World Paper Currency Values Race to Bottom

[EZ_E]

Here are three articles that follow a progressive path from a nation's decline to a world economic order.

 

[font:Arial Black]World Paper Currency Values Race to Bottom[/font]

 

 

[font:Comic Sans MS]By Patrick A. Heller, Market Update

March 24, 2009

 

For some time, a number of analysts have suspected that the Federal Reserve was secretly purchasing U.S. Treasury debt as a means to support the value of the dollar. Last Wednesday, March 18, the Federal Reserve openly announced that it would be purchasing $300 billion of Treasury debt.

 

Upon this announcement, the U.S. dollar index immediately fell 2.5 percent and the price of gold soared more than $50. The purchase of U.S. Treasury debt by the Federal Reserve is an outright increase in the money supply. In other words, it is blatant inflation. The U.S. government has now publicly revealed its decision to sabotage the value of the U.S. dollar in order to support the U.S. stock markets.

 

Many more American and foreign holders of U.S. dollars now realize that they need to move more of their wealth out of the U.S. dollar and U.S. dollar-denominated stocks and bonds into other safe havens - such as gold and silver. Of course, those who realized what was happening several years ago have already had the opportunity to protect themselves at more advantageous price levels.

 

Last week's action by the Federal Reserve did not occur in a vacuum. The Swiss central bank recently announced a deliberate policy of devaluing the Swiss franc against other currencies. The Bank of England has also announced that it will create an enormous amount of new paper currency to try to cure the United Kingdom's financial problems. The European Central Bank is expected to match these moves (if the internal stresses threatening the euro zone don't bring down that currency first).

 

With governments around the world seeking to lower the value of their currencies as a way to manage financial crises (to more easily pay back massive debts and to stimulate exports), tangible goods, especially precious metals, are almost certain to rise in price.

 

It's not just private parties who are now buying gold. Russia's central bank, at least one national central bank in the euro zone, and at least two South American central banks are openly adding to their gold reserves. Several other central banks are suspected of secretly adding to their gold reserves. If very many more central banks start to openly add to their gold reserves, we could see an all-out gold buying/currency dumping frenzy.

 

Here's one more indicator that could foretell a near-term explosion in the price of gold - the backwardation of silver prices in the London market. In normal commodity markets, contracts for delivery in future months trade at a premium to the current, or spot, month. In general the premium is tied into prevailing interest rates. Such normal markets are said to be in contango. When there is an unusually strong demand for immediate delivery commodities, it is possible that the current spot month price could exceed the price for delivery in future months. This condition is called backwardation.

 

The London silver market has been in continuous backwardation for about two months. This portends an imminent supply squeeze that could spill over into other precious metals markets, with much higher prices for all of them.

 

When Warren Buffet's Berkshire Hathaway bought 129.7 million ounces of silver contracts in 1997 for delivery in early 1998, then requested physical delivery instead of rolling over the paper contracts, the price of silver soared. On Aug. 6, 1997, the closing U.S. silver spot price was $4.30. Six months later, on Feb. 5, 1998,, it was $7.23, a 68 percent increase. Late last year, Warren Buffett spent about $7 billion buying shares in Goldman Sachs and General Electric. Even with the recent stock market surge, he has lost a substantial portion of these investments. I guarantee you that if he had instead put the same amount into purchasing silver for physical delivery, Buffett would be in a huge profit position today.

 

Compared to the trillions of dollars that are flooding the paper asset market to try to stem the downfall, it would take a comparatively trivial amount of investor interest in buying gold and silver to send prices to double or triple current levels.

 

Notes on last week's column: The best information I have as to the source of the gold that was dumped onto the market on March 6 in an effort to drive down gold prices is that it came from exchange-traded funds (ETFs). Many ETFs are allowed to lease gold, though I suspect an intermediary (ultimately I believe to be the U.S. government) subsidized leasing gold at a loss that day.

