Bill Fleckenstein

Contrarian Chronicles12/10/2007 12:01 AM ET

Mortgage bailout just makes it worse

This mess of a plan will further devalue the assets tied to those bad loans, add to the markets' confusion and give homeowners a reason to quit making payments.

By Bill Fleckenstein

There is a huge contingent of people who anticipate a rally into the year-end. They are more terrified of missing it than they are of anything in the credit arena. That we have a credit crisis and a dollar crisis at the same time means nothing to them.

After all, these are the same adults who believed in a Goldilocks economy. So why not believe the "H" in Treasury Secretary H. Paulson's name stands for Houdini? With the wave of a magic wand, he will allow folks to resume payments on their mortgages at a rate they can afford -- and thereby make all of our problems disappear.

Real estate's residue

For those who are confused, the problem is simple: Too many Americans own homes they once could "afford" due to the credit mania that continually inflated prices. But now that credit is contracting, so are home values.

This bailout will complicate the lives not just of homeowners but of anyone who touches the mortgage paper after them. Allowing someone to pick whatever mortgage rate they'd like to pay will solve nothing. It will only make mortgage-backed assets worth that much less, with the very stocks that rallied recently on this idea being the ones negatively impacted.

Wild rallies notwithstanding, no problems have been solved. Most of the ideas trotted out in Hank Paulson's absurd mortgage-bailout plan will increase the level of confusion while inducing more people to stop making mortgage payments. Of course, Wall Street is relying on crony capitalism to "paper" over all the bad mortgage products it underwrote.

An impassioned plea for responsibility

Regular readers know I have decried this mockery of free markets -- most recently in my Oct. 22 column, "A super-duper bad-loan bailout scam" -- ever since the whole notion of bailing out mortgage-related products first popped up. This week, I would like to quote from Dennis Gartman's eloquent comments on the consequences:

We wonder who it shall be that will make the decisions involved as to which mortgagee shall be helped out and which shall be left behind. What shall become of those mortgagees who had paid up their mortgages; accepted the newer, higher rates; and have been consistent in meeting their obligations?

Are contracts no longer to be viewed as law, but rather are to be viewed as nothing other than mere whim? If we are to allow mortgagees who are in trouble to stand down and have their problems taken up by taxpayers, what then of contracts anywhere? Can we demand foreign governments, or foreign companies, or foreign individuals to stand by their commitments to Americans if Americans will not stand by their commitments to one another?

No one wants to see the television photo-op of poor people pushed from their homes at Christmastime, or in the depths of winter. No bank wants to take delivery of a foreclosed-upon home when it could be left in the hands of the former home owner, with the mortgage shortage to be worked out over time.

However, this is a country of law, which believes in the sanctity of contract agreed upon by those who've consented to the binding nature of that contract. If the parties involved wish to change the contract, and if agreement can be reached to do so, then it can and should be done. But to have the government force the issue . . . is morally wrong, with implications that shall redound into any and all other economic concerns.

Flawed forex thinking

Finally, some thoughts on the dollar. I continually see commentary to the effect that it must rally, given all the dollar bears around. I agree that nearly everyone seems to be bearish on the dollar. However, I think folks trying to buy the dollar on that idea are being far too clever. I don't really believe the positions held by those dollar bears are as high as the pundits would have us believe.

Indeed, two stories in the current Economist that are cited as dollar-bullish by contrary-thinking types aren't even bearish -- they argue that the dollar's decline will be manageable. (However, what the magazine emblazoned on its cover -- "The Panic About the Dollar" -- seems to suggest otherwise.)

Grading papers

My belief is that though the dollar has fallen a long way against many currencies, the downside process is not finished. As to what currency might lead the charge prospectively, I wish I knew, though I have a hard time believing it will be the euro.

Of course, all of these currencies are just pieces of paper, a point demonstrated last week by Canada's central bank when it saw fit to cut interest rates.

Video on MSN Money

Jim Jubak
Jubak's Journal: Is the credit crunch winding down?
Distressed sales of assets may be bad news for sellers such as E*Trade and Lennar, but the emergence of buyers suggests the credit crunch is starting to work itself out, MSN Money's Jim Jubak says.

Having said that, I think the Canadian dollar is one of the best pieces of paper on the planet and far superior to the U.S. dollar. I believe the former overshot to the upside when it reached about $1.10 U.S. and that some of its recent weakness had been in anticipation of Canada's rate cut.

I intend to watch for where the Canadian dollar stabilizes and then buy a fair amount of the currency.

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