The Second Bernanke Crash

From the Prudent Bear. I won't post the whole article just a snippet. Very interesting day. Gainesville Coins called me asking me to sell back my Krugs for 10.00 over spot. That means they are desperately in demand. 
Taxhaven, I think holding on to our gold is vital now just as Dr. Faber and Jim Rogers and Jim Sinclair are stating. If a dealer is trying to buy it back then they must have a huge buyer on the other side of the deal. 
It's always a good time to own gold, but now I am convinced it's an even better time to buy more! Queenbee


The Second Bernanke Crash



  • by Martin Hutchinson
  •  
  • May 24, 2010
The turbulence in financial markets in the last couple of weeks has been ascribed by reporters to doubts about the long-term stability of the euro, and of southern European finances. This is over-optimistic. Whether or not the current market downdraft proves temporary, monetary and fiscal policies in the United States and worldwide have been excessively stimulative since the September 2008 market meltdown. Thus we are at some point in the near future going to suffer the Second Bernanke Crash.
As I have frequently discussed, there were a number of causes of the 2008 crash, some of them as far back in the past as financial theories devised in the 1950s and housing regulation designed in the 1960s. Nevertheless, if one single cause has to be assigned, it would be the excessive money creation in the United States after 1995 and worldwide after 2002. This caused a massive asset bubble, initially in stocks and later in housing. Once the bubble had inflated a commensurate crash was inevitable.
Had monetary policy returned to sanity after September 2008 (and fiscal policy not itself relapsed into madness) that would have been the end of it. Banks would have been provided with unlimited funding, as Walter Bagehot recommended in his 1873 “Lombard Street,” but at high interest rates. The global economy would have undergone a sharp recession, steep because of the deflation of value that had become necessary, but by the middle of last year would have begun a healthy and sustained recovery.
Apart from the direct bailouts of the basket cases Citigroup and AIG and the “stimulus” packages, the important difference between what happened in 2008 and what should have happened lies in the interest rate charged for the liquidity supplied in the crisis. A great deal of capital had been destroyed in the subprime mortgage meltdown, and risk premiums had gone sky high. Accordingly, while capital should have been made available by the world's central banks to their banking systems, it should have been available only at penalty rates. Rates of 8%, even 10% would have been appropriate levels for the federal funds rate and the rate for Fed “quantitative easing.”
There would in that case have been no banks borrowing money from the Fed at ultra-low interest rates and investing it in Treasury bonds or government guaranteed mortgage bonds. Conversely, since money at high interest rates was readily available, high yield uses for that money, such as lending to small business, would have remained quite attractive to the banking system.