Silver Dice

Silver Dice

The Irresponsible Lender of Last Resort

By Eric Kingsley

www.thetradevine.com

 

If you surf the web using search phrases like “New World Order”, “Illuminati”, “David Rockefeller”, and so forth, chances are subjects like “Lender of Last Resort”, “The Federal Reserve”, and “central banking” have come up. Regardless, I have to admit that the aforementioned keywords make central banking a lot more interesting to the average person. Nothing like a little mystery to entice an audience, which is good. It is good because if people believe that there is something nefarious behind it, they will no longer be willing to remain ignorant on such matters that may ultimately effect the dinner table. Never the less, although this subject may have been discussed on the blogs over and over again, I will attempt to break down why I believe the “Lender of Last Resort” is in fact Irresponsible and immoral in my own way and what you can do about it.

When the term “Lender of Last Resort” is mentioned, usually a central bank is the first thing that comes to mind. To gain a historical perspective, one need not look further than the panic of 1907. The panic was sparked by rumors that the National Bank of commerce was insolvent. As a result, depositors withdrew their savings from the NBOC en masse; Thus, causing an onslaught of withdraws from other banks. In the aftermath of the panic, calls were made by leading political and industry figures to create a centralized banking authority in a attempt to prevent another crisis from occurring. In 1913, a currency bill, known as the Federal Reserve Act, was passed, implementing a new central bank in the United States.

Contrary to what the spin doctors in the financial press espouse, this system poses a severe moral hazard to the overall economy. Over the course of the decade, the Fed’s decision to maintain short-term rates (monetary expansion) at record low levels gave Wall Street an incentive create risky loan products, such as sub prime and interest only products that were set up to fail. To add insult to injury, these loans were then sliced, diced, and re-packaged and sold on Wall Street in the form of CDO’s, CMO’s among other devices. In addition, in the event of foreclosure, these new inovations would make it next to impossible to find the sole note holder. In 2006, when the worst of the mortgages began to rear their ugly heads, investment banks began losing their depositors (Other banks) at a rapid pace, most notably the recent run on Bear Sterns. However, unlike 1907, where the insolvent bank would just collapse, they now have the irresponsible lender of last resort to fall back on., the Federal Reserve. The Fed will then lower interest rates (expand the money supply) to rescue the financial system. Consequently, the reckless banks are not held accountable for their actions. If the lenders were held responsible, by letting them collapse, they would regulate themselves and we would be spared the boom and bust cycles.

Unfortunately for the working class, the end result of this scheme is the debasement of the currency. For reasons stated above, when the economy gets a shot of new money, the value of your savings will decrease. For example, if you have $100,000 in your checking account and there is $1 million dollars in the economy, you have 10% of the money in circulation. However, if the Fed decides to pump an additional $1 million ($2 million total) into the system, you now own only 5% of the money in the economy. In addition, the total value of money in your checking account is now reduced by 50%. It is important to note that rising prices is not inflation. On the other hand, high prices are the result of an inflated money supply, real inflation. As the new money cascades through the economy, prices then rise. In the end, the incentive to save is deminished.

In the final analysis, this system is nothing more than confiscation of wealth through a hidden tax, inflation. The logical solution to this problem would be to force the Fed turn off the printing presses, but how? Because fiat money has no safe store of value, meaning it takes no effort to produce therefore tempting to inflate, it would be fair to say that we need money that does have value. This could be accomplished by backing the dollar with either gold or silver. These two items have a safe store of value because they both take human effort to produce which cannot be easily inflated. To protect the purchasing power of your savings, it would be advisable to own a certain amount of gold in your portfolio. I’m not suggesting that you invest every last dime in gold or silver. However, it would be, at the very least, good to have some for a rainy day. As a result of the lender of last resorts actions, gold and silver will continue to go up for reasons just discussed.

About the Author

Eric Kingsley is the owner an operator of www.thetradevine.com, a precious metals dealer. Mr. Kingsley has 8 years experience under his belt in the financial markets.

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