Out of the Goodness of Their Hearts...

by Joseph McBrennan

The banks are announcing, one after another, the suspension of foreclosures. Bank of America, as
of late last week, stopped foreclosures in 32 states and then bumped it to all 50. Don’t for a minute
think that they’re doing this out of the goodness of their hearts. The reported reason is about as
likely. What they’d like us to believe is that they’ve discovered several glitches in their processing of
the paperwork, which has thrown into question the legality of the entire process.

Here’s the explanation they want us to believe. They’re blaming this one on the “Robo-signers.” The
explanation goes that some very lazy, robot-like bank employees have been automatically signing
documents without checking them thoroughly. Perhaps this is the actual, and only, reason for the
suspension of the foreclosure proceedings. However, the cynic in me thinks this stinks of political
payback.

What I suspect will come out over the next several months, but definitely after the election, is that the
number of homes that will be given back to banks has grown beyond anyone’s worst estimates. And,
while there were errors by these so-called Robo-signers, the majority of problem loans were legally
processed.

You decide which sounds more likely: Robo-signers or pre-election worries for the incumbents,
especially the Democrats, that they’ve asked banks to suspend until after the elections.

You see, people losing their homes in record numbers just days before a major election is not the
greatest news headlines and completely unacceptable to our leaders.

When a bank decides it’s time to take the keys to your home, most people, right or wrong, now
believe Washington is at least partially to blame for their misfortune.

Don’t forget: Favors are owed. This payback is just a return on the investment Washington has
already purchased with the bank bailouts.

Not foreclosing on homes may sound harmless, or even kindhearted. However, it may be
devastating to the residential real estate markets already way underwater.

Home Prices Down Another 30%?

Could anyone comfortably enter this real estate market when the outlook is so cloudy? I’ve seen
credible predictions calling for at least another 30% drop in prices.

Is this number too high? Too low? The problem is, with the banks holding back what must be a
staggering flood of new foreclosures, anyone considering purchasing a home will wait.

Basic supply and demand teaches us that if you know that a greater supply of something is going to
be coming on the market soon, in this case homes, you wait for the glut to show up and prices to
drop.

We currently have record high levels of unsold new and existing homes. We now learn that the
banks are going to hold back their supply while they straighten out their “paperwork” problems.
(Which, coincidentally, they’ll finish a few weeks after the elections.)

If the above theory is even partially accurate, we could see residential real estate drop further and
our economy follow it straight down.
Banks Bailing Out Politicians

What we’re witnessing is the banks bailing out the politicians with this temporary suspension on
foreclosures.

In reality, we’re again watching an artificial delay in the liquidation of unprofitable investments. In the
case of the banks, those investments are home mortgages. Until we allow the markets to dispose of
these overvalued assets, without interference from the government, there is no way to accurately
gauge the value of homes, or for that matter, any investment.

There was also another time in our history when government and corporations colluded to artificially
support prices like now. It was called the Great Depression. It didn’t work then and it won’t work now.

Russian Roulette, Bernanke Style

I wasn’t purposely segueing from the Great Depression into Big Ben’s next scheme, but somehow it
seems to fit.

Quantitative Easing, or more commonly known as “QE,” is the act of our Federal Reserve creating
billions (or trillions) of dollars out of thin air. It can be done by the Fed increasing (easing) the money
supply by purchasing U.S. government bonds.

This puts dollars into circulation and removes bonds from the market. A lot of people are referring to
this round as QE2. As you’ll recall, the Federal Reserve Bank a couple of years ago, also in an
attempt to stimulate and stabilize the economy, purchased not only Treasury bonds, but a great deal
of junk debt as well.

The result of any more QEs will be the continued devaluation of our dollar. The situation would be far
worse, except the Europeans as well as the Japanese are trying to devalue their currency as quickly
as our government attempts to steal value from each greenback U.S. citizens hold. As I said last
week, it’s a race to the bottom.

Unfortunately, robbing purchasing power from your citizens can go unnoticed for a while, until
inflation hits. However, stealing from your banker, the Chinese, doesn’t ever get overlooked for long.
Scolding them and blaming them for our self-imposed economic disasters, as our Congress and
Treasury Secretary continue to do, amounts to playing Russian roulette by yourself. It may bring a
temporary thrill, but sooner or later you’re blowing your brains out.

The Chinese are losing their patience. It is a dangerous game that we should avoid.

And, if QE had worked originally, we’d really not be discussing QE2.

It will not work. It hasn’t worked over the past three years here; it didn’t work for the two decades the
Japanese tried it; and it won’t work in Europe. There will, however, be isolated places where a great
deal of money will be generated. You should be able to guess where: Wall Street, large banks,
unions and anyone tied to the government should profit nicely. Just the expectation of QE2 has been
enough to send markets higher.

Ordinary Americans, the ones who don’t have access to the credit markets, even if they actually
wanted to borrow, will continue to suffer through this depression.

What too few are talking about is that QE, whether it’s QE2, QE3 or QE20 (and there will be more
than two), does nothing except make a select few rich and impoverish the rest of us.
That, of course, is where things are getting tricky for our friend Ben Bernanke.

Seventy percent of our economy is driven by consumption. I’m talking the Main Street shoppers, not
Wall Street or the D.C. elites. The moms and pops of this world have been fooled into believing that
your entire wealth could be stored in your home. That this single asset was all the diversity you’d
ever need. And, with the Fed keeping home prices artificially a hair higher than the inflation rate, it
was an easy myth to believe.

Unfortunately, as with all dreams, sooner or later the sleeper must wake up.

After a 30-year nap, we’ve come to realize that our wealth was a mere illusion. While we slept, our
fearless leaders destroyed our manufacturing base to the point that we can no longer build anything
here at home.

The United States has been blessed with boundless natural resources. There are no shortages,
even today after aggressive exploration and utilization for more than 100 years. We have plenty of
coal, oil and natural gas, and all in quantities too great to accurately measure. We even have more
timberland than a century ago.

Unfortunately, each one of these God-given economic advantages has been eliminated or restricted
by federal intervention and/or regulations.

We’re no longer the greatest manufacturer on the planet and it’s not because we’ve lost our
competitive edge or somehow our capacity to work.

We’ve lost the mantle of manufacturer to the world not because labor is cheaper overseas, but
because government intervention is so much more expensive here. They’re not the same thing.

Ben’s problem is that with few manufacturers that can afford to create under the burden that is our
government, his entire bag of tricks is relying on a consumer that wishes not to borrow or consume.
He’s pushing on a string.