Weiss White Paper to Congress on TARP Bailout Plan

Category 5 Credit Market Hurricane!

Weiss Research Inc Sept 25, 2008
"... Too Much, Too Soon for the U.S. Bond Market. There should also be no illusion that the market for U.S. government securities can absorb the additional burden of funding massive government bailouts without traumatic consequences.

In its Fiscal Year 2009 Mid-Session Review, Budget of the U.S. Government, the
Office of Management and Budget (OMB) projects the 2009 federal deficit will rise to $482 billion. At the same time, the OMB seeks to minimize this record.

SIPC Annual Report 2007, http://www.sipc.org/pdf/SIPC_Annual_Report_2007_FINAL.pdf, page 8. 25 See July 1991 testimony by Martin D. Weiss before the House Subcommittee on Commerce, Consumer Protection, and Competitiveness and February 1992 testimony by Weiss before the Senate Committee on Banking, Housing, and Urban Affairs regarding the insurance industry failures. Weiss Research, Inc.

Deficit by stating it will be only 3.3% of estimated GDP, which is lower than the
recent peak of 3.6% of GDP. However, the OMB made this projection before the recently announced or proposed bailouts. Considering those that have come to light in the last fortnight alone, the potential bill for the government’s largesse can be calculated as follows:

Fannie Mae and Freddie Mac $200 billion
AIG Insurance Corp. 85 billion
Financial market bailout proposal 700 billion
Total $975 billion

This bill, approaching $1 trillion, is so extreme, it is undeniable that:

1. It could double or triple the federal deficit in a very short period of time.
2. Such a dramatic increase in the deficit would drive up the cost of borrowing not only for the U.S. Treasury, but also for other bonds and for millions of Americans seeking a mortgage or other credit, since Treasury yields are the benchmarks against which most borrowing is based.
3. To the degree that the Federal Reserve purchases U.S. government securities for its own account to help support bond prices, it would devalue the U.S. dollar, risking a dollar collapse and the flight of much-needed foreign capital from the U.S.
4. Ultimately, either of these outcomes — sharply higher U.S. interest rates or a U.S. dollar collapse — could seriously aggravate the very debt crisis that the bailout plan seeks to address...."