The Suspension of Belief

We’ve talked often on this blog about the necessity to have confidence in the banking system. Paper money is, after all, just paper.

There’s no point playing the blame game. It’s all about what we do now.

Although G7 and the IMF have gone to full battle stations the reality is the die is cast. Markets have crashed, liquidity has disappeared, credit is history and the revaluation and squaring up of positions has to somehow be undertaken.

The margin calls will be coming thick and fast next week. The derivatives nightmare is a beast matched only by the legendary Hydra. Each cut brings forth two new disasters.

The choices facing policymakers are stark and , for them, almost unbelievable.

- Public interest free money will need to be pumped into the system. Not to cover debts but to provide a boost to a money supply which is disintegrating as loans are written off. This should not be a bank bailout but a reconstitution of a money supply from the public. Banking for now is suspended and banks are likely to be worth very little unless they are very well capitalised and have little exposure to falling asset prices. Bank deposits will be uncondtionally guaranteed under this approach.

- Stock markets: Next week will see a wave of selling that can only be described as a death spiral. It is hard to see any approach other than freezing all global stock markets. The alternative is for governments to start buying stocks i.e. nationalisation of business. That would be a very big call but is possible.

_ Currencies: There are potentially very crazy moves ahead. Deficit countries will see huge sell offs so some kind of coordinated intervention will be needed here. It may not be physical but more a guarantee between creditor and debtor nations to maintain current levels.

This is going to be a momentous week. Let’s hope policymakers are up to the task .

Either way

The Crash of ’08: The End of Days

As banks continue to go down and credit default swaps unwind it has become clear that we have experienced a crash. Not a one day cataclysm a la 1987 but a more sustained and painful ratcheting down of markets. It’s like being stuck in a falling elevator which shudders to a halt every 10 floors before lurching further down.

Each stop feels like the last but it never is.

After a horrendous week G7 has responded with a new pledge to do whatever it takes.

The question is will they? Do they know what it’s going to take?

They already said this back in April.

It seems to me that the numbers are no long relevant.The game has been up for some time now.

Everywhere you look monetary authorities are looking to buy something whether its banks or stocks.

Forget it…..some banks arent worth it. Deposits in major banks should be guaranteed. That is people’s money not an investment (well it is sort of but not for most).

Stocks should go down to wherever they go down to. The US via the Plunge Protection Team has supported the equity markets for too long.

They should let it act like the market it is supposed to be. Once leveraged trading is stripped out out the market we can go back to buying stocks in a normal investment manner.

As i keep stressing the financial system has been nationalised in all but name. Psycholigically that is hard to take for many because nationalisation is a dirty word to many in the markets, just as priviatisation is to others.

Money is a national tool. Regardless of the shennanigans around the BIS and the Fed and their accountability to government and citizens, we can assume that governments will reassert their sovereign right to coin.

What is interesting in the G7 communique is Point 3:

“3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.”

I like the inclusion of “public” sources.

I think we can expect more and more public money flowing into banks coffers.

Part nationalisation is already here. Depending on how the markets fare from here will determine how far this goes.The margin calls are coming thick and fast and the only place to get cash is from equities. Given the lack of concrete proposals (let’s face it all they are saying is that they’ll bring loads of ambulances) markets will continue to tremble.

The timing has never been better for a sovereign reassertion of the right to create money.

On the US the AMI continues to work on its American Monetary Act and in the UK the Forum for Stable Currencies promotes its series of EDMs on Public Money. More and more we need constructive proposals that can be presented to Government for debate.

There is no time to waste.