Bloomberg reported that today (Sept. 12), "Governor Mervyn King refused to relax the Bank of England's system for money-market lending, rejecting calls to provide commercial banks with more longer-term cash to reduce borrowing costs."
More importantly, King said, "The provision of such liquidity support undermines the efficient pricing of risk by providing ex-post insurance for risky behavior."
King went on to state, "That encourages excessive risk-taking, and sows the seeds of future financial crisis."
This is startling stuff — startling because, we believe, it is true!
We hope our readers will take due note and act accordingly, by not get suckered into so-called "cheap" stocks in casino-like stock markets, that appear to us more set to drop steeply, than to soar.
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Today's Financial Times headline runs, "Paulson recovery warning."
The article goes on to report Treasury Secretary Paulson as saying that "Uncertainty would last longer than the turmoil after the Asian crisis and the Russian default of the 1990s or the Latin American debt crisis of the 1980s."
Wow! So much reality in one day is almost too much for our digestion, accustomed as it is now to a stream of lies from top officials.
We believe that both these statements are of vital importance as a background to our readers' financial thinking in the months ahead.
First, the Bank of England (commonly know as the Old Lady of Threadneedle Street) is the oldest of central banks, with centuries of experience.
It is also the lender of last resort in London, which is home to the vast euro-dollar markets, the world's largest foreign exchange, commodities, bond, shipping and insurance markets and a stock market set to exceed the volume of the New York Stock Exchange. In many ways, it has re-established its position as the financial capital of the world — a position it lost to New York, in the mid 1900s.
This means that the thinking of the Bank of England is crucially important to the world economy.
[Editor's Note:Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.]
It appears that the Bank of England shares our view, that our present credit crisis was caused by excessive liquidity and that pushing ever increasing amounts of liquidity at it is no "real" solution. Indeed, it not only bails out the reckless at cost to the prudent, but encourages yet more similar foolhardy action in the future.
The responsible action by a central bank is to ensure the banks remain liquid (as the Old Lady is doing) and meanwhile, to let the free market sort out the good credits from the bad in the hope that free market practitioners will both do so efficiently and learn a good lesson.
We feel that our Fed Chairman Ben Bernanke has strong sympathy with the Old Lady and seeing the precarious position of our dollar, would like to hold the Fed target rate.
Sadly, in the ‘good ole days", our Congress gave our Fed not one mandate, to maintain a sound currency, but a second, often conflicting mandate to encourage a growth economy. This places our Fed at a competitive disadvantage with other central banks, most of which have just a single mandate.
We feel great sympathy for Chairman Bernanke. It is vital for our long-term good that our dollar does not lose its remaining credibility.
We think that Bernanke shares this belief, but he now faces a massive wave of public opinion calling for the "quick fix" of a Fed rate cut. Indeed the public, led by the media cheerleaders and now even by some politicians, are now almost "demanding" a rate cut — from our supposedly independent Fed.
In short we feel that, as Mervin King indicates, while a rate cut will provide pain relief in the short term, it will lead to a far worse financial and economic crisis in the medium term.
Most interestingly, Treasury Secretary Hank Paulson has now suddenly stopped saying that our economy is fine and is now warning of a long drawn out "recovery."
A recovery from what, we ask?
[Editor's Note:Bernanke Reveals `Fiscal Crisis` Ahead]
As we have said, we sympathize strongly with Ben Bernanke and his FOMC compatriots as they sit down next Tuesday to decide what to do with the Fed target rate.
We hope they will use the "political shield" of independence, that a former Congress so wisely granted them, to national advantage and defend our dollar in its current hour of need.
However, we have a growing fear that, even if Bernanke holds out, most of his fellow FOMC members will fold under public pressure and throw in the white towel of surrender by voting to lower their target rate.
Of course, to prevent the impression of uncertainty, the final vote will likely be portrayed as "unanimous."
If the Fed does cut its rate, stock and short-term bond markets will roar, as they sense the Fed has capitulated and that more rate cuts will follow.
Gold prices will soar as long-term bonds and the U.S. dollar plunge, correctly sensing the unleashing of both inflation and, as we have long forecast, stagflation. (See today's article by my colleague, David Frazier, "Stagflation Has Arrived," on MoneyNews.com.)
We feel our more conservative readers, who fear riding the coming tiger, should continue to accumulate cash, gold, agricultural commodities, and ETFs that can short sell the stock markets.
Editor's note:
Bernanke Reveals `Fiscal Crisis` Ahead
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
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