 

Also, several readers who contributed comments on last week's column wondered how long the U.S. government might be able to manipulate gold prices. A 1961 document prepared for the Federal Reserve outlined how the U.S. government could do so. I personally think that the available documentation points to manipulation going back at least to the mid-1990s.

 

Someday the U.S. government will run out of assets and other tactics to suppress gold prices. The facts that it has been unable to prevent the nearly quadrupling of the gold price during this decade and that the manipulation has become more obvious as time goes on lead me to expect that the U.S. government is getting close to the end of its ability to suppress gold's price. How close are we? No one knows for sure. Those in the government working on the manipulation are not talking, if even they have any idea. But if you consider that the gold price suppression may have been going on for decades, however long it takes for gold to reach $1,500, $2,000, and higher will seem short in comparison.

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Zimbabwe Closes in on Record

 

 

By Kerry Rodgers, Bank Note Reporter

March 16, 2009

 

Readers will be aware that hyperinflation has long been alive, well and thriving in Zimbabwe. Back in February 2007 the country became the first to hyperinflate in the 21st century when the monthly inflation rate achieved 50 percent. This is taken as the minimum rate to allow a country to qualify as a fully paid-up member of the hyperinflation club. It equates to 12,875 percent per year.

 

Promotion through the ranks has been rapid for Zimbabwe. Last October it achieved second place in the all-time hyperinflators' stakes when it nudged aside Yugoslavia's January 1994 monthly rate of a miserly 313,000,000 percent.

 

Sometime this year the country could become the new world champion. To take the number one spot, Zimbabwe must eclipse Hungary's stupendous achievement of July 1946. Then the monthly rate peaked at 13,000,000,000,000,000 percent with prices doubling every 15.6 hours.

 

On Friday, Jan. 16 The Reserve Bank of Zimbabwe (RBZ) marked the country's new international status by announcing plans to issue Z$10 trillion, Z$20 trillion and Z$50 trillion notes along with one for Z$100 trillion. At the time Z$100 trillion equated to about US$60.

 

As in the past the announced official intent was to introduce the new denominations gradually starting with the Z$10 trillion. However, such is the exponential growth of the country's inflation that the $100 trillion proved to be needed sooner rather than later.

 

The BBC noted wryly that a Z$50 billion note had been issued three days prior to the announcement on Tuesday, Jan. 13 and that was less than a month after release of a Z$500 million bill. Somewhere in the intervening days the RBZ had abandoned the daily bank cash withdrawal limit. It had become irrelevant. Not only was it barely sufficient for a few loaves of bread but most banks had long lacked sufficient cash float to meet the demand.

 

Then, on Feb. 3, the RBZ revalued the Z$100 trillion issue to ZN$100 by chopping 12 zeros from the Zimbabwe dollar. This added to the 10 zeros slashed back in August 2008. As on that earlier occasion, record keeping was having problems keeping abreast of the size of the numbers involved. The bank's governor, Gideon Gono, assured one and all that the move was meant to bring convenience to the public, and introduced six brand new currency denominations of one, five, 10, 20 50, 100 and 500 dollars with immediate effect. The three-week-old trillion dollar notes will cease to be legal tender on June 30.

 

The country has also adopted a multiple currency trading system - officially. Both the U.S. dollar and the South African rand now circulate alongside the ever-inflating Zimbabwean dollar with government blessing. For many months the two alternative currencies have been preferred for all cash transactions on the black market. But now essential civil servants are paid in both rather than the Zimbabwe dollar.

 

An excellent account of Zimbabwe's hyperinflation, including comparisons with other infamous currency crashes, is given by Steve H. Hanke, professor of Applied Economics at John Hopkins University. It is recommended to all those addicted to collecting hyperinflation monies. Try: www.cato.org/zimbabwe.

 

Back on June 25 last year Hanke observed: "Zimbabwe is in the late stages of a classic hyperinflation - Inflation is galloping ahead as the supply of Zimbabwe dollars surges and the demand for them shrinks. Eventually, the currency will totally collapse as people simply refuse to accept it." In effect this has happened with the widespread use of the U.S. dollar and rand.

