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Mr. Joseph E Stiglitz,
a Nobel Prize winner in 2001 for his work on the economics of information,
recently attended the World Economic Forum in Davos
and wrote an article published on February 5th, 2008 titled:
Sub-prime crisis has led to the humbling
of America.
http://www.nationmultimedia.com/2008/02/05/pda/opinion_30064446.html
The article highlights were:
1. Those who think that globalization,
technology, and the market economy will solve the world's problems seemed
subdued.
2. If we know the price of cream and the
price of skim milk, we can figure out the price of milk with 1 per cent
cream, 2 per cent cream, or 4 per cent cream. There might be some money in
repackaging, but not the billions that banks made by slicing and dicing
sub-prime mortgages into packages whose value was much greater than their
contents.
3. Mr. Stiglitz
also argued that central bankers also got it wrong by misjudging the threat
of a downturn and failed to provide sufficient regulation. They waited too
long to take action. Because it normally takes a year or more for the full
effects of monetary policy to be felt, central banks need to act
pre-emptively, not reactively.
4. This is the third US crisis in
the past twenty years, after the Savings & Loan crisis of 1989 and the
Enron/World.Com crisis in 2002. Deregulation has not worked. Unfettered
markets may produce big bonuses for CEO's, but they
do not lead, as if by an invisible hand, to societal well-being. Until we
achieve a better balance between markets and government, the world will
continue to pay a high price.
For any economic problem, it's
interesting how Keynesian economists always find the greedy bankers
guilty, the public innocent, and the government responsible for prevention
AND a cure through regulation.
Mr. Stiglitz
correctly explained how the subprime problem
started. However he failed to point out the root cause. The cause is not
globalization, deregulation, technology, or free market. The bankers were
greedy to lend to earn interests, and the public were greedy to borrow money
and spend on things they couldn't afford.
But how can we fault Johnny who loans
his money to Jane that can't pay back? We can't blame the government for not
regulating the lending industry. The banks didn't jam the money down our
throat or force us to sign the dotted line did they?
Government actions often times have good
intentions but with unintended consequences. Should the government be more
proactive in lowering interest rates and early bailouts as Mr. Stiglitz suggests, this would amount to loosening
monetary policies, or to put it more bluntly, money printing, which is a
stealth wealth transfer by diluting savings of others.
Those who study the history of money
understand the cause of the debt bubble is composed of two factors: The
centralized interest rate model and the fractional reserve system.
- The Fed unilaterally sets the national
interest rates, which indiscriminately applies to Bob, Jane, and everyone
else. The economy endured several years of unprecedented, historic low
interest rates below 3% since 2001. Low interest rates encourage excessive
borrowing, and ultra low interest rates like 1% exacerbate the problem even
more.
- Through the fractional reserve banking
system installed in 1913, banks can print money out of thin air and lend to
earn an interest. This magic of making something from nothing leads to lax
lending standards. The Fractional reserve banking system is also directly
responsible for gas prices going from .15 cents a gallon in 1910 to today's
$4 a gallon.
The solution is less regulation, not
more as Mr. Stiglitz or Mr. Obama
have proposed. Set the market truly free. Let every individual lender, not
the Fed, decide what interest rate to apply to each
of his borrowers. Eliminate fractional reserve banking and phase out the Fed,
this will restore confidence of the dollar, restrict excessive spending by
all levels of government and consumers, fix the money supply, and stop
frivolous lending. Remove all government sponsored enterprises, other
government guarantee and bailout programs. Those programs and agencies only
distort markets, offer a false sense of security, and contribute further to
inequality.
We can't regulate the patient who wants
to overdose on painkillers. We shouldn't over burden all banks with piles of
rules designed to prevent a few outlaw borrowers either. Remove the
government as the safety net and return the responsibility back to the
people. Let the careless and the weak fall, isn't that what capitalism,
evolution, and free markets are all about?
Until then, dollar will continue to lose
value and gold and oil will continue to rise in dollar terms.
 
For those who are interested in the gold
and resource market, a good introduction will be to visit for free,
the world's most attended resource investment conference. Hosted by Cambridge
House, the next event will be held this February 9th through 10th in sunny Phoenix, Arizona.
An interview between me and the conference's president is available at www.goldmau.com.
By :
John Lee, CFA
www.goldmau.com
John Lee is a
portfolio manager at Mau Capital Management. He is a CFA charter holder
and has degrees in Economics and Engineering from Rice University.
He previously studied under Mr. James Turk, a renowned authority on the gold
market, and is specialized in investing in junior gold and resource
companies. Mr. Lee's articles are frequently cited at major resource websites
and a esteemed speaker at several major resource
conferences.
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