
government taking control of something as
important as setting interest rates, this
is the kind of disaster you get.
At this critical political juncture,
are we going to compound the problem by
giving the government even more power,
making it even bigger, and putting it in a
position to do even more damage? The
alternative, of course, is letting the
free market self-correct, which I believe
in strongly but which is not, I'm afraid,
the way Americans are inclined to lean in
a time of economic crisis.
The impending failures of Freddie Mac
and Fannie Mae, events I forecast in my
book Crash Proof, in commentaries on my
web site, and on television, and the
government's intention to bail them out,
is a huge step in the wrong direction.
These quasi-governmental agencies, with
their implied government guarantees,
provided much of the air that inflated the
housing bubble, and should be allowed to
fail. Instead, they will be pumped up with
more government money, compounding the
fundamental problems in the housing market
and worsening inflation.
In fact, early on in the housing
crisis, most in government and on Wall
Street were still so clueless that these
agencies were actually touted as being the
solution to the problem. In sharp
contrast, I wrote in an August 2007
commentary entitled "It's a Shoo-In":
- In order to breathe life into the
dying secondary market for
nonconforming mortgages, some have
suggested that Fannie Mae and Freddie
Mac be allowed to buy jumbo mortgages.
This overlooks the problem that many of
these larger mortgages also feature
adjustable rates that will likely show
greater default levels when payments
reset higher. Allowing Fannie and
Freddie to buy larger loans now merely
sets up a more expensive federal
bailout down the road, as both of these
entities themselves will likely need to
be bailed out when the conforming ARMs
they already insure go bad as
well.
Bailing out Freddie and Fannie, as well
as all schemes to bail out overextended
homeowners and artificially prop up home
prices are doomed to failure, and will
only compound the problems they are
attempting to solve. The recent failure of
California-based IndyMac, a former leader
in nontraditional mortgage lending,
resulting in long lines of angry
depositors, is but the tip of the iceberg.
As more banks fail and the FDIC runs out
of funds, the Fed's printing presses will
be operating until they run out of
ink.
Without getting into a contentious
political discussion, I do see a parallel
between the 1976 election of Jimmy Carter
and the Reagan succession in 1980. Carter
had taken office at a time when inflation
and unemployment were issues. Voters were
disenchanted by Gerald Ford and alienated
by his pardon of Richard Nixon, whose
abuses of power were still very much on
their minds, and whose failed policies led
to higher inflation and unemployment. The
mood was very strong for a change from the
traditional ways of Washington. The
economy was so bad that Gerald Ford was
even challenged in the primary by Ronald
Reagan, who at the time was dismissed by
the media and the party elites as too
outside the mainstream to be electable.
Carter ran as a Southern modernist and
Washington outsider. He promised change
and won. A similar situation exists
today.
The Carter administration proved to be
a turnoff and a disappointment for a
majority of Americans, as the bad economy
he inherited got even worse under his
stewardship. As a result, the emergence of
Ronald Reagan, an improbable candidate
under normal circumstances, was actually
welcomed as a timely alternative. Voters
generally bought his mantra that
government was the problem, not the
solution, and he won the election. Reagan
and Federal Reserve Chairman Paul Volcker
took on double-digit inflation with
double-digit interest rates, inflation was
pronounced dead, striking air controllers
were simply fired in a no-nonsense way,
and the Reagan years generally got high
marks. The mainstream world was now
finally safe for a conservative promising
limited government, provided his
predecessor had exhausted the public's
tolerance for big government.
Unfortunately, Reagan never really
followed through with his promise to rein
in government spending, the consequences
of which we are struggling with today.
Similar to Gerald Ford, John McCain had
one challenger in particular whose message
of limited government and sound money
resonated with a small but organized
minority. I am referring to Congressman
Ron Paul, who, despite being marginalized
by his other opponents and the mainstream
media, struck a chord unheard elsewhere in
modern politics, and managed to raise more
money than any of the mainstream
Republican alternatives.
The 2008 election features two
candidates likely to make the current
problems worse. Ironically, Barack Obama,
whose policies would likely prove even
more disastrous than McCain's, probably
represents the lesser of the two evils.
This is because Obama is perceived to be
the candidate of big government, while
McCain has wrapped himself in the false
trappings of small government.
In the unlikely event McCain wins, he
will be the Herbert Hoover of the modern
era, completely discrediting capitalism in
the minds of the electorate and setting
the stage for a disastrous ideological
counterreaction in the election that
follows.
If Obama wins, however, while the
economy will fare even worse, it will at
least be clear that big government is to
blame. By the end of Obama's term, the
voters will have had such a bellyful of
noxious government solutions that the mere
thought of any more will put them squarely
at the wheel of the porcelain bus. In such
an environment, a Ron Paul type of
Republican, dismissed as unelectable
à la Ronald Reagan in 1976, may
actually be in a position to capture the
White House in 2012 and finish the job
Ronald Reagan started.
Ultimately, we are going to need a
free-market president, who understands
sound money and Austrian economics and has
the toughness, courage, and leadership
talent to take the bull by the horns and
begin the process of shrinking government,
dismantling programs we can't afford,
minimizing regulation and taxation so
businesses can operate without competitive
disadvantages, and generally taking the
steps that will put us on a path to
becoming a nation of savers and producers
once again. If suffering though four years
of hellishly misguided big government is
the price we pay for true reform, it may
in the end be worth it.
Copyright
© 2008 Peter Schiff. Reprinted with
permission.
Peter
D. Schiff is President of Euro Pacific
Capital, Inc., and one of the few unbiased
investment advisors to have predicted the
current bear market and positioned his
clients accordingly. Schiff appears
frequently on Fox News, Fox Business News,
CNN, CNBC, and Bloomberg TV, and has been
quoted in such publications as the Wall
Street Journal, Barron's, the
Financial Times, and the New
York Times. He is also the author of
Crash Proof, which is published by Wiley.
For more information, please visit
http://www.europac.net/.
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In the wake of declining stock
prices, the bursting of the real
estate bubble, and a weakening
dollar, the American economy is
poised for a prolonged
contraction and U.S. stocks will
suffer a protracted bear market,
so says seasoned Wall Street
prognosticator Peter Schiff.
Having accurately predicted the
current market turmoil in his
recent bestseller Crash Proof:
How to Profit from the Coming
Economic Collapse, the
CNBC-dubbed Doctor Doom has
helped savvy investors protect
their portfolios in some very
turbulent markets--and now, he'll
show you how to do the same.
Written in a straightforward
and accessible style, The
Little Book of Bull Moves in Bear
Markets reveals how you
should protect your assets and
invest your money when the
American economy is experiencing
perilous economic downturns and
wealth building is happening
elsewhere. Filled with insightful
commentary, inventive metaphors,
and prescriptive advice, this
book shows you how to make money
under adverse market conditions
by using a conservative,
nontraditional investment
strategy.
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