 

And in November, when the monthly rate raced past 80,000,000,000 percent, Hanke observed that all non-cash Zimbabwe dollar transactions had ceased and the Zimbabwe Stock Exchange had stopped trading. He hence declared the non-cash Zimbabwe dollar to be dead, i.e. no checks, no plastic money.

 

As a consequence, and with few goods in the shops to measure inflation on at a practical level, Hanke sees no point in trying to estimate, let alone calculate any inflation figure beyond this point. In an article in Forbes Asia of Dec. 22, he noted the annual rate, based on the 80 billion percent November monthly rate, would be 6.5 quindecillion novemdecillion, that's 65 followed by 107 zeros percent - or 98 percent a day if you prefer.

 

Nonetheless a lot of folks in Media Land continue to make estimates and display their skills with the names of really big numbers, prompting some derisive comments and observations.

 

When Gary Els, vice chairman of the Astronomical Society of Southern Africa, read a report in The Times of Feb. 4 that the annual inflation rate had passed, a conservative, five sextillion, or 5,000,000,000,000,000,000,000 percent, he realized that in size the rate will soon approximate the number of stars in the known universe.

 

In a blog, he calculates that if a Zimbabwe dollar is 0.1mm thick, such that a stack of 10,000 notes is 1 m high, then a pile in which one dollar corresponds with every percentage point of Zimbabwe's February five sextillion percent inflation, would reach from earth to the edge of our solar system. In fact Voyager 1, launched by NASA in 1977 and currently trundling along beyond the orbit of Pluto at 17 km/s, will not arrive at the top of that pile until 2025, by which stage it will have grown considerably higher. Goodness knows what it would stack up to using Hanke's estimation.

 

Whatever the real rate, Zimbabwe may soon become the new world champion. It could happen any day soon.

 

WORLD LEADERS CONSIDERING SINGLE CURRENCY AMIDST SEVERE GLOBAL ECONOMIC CRISIS

 

[font:Century Gothic]

(Washington, D.C., March 19, 2009) -- Amidst the global economic crisis in which upwards of 45% of the world's wealth has been lost in the last 18 months, talk of radically restructuring the global economic system is growing. In recent weeks, leaders in Europe, Africa and the Middle East have proposed scrapping the current economic order and going to a single common currency.

 

A story in yesterday's Moscow Times is creating quite a stir in particular. At the April 2nd meeting of world leaders in London (the G20), the Kremlin is reportedly set to propose a new global common currency system to replace the U.S. dollar as the international currency of choice.

 

The story notes that "the Kremlin's call for a common currency is not the first in recent days. Speaking at an economic conference in Astana, Kazakhstan, last week, Kazakh President Nursultan Nazarbayev proposed a global currency called the 'acmetal' - a conflation of the words 'acme' and 'capital.' He also suggested that the Eurasian Economic Community, a loose group of five former Soviet republics including Kazakhstan and Russia, adopt a single noncash currency - the yevraz - to insulate itself from the global economic crisis…."

 

"Nazarbayev's proposal...garner[ed] support from at least one prominent source -- Columbia University professor Robert Mundell, who was awarded the Nobel Prize in 1999 for his role in creating the euro. Speaking at the same conference with Nazarbayev, he said the idea had 'great promise.' The Kremlin document also called for national banks and international financial institutions to diversify their foreign currency reserves. It said the global financial system should be restructured to prevent future crises and proposed holding an international conference after the G20 summit to adopt conventions on a new global financial structure."

 

Iranian President Mahmoud Ahmadinejad last week called for a single regional currency for 400 million Muslims in the Middle East. "The process of obtaining one single currency in the trade and exchanges among members, and in the next stages with other countries and neighbors, should be designed," the Iranian leader said March 11th.

 

Libyan leader Muammar Ghadafi, recently elected leader of the African Union of states, is calling for a single continental currency for all of Africa and has persuaded 200 tribal leaders to call him the "King of kings." The BBC reported in February that Ghadafi "envisages a single African military force, a single currency and a single passport for Africans to move freely around the continent."

