Fed to freeze mortgage rates……another fiddle

So the Fed joins the Bank of England in changing the rules. The word is that certain sub prime mortgages will have their rates frozen for 5 years. This will ease the pain of borrowers who in some cases face rises of up to 30% on their mortgage bill.

Did i mention that mortgage means “deathgrip”?

Anyway this just shows that for all the hi’ fallutin’ nonsense about free markets we actually live in a system that is far from free. Bush doesn’t really want to hand the next election to the Democrats though he’s done his best to do so in recent years.

But what we are seeing now, as we saw post 1930, is that the financial system can be changed if required and that the fundamental right to create money resides with the people via their representatives. If i owned shares in a bank i would be worried.

Come to think of it if i had money in a bank i’d be worred but humping around gold coins is so 13th century.

I can’t quite work out if this is the beginning of the end or the end of the beginning. I fear its the latter.

The End of the $?

Following on from my post on the Amero I came across this article which explores the fallout for the $ from the current financial crisis. The hard question the Chinese, Russians, Arabs and other holders of $ must be asking themselves is what to do with them.

Well I think we’ve been seeing the answer in action for some time now. Buy overseas assets not paper. In other words buy into industries, land, property but not continue to finance the US deficit by buying US treasury stock.

We’re starting to see the Arabs and Chinese buying up assets in many sectors, especially finance and resources. Makes sense doesn’t it?

Nothing confirms this more than the Abu Dhabi Investment Authority buying 5% of Citbank for $7.5bln…….structured as a convertible loan paying 11%….now that is a junk rate.

What a deal for the Arabs. And the irony of having to bail out a huge US financial behemoth.

No doubt there has been plenty of sucking wind going on in Washington and Wall Street.

It’s a simple game from here on in. It’s called “Show me the Money”.

The first run on the Bank of England

No not today but back in 1696. But its useful to just retell the story as it has laid the foundation for the development of industrial societies all over the world but primarily the UK and the USA.

When the Bank of England was formed in 1694 it was not as a government agency but a joint stockholder company who then lent money to the government to wage war. Money and war go hand in hand really….sound familiar?

But the deal was interesting. Coin, in the form of gold and silver, had to be deposited and then was lent at a rate of interest which at the time was 8%. This is where the term “gilt edged” comes from.

So far so good. But at the same time new money in the form of paper bills was issued against the same deposit of coin. Therefore at a stroke the amount of money as measured by coin and paper was doubled. The paper money was exchangeable for coin so in fact there was only enough coin for half the supply of money.

I’ve seen more complicated magic tricks at a children’s birthday party!

Needless to say some bright spark decided to up the ante somewhat and the first run took place. Over time this settled down so that 4 to 6 times the gold on reserve could be lent out as paper money. This paper money became known as “good as gold”. Quite clearly it wasn’t but it became accepted.

This was taken to extreme by the Farmers Exchange Bank from Rhode Island which was found to have issued banknotes to the tune of $580m backed up by metal reserves of just $3m (note to Les Hunter for that information).

It never hurts to check the balance sheet of your bank to see exactly how much it does have in the way of equity but as we saw in the UK recently it doesn’t really matter since its all guaranteed by the authorities anyway!

The People vs The Banks

News comes of a huge class action suit brought in Canada by a litigator called John Dempsey. Following on from John Kutyn’s (a Canadian living in NZ) paper “the Nature of Money” it takes the next step of actually calling banks to account under the law.

It’s being held up in the courts but at some point the suit must be acknowledged and heard. Its a tough one for the judges as they are being asked to rule on one of the most accepted practices in society today, namely the equivalence of “digital money” and cash in the form of notes and coins.

With the relentless advance of Peer to Peer lending systems coming online and complimentary currencies in every country it is easy to see how a major change is underway. Sure the banks may not be too concerned now but we are seeing the beginnings of a major revolution in what we know as money.

Fed readies for another cut as markets hit and hope

As the Fed prepares for another rate cut, probably 25bps, possibly 50, markets are resilient in the face of what is still a horrendous credit meltdown. With Merrill Lynch reporting a monumental loss last week, it is clear that banks are still clearing away the debris of the last few months and the real impact may not be felt for some time.

Never mind the jokes (you can’t bail out anything with a siv)around the Super SIVs: the great $100bln bailout plan hatched by some genius to support the market. Similar to the rescue plan post LTCM crash, it basically involved the market coming in to buy its own distressed assets. Liquidity is the mantra but holding up the market is the reality.

Everything is under water so its a game of smoke and mirrors. As I’ve said before its a rational response to a difficult situation. The social impact of a complete financial crash is not something anyone wants to see but the longer we put off the necessary surgery the worse it will be.

The credit bubble of the last 15 years is over. The balloon has too many holes in it and its a waste of time pumping more air into it.  Satayjit Das, author of Traders, Guns and Money lays it all out in this paper. Its worth a read.

Branson moves into P2P lending

CircleLending has been snapped up by Virgin and rebranded as Virgin Money USA. It’s a spunky move by Virgin as they seek to expand into the US market. Branson has big plans for the US and this is a great starting point. He’s already beamed himself down to Boston today for the usual PR fest that accompanies any of his moves. What can you say? He’s a great showman as well as a passionate entrepreneur.

The face of money is changing all the time and whilst money will not disappear as some forecast the process of exchanging it will and the web will be the platform for that whether online or mobile.

Lend us a tenner?