Nationalizing the Banks

Although nobody wants to use the "N" word, more and more economists, including Nobel Prize winners, are saying that this is really our only choice. Of course it will only be "temporary". Maybe it will be "partial". But any way you slice it, it will be ugly. Thanks to a tip from Seeker Blog editor Steve Darden, I recently came across a great opinion piece in the Financial Times called "To Save the Banks We Must Stand Up to the Bankers". In this article, Peter Boone, a researcher at the London School of Economics and Simon Johnson, former IMF chief economist, and professor at the MIT Sloan School of Management, give us the following memorable quote:

"If you want to end up with the economy of Pakistan, the politics of Ukraine and the inflation rate of Zimbabwe, bank nationalisation is the way to go."

They suggest some ways to avoid a few of the potholes in the bank recovery roadmap, but ultimately it comes down to having the political will to do the hard things, to deliver sufficient pain to the banking and financial elite that created the mess in the first place with the willing collusion and encouragement of government. Pain that must be confronted to cleanse the system of toxic waste and moral hazard. What is the chance of this type of solution coming out of a bipartisan working group? And if it was offered, what are the chances of it being implemented? And if tried, how long would it last before being abandoned as "un-workable"?

It is so much easier to just put the patient on an IV drip of stimulants and pain killers… which the Fed is happy to provide in many forms, most powerfully by "quantitative easing" and "expanding it's balance sheet", also known as "printing money".

Of course, most of the "experts" say that once the crisis has passed, and things are "back to normal" (whatever the heck that means) the Fed can simply "drain excess liquidity out of the system" to avoid any serious inflation. This is roughly the equivalent of taking the patient, now living in a happy pain-free daze, out of the heart-lung machine, pulling the IV drip, and sending him home to go cold turkey. And handing him a huge bill – equal to a large fraction of his annual income – as he checks out of the hospital.

You get the picture.

What is the solution? Have some money that has no counterparty risk and cannot be counterfeited, even by governments. Of course that means gold, preferably physical gold in your personal possession. How much? That's up to you; but with gold paying about the same interest as treasury bills, with much lower risk, and with the multitude of economic problems still lurking out there, I think 10 to 20 percent of your liquid assets would be a good place to start, and going over half would not be at all imprudent. At the moment, Cash is King, and gold is the King of cash.

Don't get swept up in illusory losses and gains due to the volatile pricing of fiat currencies like the US Dollar, either. Track your investments and net worth in gold, and don't be afraid to cut the under-performers from your portfolio. However ugly things look now, you want to be worth more gold next year than you are worth today.

Let me know if there's any way Priced in Gold can help.