 

Now comes a new story on this morning on the Reuters news wire: "U.N. PANEL SAYS WORLD SHOULD DITCH DOLLAR."

 

"A U.N. panel will next week recommend that the world ditch the dollar as its reserve currency in favor of a shared basket of currencies, a member of the panel said on Wednesday, adding to pressure on the dollar," the story noted. "Currency specialist Avinash Persaud, a member of the panel of experts, told a Reuters Funds Summit in Luxembourg that the proposal was to create something like the old Ecu, or European currency unit, that was a hard-traded, weighted basket. Persaud, chairman of consultants Intelligence Capital and a former currency chief at JPMorgan, said the recommendation would be one of a number delivered to the United Nations on March 25 by the U.N. Commission of Experts on International Financial Reform. 'It is a good moment to move to a shared reserve currency,' he said."

 

The "Euro" is the model many are looking to, in part because 20% of the world's foreign exchange reserves are already held in euros. Last year, the EU celebrated the 10 year anniversary of the creation of the "euro."

 

These are curious developments given that scholars of Bible prophecy have long noted that according to the Scriptures, in the "last days" the world will see the emergence of an entirely new international financial architecture, complete with a single common global currency created and mandated by the leaders of Europe. The Bible indicates that eventualoly no one on earth will be able to engage in commerce without "buying in" to the new cashless system. The prophecy is found in Revelation 13:16-17, which reads: "And he [the world leader that emerges from a revived Europe] causes all, the small and the great, and the rich and the poor, and the free men and slaves, to be given a mark on their right hand or on their forehead, and he provides that no one can buy or to sell, except the one who has the mark, either the name of the beast or the number of his name."

 

Cynics and skeptics have long dismissed such talk as the province of "religious nuts" and "prophecy buffs." But the discussion is now being advanced by major world leaders. It's too soon to say where this will all lead, but these are certainly developments worth watching. [/font]

 

[MorganMan]

Yup, we are getting closer....

 

 

MM

[Schatzy]

MM.....Nice Coin!!

[World Colonial]

Its merely an assumption that this future global totalitarian socialist superstate will be based in Europe. (I expect it to be based in the Middle East.) I would also argue that the current global megapolitical environment will not accomodate it. As this crisis intensifies, the voices calling for socialist cooperation will be drowned out by parochial self-serving local interests which I expect to lead to armed conflict. But I still consider that years away.

[Houston Investor]

100 Ameros = 1 Troy oz Silver......interesting

 

What is the purchasing power of 100 Ameros in todays dollars?

 

I like that coin design - it has an almost well Roman flavor

[just-john]

the real difference between Zimbabwe and the US dollar is the color ours will be green good thing we have credit .Our national dept makes their's look small .Were still #1 is somethings

[World Colonial]

There have been several people who have tried to compare the monetary policies and practices of the US (and possibly other leading economies) to those of Zimbabwe and Weimar Germany. The one thing they share in common is that they are equally wrong.

 

Yes, it is true that no country including the United States can expand its money supply indefinitely and infinitely without consequences, but the consequences which the hyperinflationists expect and mostly now will come later. The reason for this is twofold. First, the United States is primarily a CREDIT based as opposed to a currency based financial system. And second, this monetary printing, while stupendous by historical standards and relative to those of other nations, is still an absolute pittance compared to the total value of outstanding credit and the value of financial assets. The latter is why despite the Fed and Treasury's "best efforts", credit is still contracting, the financial system is imploding and deflation has the upper hand.

 

The other minor detail these people have (possibly conveniently) left out is that there is no prior occurrence of a country with a predominantly credit based economy and with significant financial assets inflating or hyperinflating its currency. Or if there is, I would be interested to know where and when. These countries, first under the gold standard and even after in the 1930's and Japan in the 1990s, followed the deflationary path. (This despite Japan's "efforts" to create inflation.)

