The American Monetary Reform Act

With the financial system gutted and exposed like big swordfish from the Grand Banks, it’s time to have a look at a proposal for monetary reform. Stephen Zarlenga from the American Monetary Institute has put together a proposal that rests on the US constitution no less.

As many people are starting to learn, the 1913 Federal Reserve Act “effectively ceded the sovereign power to create money delegated to Congress by the Constitution to the private financial industry”. It was led by none other than JP Morgan himself. There is some interesting history of how the Act was actually passed during the small hours of the morning whilst no one was looking.

As Jim Rogers suggested yesterday, the Fed could be abolished or as Stephen proposes, be purely a bank of issue, supplying money as required by the government.

Now there are many ways to approach the issue of interest free money into an economy but for now I would just like people to read through the proposal and see what they think. Pass it to friends, schools and universities. People should be discussing this openly.

The AMI hold talks around the US all year round so get in touch and find out when they are coming your way.

Its your Congress and its your money.

Fed cuts 75 bps: Is it enough?

Fed just cut the fed funds and discount rate by 75bps voting 8-2. The 2 against were for less aggressive cuts.

Overall the market wanted a bit more but still rallied initially. Better than expected numbers from Goldman Sachs and Lehmans helped with overall confidence

So what now? Well it’s hard to say. I don’t think much has changed and its hard to justify a big market rally from here. So the best to hope for is some stability from here.

I think the focus will now shift back to the banking sector and who is next up for refunding.

As for the market I expect that to come under further pressure.

Helicopter Ben readies for drastic action

After a chaotic few days the market has calmed as it awaits the next round of soothing medicine from the Fed. 100bps is expected now and anything less could see a major sell 0ff. So perhaps its time to recap on what’s happened:

- Global expansion of the money supply by the banking system abetted by loose regulation.

- Financial assets treated as investments.

- Trading on a leverage basis whether in the markets or in property.

- Reliance on capital gain to pay off debts.

- Creation of an asset bubble in property and stocks.

- New financial products promising spectacular gains.

A quick recap:

- Asset prices can go no higher as the mathematics of compound interest and cashflow catches up.

- The first domino falls as the sub-prime market starts to fall.

- Property finally turns and heads south in the US.

- Debts over run equity in houses.

- Spirals into derivative products causing a more widespread reaction.

- First reaction from Fed.

- Banks start to revalue (mark to market) loans.

- First run on a bank: Northern Rock fails.

- UK nationalises Northern Rock.

- General deleveraging starts as contagion spreads.

- Banks review lending and fringe financing companies fail.

- Rogue traders appear.

- Central banks provide copious amounts of liquidity.

- Fed cuts rates heavily and provides open lending to all.

- $ collapses and commodities explode as safe haven.

- Second run on an investment bank: Bear Stearns fails.

- Fed sort of nationalises Bear Stearns but gives it to JP Morgan under guarantee.

- Financial system on the verge of complete collapse.

So what now?

Well the Fed has studied the 1930s depression very carefully and realises that systemic bank failure is simply not an option. Yes shareholders will lose most of their money but that’s the risk with equity. The lines of credit and liquidity must be kept open and depositors must be kept afloat. If necessary banks in trouble will be taken over or have to merge.

It’s safe to say they will do whatever it takes, regardless of the cost. The clean up can come later but for now this is mainly about preserving confidence in the system.

How it pans out is impossible to predict but i wouldn’t want to own any banking stocks.

Markets Routed as Fed tries to hose down Fire

So JPMorgan picks up Bear Stearns for $2…..yes $2…not $20 as on Friday. The fed cuts the discount rate 0.25% which actually is neither here nor there.

The markets rallied initially on some short covering but the market is now in full blown meltdown.

Even Goldman Sachs has reported a write down. Only $3bln which is chump change for them but it shows how this contagion is spreading far and wide.

This is like a game of dominoes now and the central bankers globally need to pull every trick out of the bag to prevent a complete collapse in global banking stocks and general equities.

I would imagine there will be some concerted intervention either in currency markets or in the interest rate markets. This isn’t just a US problem because it will start spreading soon.

This is a very serious situation.

Fed bail out continues: Bear Stearns throws in the towel

Bear Stearns finally ran up the white flag today and was forced to seek funds from JP Morgan for 28 days. These loans have been underwritten by the Fed essentially preventing Bear Stearns going under.

This was the moment of truth for the Fed. They blinked.

Now they have underwritten the US banking system they will have no choice but to support any institution that experiences similar problems. On one hand this is a prudent move as the implications of a bank failure are very serious but the sad fact is that in order for the market to recover from this era of cheap and funny money is to allow failure to occur.

So the taxpayer can now expect to pick up the tab for this party. It will be interesting to see if this spreads outwards from the US as the credit markets simply disintegrate.

Expect more official action next week probably involving currencies as well.

Currency Intervention: Next on the Fed’s Agenda

With the Dow already 250 points off the recent bounce and the $ hitting new lows against the Yen, Sfr and Euro, the time has come for the Fed to look at the $. Today even the President was moved to make some comments about strong dollar policy and importing energy inflation through a weak dollar.

The problem the Fed has is that the $ could really collapse here. $Yen is current at 101.15, a 13 year low give or take. That was when I was actually quoting the currency pair myself. Actually it has been down at these levels a few times but briefly. For the Japanese this is not helpful at all with exporters penciling in 113 for 2008. But the psychological effect of the $ breaking 100 against the Yen and 1.00 against the Sfr may well bring some serious fallout. The $ may well be booted into oblivion by all those on currency pegs to the $ who are certainly wondering whether or not to abandon them.

The question is whether intervention would do any good. Well it might and that may be all that is needed. There isn’t any good news for the US right now but then again its been one way traffic for 6 months now and for most of the last few years for the $. Is there any good reason to see it lower other than a complete disengagement by the market of the $.

The knock on effect in all markets could send the whole US financial system over the edge. A quick 5% appreciation in the $ against the majors as well as Aus, Cad and Nz would certainly help take the edge off the current situation. It may not save the $ in the long run but it would buy some breathing space over the next few months.

Will they do it? Well if they don’t you’d better hold on to your hats as carry trades get unwound.