29 April 2008

where lies the blame

BLAME FOR THE credit crunch has landed squarely on the big Western
banks, with government and the monetary authorities leading the

This seems a bit rich. Government and central banks were the chief
architects of the current difficulties. And as usual, their reaction
to this crisis is just as wrong-headed as their reaction to the
last crisis.

It's also certain to make the next crisis worse still.

Unfortunately for the US and Britain, the authorities remain too
convinced of their own powers to see the truth of this. There
they sit, Canute-like before a sea of economic reality. They truly
believe they can command the tide.

After all, this was how they responded from 2001-2005, force-feeding
money to the big banks and mortgage lenders at very low rates
of interest.

Thus did Alan Greenspan and Ben Bernanke switch the Tech Stock
Bubble for today's Subprime Crisis. Thus did Gordon Brown here
in London encourage all those "unbroken years of growth" that he
still loves to brag about. To perpetuate the feel-good factor,
Brown continued pumping the UK economy with cheap money while
preaching sanctimoniously about prudence.

And my, how he bragged! During the good times, Britain's unbroken
growth all came down to Gordon's brilliance.

Funny, isn't it, how the downturn is now somebody else's fault?

But in economics, as in life, the hangover reflects the
party. Creating artificial demand is sure to create exactly the
situation we're in today.

So let's spell it out and see if Gordon and Ben can get it, before
they and their wretched textbooks destroy the wealth of cautious
savers and their children once more.

Whenever and wherever you find a surfeit of money, bankers will
face a choice:

#1. Take the money and lend it; or
#2. Refuse the money and lose out.

The problem for banks – as for all financial companies during a
bubble in money – is keeping up with the game. If they don't take
the cheap money on offer, they will under-perform their competitors,
and that will end in a take-over.

Another bank – making bigger profits by taking the cheap money
– will buy out the laggard. That's how cautious banks caught
playing it safe, rather than joining the fun, are dragged to the
party regardless. Their kicking and screaming is drowned out by
the clamor for "total shareholder returns".

So the reason the banks you now see around you all look like
incautious buffoons is that, between 2001 and 2005, the US and
European authorities created conditions in which only the incautious
could prosper. Government killed off the cautious by pouring cheap
money down the throats of the most aggressive banks.

Socialists and central planners just don't understand that you
cannot command an economy onto such an unnatural path without
later paying the price. Cheap money destroys caution and nurtures
speculation. When the world is awash with it, banks must take ever
bigger and bigger risks, or they will wither and die – it's as
simple as that.

The irony of the Bear Stearns' rescue seems lost on the media. Yet
it was Bear Stearns that first signaled the start of today's crisis
last June, when its "enhanced leverage" funds went bust. And if
Britain's new banking bail-out works this time (and let's hope it
doesn't) then no British bank will fail either.

The message will then echo round the City of London – as on Wall
Street – that you simply must take all the cheap money on offer
and punt it straight out to consumers and business.

By 2012 if not before, we could find the Bank of England effectively
bankrupt, sitting on a pile of "quality" mortgages as collateral
as house prices tumble from even higher peaks than last summer's top.

And the big investment banks? They will be pitching for a fresh
rescue from their next over-priced speculation.

Wind-swept farmland? Ocean-floor mining? High-orbit solar
panels...? Who knows what fresh nonsense the banks will be forced
to finance in the government's scramble for un-ending growth. Who
can guess at how much the banks – and then us - will lose as a
result. Such a slow-motion disaster, however, is baked in the crust
when those in power subvert the economy to their own over-inflated

Witness Argentina, Turkey and Zimbabwe already this decade. Now
thanks to Gordon Brown's self-belief in his personal, hands-on
management of the economy, the UK is thoroughly addicted to monetary

The United States, of course, is strung out on Ben Bernanke's junk,
first peddled by Alan Greenspan when Bill Clinton's White House
proclaimed "It's the economy, stupid!" As in the UK, breaking this
habit will hurt; the banks themselves warn of outright depression
if taxpayers don't front up today.

But cold turkey, according to Keith Richards at least, is just
five days of climbing the walls. (And the Stones' guitarist should
know!) Whereas, if we stick with our habit, then it could soon be
our turn to queue in the streets bearing armfuls of cash, fighting
over the last loaf of bread in the shop.

The great private antidote to the Browns and Bernankes of this
world remains gold. Those people owning it over the last couple of
years now stand unaffected by the losses sweeping through financial

Yes, it's come a little off the boil since mid-March, but the
fundamentals remain stacked in gold's favor.

** Flat-to-falling production worldwide;
** Money creation still running amok;
** Growing investment demand from a very low base (particularly
in the Far East);
** Rising inflation in your cost of living;
** Control-freaks running government; yes-men in charge of
monetary policy.

It's always painful, of course, to buy something at twice the price
it was just two and a half years ago. But markets – like gold
mines – don't easily give up their riches.

What's hardest to do can often prove the best course.

This current lull in the gold price might just be your best chance.

Adrian Ash
Research, BullionVault

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