 

Of course, most people use the price definition of inflation while others such as myself make a distinction between the two, monetary and price inflation (or do not consider price inflation as inflation at all).

 

During the recently ended "disinlfation", the expansion of credit and of the money supply primarily went into financial and "investment" assets and much less into physical goods and commodities. This was primarily a psychological phenomenon.and contributed substantially to increased prosperity and the (false) belief in a free lunch from endless credit expansion.

 

One of the consequences that I expect in the aftermath of this fiasco is the opposite of what I just described. In the next recovery and possibly for quite awhile afterward, I expect credit expansion and monetary printing to end up more in real assets and less in financial assets. If this happens, this will result in higher price inflation, lower asset prices and a lower standard of living. Assets such as gold and silver and probably commodities generally will sell for higher inflation adjusted prices but not others such as real estate. Real Estate is financed primarily with debt and one other outcome in my scenario is higher (possibly much higher) interest rates.

 

As for Zimbabwe style hyperinflation, only when the value of financial assets have mostly been destroyed and credit is no longer available would any government have an incentive to follow that path. That is especially true for the United States as long as the USD is the world's reserve currency or even a "hard" currency.

[jackson64]

I still like the 2007 one-ounce gold Amero design....

[MorganMan]

You can bet if they do have an "Amero", it will more likely be aluminum, not gold or silver...

 

MM

[PerryHall]

You can bet if they do have an "Amero", it will more likely be aluminum, not gold or silver...

 

MM

 

I'm sure it would at least be gold colored.

[Revenant]

I'm expecting something along the lines of the current dollar coins. Manganese Brass to make common folk think they have something "golden."

[Tradedollarnut]

Why would the US government suppress gold prices? What does it care?

 

Late last year, Warren Buffett spent about $7 billion buying shares in Goldman Sachs and General Electric. Even with the recent stock market surge, he has lost a substantial portion of these investments. I guarantee you that if he had instead put the same amount into purchasing silver for physical delivery, Buffett would be in a huge profit position today.

 

Buffett bought preferred shares returning guaranteed 10% dividends and has no intentions of selling any time soon. Silver doesn't pay dividends. Nor has it been immune to the deflation of commodities over the past year.

 

It would be interesting to see what would happen to the price of silver if Buffett decided to sell his theoretical $7B position.

 

[jtryka]

When Buffet sold his silver in the 1990s, as I recall it had little if any impact on prices, since no one knew about it until after it was sold.

[EZ_E]

Geithner tells media he favors the creation

of a global currency as a means of protecting

the United States from financial collapse...then he

tells Congress he would renounce such a move.

 

 

On March 23, China and Russia urged the world community to create a new currency to replace the dollar as the world's standard. Chinese Central Bank Governor Zhou Xiaochuan floated the idea of an increased role of the International Monetary Fund creating a global monetary unit tied to all of the world's currencies in order to stabilize the exchange rates caused by the Fed flooding the world with dollars to stave off the collapse of the financial markets.

 

On Tuesday, the Wall Street Journal reported that US Treasury Secretary Timothy Geithner said he was open to displacing the US dollar with an "international reserve currency." Within 10 minues the dollar promptly fell 1.3% against the Euro. The WSJ and the Washington Times both reported that he later recanted his statement, saying that "...the dollar remains the world's dominant reserve currency. I think it's likely to continue for a long time." (Personal opinion: the fact that Geithner made the statement suggests that's what the money barons are talking it about very privately and weighing the options. Was Geithner used by the money barons to "feel out the sentiments of the nation," or was it an insufficiently_thoughtful_person gaffe? It's a sure bet that Geithner received a telephone call from either Fed Chairman Ben Bernanke or his boss, Resident Barack Obama, who perhaps reminded him that "global currency" is a "no-no phrase" to the American people who want to return to pre-1917 isolationism. The American people want to seal our borders, kill imports into the country and tell the barons of banking and industry and the merchant princes that "if you want to sell it here, you'd better make it here." And, if they aren't, all of us need to be.)

