Oh, Say, Can You Still See?
Part 9: Real Estate Bailouts

By Dr. Russell McDougal

Dear Reader,

You are being stolen blind.  The Fed is the master thief.  They print the excess money that blows the bubbles that inevitably pop.  The Fed is an instrument of inflation and it is directly responsible for the current bust cycle.  Real estate remains the epicenter of an ongoing U.S. and global financial disaster.

Our present central planners decided early this decade that an officially recognized recession was not to be allowed.  The previous Fed-inspired bubble was the high-tech bubble that burst in 2000.  The 9/11 atrocity was also a tremendous blow to the American economy.  The Federal Reserve, with little to no trust in American resiliency, ingenuity, and work ethic, decided to intervene.

Here’s what they did:

It’s called four years of historically cheap money from late ‘01 to late ‘05.  It was designed to keep the fiat party going.  Everyone within the mammalian species was encouraged to get rich through borrowing and buying property and homes.  This is a classic credit expansion.

You can borrow hundreds of thousands of dollars for homes or other “assets,” but you cannot borrow your way to wealth.  True widespread wealth comes only through productivity and savings.  The Fed, banks, government agencies, and a willing public created a new ground zero - real estate.

As you’ve read in previous articles, risky mortgages were packaged together, leveraged, and pedaled across the globe.  “Sub-prime” loans have failed en mass.  That story is still playing out.  There has been no containment.  Variable-rate loans as well as the supposedly less risky “prime” loans are also in the crosshairs and failing.  Both residential and commercial real estate continue to fall.  Banking has frozen up, and worldwide central bankers have their printing presses on tilt.

Any time banks are exceedingly stressed you’ll hear talk of bailouts.  Banks and their official instruments are lining up at the feeding trough as I type.  Let’s look at how a real estate bailout is destined to play out.  Who are the primary players that are likely to be in the spotlight in the coming months?

1)  Fannie Mae (FNM) - Fannie May is a publicly traded company with a government-sponsored mission.  Here are two official company statements in this regard:

“Fannie Mae has a federal charter and operates in America's secondary mortgage market to ensure that mortgage bankers and other lenders have enough funds to lend to home buyers at low rates.  Our job is to help those who house America.”

“The government established Fannie Mae in order to expand the flow of mortgage funds in all communities, at all times, under all economic conditions, and to help lower the costs to buy a home.”

2)  Freddie Mac (FRE) -

“Freddie Mac's mission is to provide liquidity, stability and affordability to the housing market.”

“Freddie Mac is a stockholder–owned corporation chartered by Congress to increase the supply of funds that mortgage lenders, such as commercial banks, mortgage bankers, savings institutions and credit unions, can make available to homebuyers and multi family investors.”

Long-time readers have heard me mention the importance of Fannie and Freddie.  Although they are “competitors,” I like to call them the Krueger kids (Freddie Krueger and his sister, Fannie).  Their mission statements sound admirable, especially to those who believe government can actually be of benefit in the markets.

On the other hand, these government-sponsored corporations were clearly used to inflate the real-estate bubble.  The Fed provided cheap “liquidity” through these vehicles.  You can rest assured there are millions of Americans who will soon wish Fannie, Freddie, and other real estate do-gooders hadn’t been quite so helpful.

Neither company has been heavily involved in sub-prime real estate loans.  Their market has been the higher-end "prime" mortgage lending.  They packaged mortgage loans together and sold them throughout the financial system as bonds.  If and when real estate continues to fall, even the loans held by these companies will come under stress.  Did I mention Fannie and Freddie love to use extreme leverage?

These two Krueger Kids back some $4.8 trillion in home loans!  Fannie just reported a quarterly loss of $1.4 billion.  Freddie reported a quarterly loss of $3.29 per share, shocking analysts on the downside.

You should know that the word fraud is frequently associated with Freddie and Fannie.  Their accounting has been similar to that which brought Enron down.  They have paid massive fines recently to the tune of half a billion dollars.  They've spent over a billion dollars straightening out their books.  I guess that is what happens when you are government "sponsored."

Here are some hideous "F words" heading your way - Fed, Fraud, Fannie, and Freddie.  Watch these government-sponsored institutions closely as 2008 plays out.  These are your first keys to the coming bailouts.  These are the end results of decades of fiat abuse.

I will present more of the real-estate bailout players in next week's editorial.  It would be nice to sum this all up in one article but the topic is too complex.  It is also a very disturbing issue, as many international readers have expressed.  I am in complete agreement that we should all be mad as hell about this fiasco.  Better to be forewarned.

Protection comes in the form of anti-fiat tangible assets.  Gold represents freedom.

Invest Resourcefully,

Rusty

[Ed. Note: Dr. Russell McDougal has dedicated years of study and investing in the natural resources exploration sector. During that time he has closed out DOZENS of gains of 500%... 1,000%... 2,000% and more! Currently he is sitting on multiple thousand percent winners, including one stock that is up a whopping +5,000%. And for a select group of investors, Rusty has agreed to share his secrets of success... and his top stock recommendations. Click here to learn more... ]

Market Watch

Maybe Inflation Isn't Tame After All

By Charles Delvalle

The Fed has said that they are more focused on growth than inflation.  But that doesn’t mean that inflation is anywhere under control.

Last year, the Producer Price Index (PPI), which measures the prices producers pay for goods, jumped up by its highest level since the 70s.  For the year, producer prices were up 6.3 percent.  That’s far higher than the Fed’s inflation comfort zone of 1-2 percent.

At this point, producers have two choices.  They could pass on these price increases to consumers, stirring inflation.  Or they could eat the price increase and kill their margins and profits.

Either way you have it, consumer spending or earnings season will be affected.  Both spell a rocky future for the market in 2008.

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