Side Effects of U.S. Treasury Massive Bailout Plan: For Better or Worse?

Why you need to position yourself for safety, liquidity and continued business operations as conditions worsen

Treasury Secretary Paulson and Fed Chairman Bernanke’s massive bailout for the banking industry is causing side effects.  Will their “remedy” cure the patient, namely the U.S.economy, as well as other foreign economies, or will the remedy kill the patient?

While banks have received some interest-rate relief and the LIBOR rate (the rate the banks loan to each other) for short-term funds has eased somewhat, the unintended consequences will be grave, according to Martin D. Weiss Ph.D of Weiss Research, a leader in the fields of investing, interest rates, financial safety and economic forecasting.

You must remember, Weiss points out, that to fund the bailout, the government will have to borrower massive sums, and the mere expectation of that huge avalanche of borrowing is already driving long-term interest rates higher:

• The U.S. Treasury is now being forced to pay the highest rates since July.  Why?  The fear of huge bond supplies to finance the bailout is driving up interest rates on Treasury bonds and that’s sending mortgage rates through the roof.

• U.S. cities and states all across the U.S. are suddenly getting slammed with surging borrowing costs.

• The housing market, where this whole crisis began, is taking the biggest hit of all: the sharpest one-week surge in mortgage rates since April 1987.

The average 30-year rate jumped to 6.47% in the week of October 10, according to the Mortgage Bankers Association. That was up from 5.98% a week earlier and just shy of the August high (6.58%), itself the highest in more than a year.

How can rates be going up when the economy is tanking and the government is throwing everything it can at the banking sector and credit markets?

As Weiss puts it, because bond investors are dumping the heck out of bonds — and when bond PRICES fall, bond YIELDS (interest rates) rise.Why are investors selling bonds? Because the budget deficit soared to $454.8 billion in fiscal 2008, which ended September 30. That was more than double the $161.5 billion deficit in 2007 and the highest in the history of the country.

Thanks to all the fresh bailout programs, the deficit will likely surge by a few hundred billion MORE dollars in fiscal 2009 — and it could easily top $1 TRILLION.That means a flood of Treasury debt the likes of which we've never seen is going to wash over the market in the coming year or two.

Bond traders know that will overwhelm bond demand. So they're not sticking around. They're selling the heck out of bonds NOW, driving prices down and rates up.

Higher interest rates will sideswipe an already sinking real estate market. Commercial real estate is getting killed.  Lenders are shutting down their operations.  They are not making commercial loans and they are closing business lines of credit – even for businesses they have done business with for years.  

These consequences will send the economy into an even steeper tailspin; force more consumers and businesses to default on their loans and, ultimately, dig an even deeper hole in bank balance sheets.The government’s bailout funds will be exhausted much sooner than anyone dreamed possible and we’ll have a banking panic that makes the recent experience seem mild by comparison.

How To Position Yourself for Safety, Liquidity and Continued Business Operations

• Cash will be king.  Keep your cash in banks and thrifts with the highest safety ratings and/or in short term U.S. T-Bills, either directly with the Treasury Department or in a Treasury-only money market account with check writing privileges.

• Liquidity will be a must.  Even if you have FDIC insured accounts, if your bank fails, you don’t know how long it will take for the government to get your money in your hands.

• Non-bank lending sources will be the only alternative source of money for business owners, real estate investors and developers.  Getting the banks to give you a loan for your business or commercial real estate will be nearly impossible for most borrowers as the lenders cherry pick the loan requests – if they loan at all.  You will have to rely on non-bank lenders. 

Fortunately, I have these sources of money available right now.  They are able and eager to provide financing.  Simply fill out my Quick Qualifier online loan request form on the homepage to access the money you need now.

[tags]money, real estate, finance, investing{/tags]