 

On Tuesday, when he and Bernanke were being grilled by Congresswoman Michelle Bachmann [R-MN], she asked both, specifically: "We've seen both China and Russia make calls for an international monetary conversion to an international monetary standard as soon as the G-20, and I'm wondering if you would categorically renounce the United States moving away from the dollar and going to a global currency as suggested this morning by China and also by Russia?" She directed the question first to Geithner, whom a day earlier said he would favor such a move. Geithner said he would categorically renounce such a move. What a difference a day makes. She then directed the same question at Bernanke, who looked like he was swallowing his shoe as he avoided looking directly at Bachmann when he said: "I would also." Isn't lying before Congress under oath a felony?

 

With the collapse of Bretton Woods during the Vietnam War, the global economy has resorted to floating exchange rates (which has been a boon to money hedge fund mogul George Soros who has earned over a billion dollars from America's weakened dollar.

 

The first calls for a unified currency came from Kazakhstan's President Nursultan Nazarbayev in February, blaming the dominance of the dollar for the global economic problems faced by all of the nations of the world. "The players," he said, "are forced to abide by rules imposed on them by others. They are set by a narrow circle and often violate the majority's interests. I believe a new global currency should serve as a foundation for a new harmonious system. The global currency market is not competitive. And, that means it's not civilized." (His words echoed a similar statement issued earlier that same day by Iranian President Mahmoud Ahmadinejah.)

 

And, while Russia agreed with Nazarbayev's sentiments in principle, Moscow did not appreciate the flea on the dog's tail wagging the dog. Moscow wants the ruble to become the world's national reserve currency. China, of course, wants it to be the renminbi, more commonly known as the yuan. And, of course, the Europeans want the world's currency to be the Euro.

 

As the European Union discovered during the last decade, no national currency can serve as a global currency because, first and foremost, a currency must satisfy its own nation's monetary policy goals. On top of that, it must also meets the demands of those countries using it as a reserve currency. That is virtually an impossible task since the monetary authority must address its own economic imbalances before being concerned about its neighbors. Generally speaking, what fixes my economy usually harms yours. And, since its become clear to the EU States that whomever controls your currency controls you, several EU States have announced they will pull out of the European Union and restore their own national currencies.

 

In a final note on the video (above). When Bachmann grilled Bernanke and Geithner about Geithner's control over money policy, she demanded to know by what Constitutional authority they were spending ten trillion dollars of the taxpayers' money to bolster the markets around the world. Bachmann said: "The American people are wondering if their government is making an historic shift, jettisoning the free market capitalism in favor of centralized government economic planning." Geithner opened the door by stating he was merely using authority Congress gave the Executive Branch to protect the American economy from these kind of things. Bachmann responded by asking Geithner "...what provisions in the Constitution could you point to that gives authority for the actions that have been taken by the Treasury since March of oh-eight?" Both Geithner and Bernanke insisted they received their expanded authority from the Economic Economic Stabilization Act of 2008 which, he said, gave the Treasury a whole new range of authority to act. Geithner, and then Bernanke continued to recite the mantra that Congress gave them the authority as though Bachmann didn't understand her own question. The problem is, neither Geithner nor Bernanke understood the reason the question was proffered.

 

Constitutionally, control over the money supply belongs to the people of the United States through the House of Representatives. (Which is why Congressmen serve for only two years.) When Congress sticks their hands in the pockets of the American people, the American people have the right—and an essential need—to fire them. Political affiliations notwithstanding. The people don't seem to get it, either. Political parties don't serve the people, they only serve the politicians and the bankers and industrialists who manipulate the strings of government.

 

 

[World Colonial]

I have seen several recent articles where the idea of a global reserve currency has been metioned. The premise behind each of them is, of course, equally absurd and that is that this crisis was caused by a lack of regulation and the absense of a regulatory body with sufficient regulatory powers.

