But calming the markets was not the point of the exercise. I’ll explain why in just a moment. And, as promised yesterday, I’ll also reveal details of how you can download your free report on how to buy gold.
First, there’s one big question on everybody’s lips today. Who will be the next casualty of the financial crisis?
Hank Paulson, the US Treasury secretary, yesterday predicted that more banks will fail. Maybe he wanted to head off commentators, like myself, who will point out that yesterday’s interventions — the British bank bailout and the international interest rate cut — will not be enough to end the crisis (sorry Hank, I just did...)
Or maybe he wanted to pay lip service to the recently-neglected concept of moral hazard. Moral hazard is, in a nutshell, the idea that banks will take excessive risks if they think the taxpayer will bail them out. Of course, that’s exactly what the taxpayer is doing, on both sides of the Atlantic. Maybe Paulson wanted to remind us all that at least some risk-takers will suffer...
I see a problem here. It relates to the ‘c’ word — confidence. A huge factor in this ongoing crisis is that banks are unwilling to lend to each other. That’s why yesterday’s intervention by the British government included a requirement (and not just a hope) that this will happen.
But now, one of the crisis’s major figures — the Treasury secretary of the United States — has stoked up suspicion of banks. Now, he’s undoubtedly right. There will be more bank failures. But Paulson hasn’t said which banks they’ll be.
My last comment is not as daft as it may appear. In fact, if I may be so bold, I have a proposal. How about this — the financial authorities take a long, hard look at the major banks’ balance sheets. It’s only fair — we’re all stakeholders, after all (literally in the case of UK taxpayers).
Having done this, the authorities can decide which banks they’ll help, and which they won’t. And then they can tell everyone.
This, of course, is the polar opposite of a neat, market-based solution. But that’s not going to happen. We’ve already moved well into the sphere of intervention — we might as well do it properly.
Tell us which banks you’ll prop up, and which ones you won’t. Arbitrary, yes, but I believe it will speed up the process by which the credit wheels can turn again, and the state can begin to withdraw.
And, financial authorities, if you’re not keen on this proposal, at least do us one favour. Don’t add to the fear and uncertainty by making vague predictions about bank failures. We can do that on our own.
The real motivation behind yesterday’s interventions
We can sometimes get too wrapped up in the stock markets. History contains several examples — 1987 was one of them — where the markets are turbulent but the real economy is not.
Yesterday produced numerous reports that claimed the intervention by governments and central banks had "failed to calm the markets". That is missing the point.
The current market volatility is historical because, unlike previous market crises, this one does affect the real economy. The transmission mechanism is the banking system. As credit dries up, real people and businesses are unable to function as normal. Spending dries up, earnings fall. Jobs are lost. More loans turn bad, and the banking sector is hit again. This is the vicious feedback loop identified by economist and long-time doomsayer Nouriel Roubini.
Yesterday’s interventions were designed to help the banking system as a means to averting pain in the real economy. Interest rates were cut in the major western economies (and in China) in the hope that it would give consumers and businesses a monetary boost. And, in Britain, public money was used to increase banks liquidity and improve their solvency. Again this was done with the real economy in mind. It’s all about getting credit going again.
Long term, we could just be storing up even more trouble for the future. After all, Greenspan-style cheap credit was what got us into this mess in the first place.
But few people care about that now. They’re worried about their jobs, their investments, their pensions, retirements, their financial security. Woe betide the public figure who pronounces on fiscal and monetary rectitude — most just want the pain to stop.
Will it? Sadly, no... at least, not immediately. Leaving aside my queasiness about cheap credit, yesterday’s measures may begin achieve what their architects want them to — a reinvigoration of the credit markets. But they’re only one step on the road.
We may, in time, see the stock market recover. It may, in the fullness of time, turn out to be a phony boom — but you can make money in those just as well as in the real ones. And you do it by identifying, during the bust, those companies best placed for the recovery.
I’ll bring you more about this in the coming editions of Fleet Street Daily.
For now, protection is the watchword...
Free gold report
Gold is one of the best — if not the best — protective investments you can buy. Now, I’m not going to go all goldbug on you and make out that the price of the yellow stuff can only go one way. No asset is bubble-proof.
When I talk of gold’s protective properties, I specifically mean physical gold. A tangible, portable store of value... just in case.
No one knows just how long and how deep this crisis will be. Sensible investors are preparing for the worst — by buying physical gold.
Many commentators have advised this. But one thing several readers have asked me is this: how do you actually go about buying gold? Is there anything you should know? Any dos and don’ts, any pitfalls?
Yes, there are some things you should know. That’s why today I’m sending you this gold report, absolutely free. It was written by Malcolm Craig, with whom long-time Fleet Street readers may be familiar.
In it you’ll discover:
- How to spot gold forgeries...
- How to run a gold dealing account...
- What influences the price of gold...
You can download your free gold report, Buying Gold Coins for Financial Profit & Protection here.
Until tomorrow
Ben Traynor
Editor
Fleet Street Daily
Selected article:
Tom Bulford on profiting from India’s growth.
The Daily Reckoning — The Boom Years Are Over
"The boom years are over..."
Speaking was a spokesperson for Vienna tourism board... 20% fewer Americans are visiting the city. But almost anyone might have said the same thing.
The boom in construction has been over for nearly two years...
The boom in the financial sector ended about 12 months ago...
The boom in the aviation industry died when oil went over $100...
The boom in commodities was killed when oil went under $100...
The boom is retail seems to have come to a halt more recently. This will be the first quarter in many years with declining consumer spending...
The boom in consumer borrowing seems to have come to an end, too...
You can read the Daily Reckoning in full here.
P.S. If you enjoyed this article then we encourage you to sign up for the free Fleet Street Daily eletter. Learn what you can expect from today's markets -- and how to prosper in the face of uncertainty. You won't find more thought provoking writing anywhere on the Internet.