 

The truth of the matter is that this was the end of a decades long CREDIT MANIA which could not have been prevented in this manner. To the contrary, what actually happened is that the EXISTING regulatory bodies were the primary cause behind this fiasco and that a supra-national agency would likely only have made things worse.

 

I was in India last October and on my last day, we had lunch with some consultants. One of them commented, "Who could have imagined that this would have happened?". My comment was "Yes, its hard to believe it took so long for this house of cards to collapse." This was inevitable because not only is it not surprising that this finally happened, the system we have is designed to collapse.

 

Here are four proximate causes which contributed greatly to the mania, three of which were entirely caused by government and the fourth shared with the private sector.

 

But before I describe each of them, I am going to dispense with the idea that greed was the cause. The literal answer is that yes, this was one cause. But greed was not unique to this period and contrary to what the populists and socialists claim, it isn't unique to "capitalism" or the "free market" either. According to these hypocritic fools, its the profit motive that causes this and (of course) those who are not in the private economy working in government and the non-profit sector only have the noblest of intentions.

 

The first contributer to this historic mania was and is the fiat money monopoly. Without the fiat money monopoly, there is no way that the historic build-up of credit and debt could have occurred. Prior to the abandonement of the gold standard, there were periodic bubbles and manias but all of them collapsed before they reached the size of this one because of the discipline imposed by sound money. This was one of the criticisms of the gold standard and why it was abandoned.

 

The second proximate cause was and is central bank monetary policy and the distortion of interest rates. Whether someone is in favor of it or not, contrary to what most people believe, central banks should not exist in a free society. That's why Karl Marx included them in his Ten Planks of the Communist Manisfesto.

 

As I have said before, there is no more reason to attempt to fix the price of money than there is the price of popcorn or peanuts. Moreover, contrary to what almost everyone believes, no central bank has a clue what the correct level of interest rates should be either. Its simply a disguised form of income redistribution which has been exercised in the US over the last century entirely for the benefit of debtors, spenders and consumers at the expense of savers, creditors and producers.

 

The third contributing factor was government regulation or should I say misregulation which combined with the above two elements, greatly contributed to moral hazard. In addition to the Fed, this includes other agencies such as the FDIC, the PBGC, SIPC, OPIC and the alphabet soup of mortgage credit backing entities such as the FHLB system, HUD, GNMA, FRE and FNMA. Since it is the most obvious one, I will use the FDIC as an example.

 

In a sound banking environment, there would be no deposit insurance though there could be regulatory supervision of bank health. But without deposit insurance, people would most likely be just a little bit more concerned with the safety of their money and what their bank did with it. (We cannot know for sure because people invested in all kinds of toxic assets until recently though I would claim that this was due to factors such as the "Greenspan" put and financial intermediation which I will cover shortly.)

 

Instead, no one gives a rat's what the bank does with their money. They just simply look for the highest yield on their deposits among other variables. This is what enabled First Plus Financial Freedom Mortgage to offer CD's at 5% back in 1998 even as its stock crashed from $58 to 25 cents in a matter of months. We also saw this recently with other banks such as IndyMac.

 

If the government were really interested in protecting depositors and a safe banking system, they would get rid of deposit insurance and institute other reforms that might actually make a difference. Or at the least, they would reduce the insurance limit to a nominal amount such as $5,000 which is more than most people have in any bank anyway and is sufficient to pay immediate expenses. But the reason this is not the case is because deposit insurance is actually a subsidy for bank shareholders and bank management.

 

One reform that has been proposed by others is changing the legal definition of a bank deposit. This is actually a misnomer because today a bank deposit is actually a loan to the bank. The second that I have not seen elsewhere but which I think is an option is depositor representation on the bank board of directors.

 

The fourth factor on my list which contributed to this disaster is financial intermediation. I do not consider this an inherent negative but the fact remains that it has greatly contributed to the public abdicating their financial responsibilities to the financial services industry. But since this isn't their money, they do not really care what happens because in good times they make a killing and in bad times, they can just claim they were prudent by acting as recklessly as everyone else did.