- Money Morning Australia

The Obama Proposal for Bank Reform


Written on 25 January 2010 by Kris Sayce

The Obama Proposal for Bank Reform

Well, we’ve taken a look at US President Barack Obama’s proposal for bank reform.

Not surprisingly, the plan involves trying to ‘unscramble the egg’ rather than throwing the whole thing out – including the pan – and starting again.

Obama’s plan has two goals. First to…

“Limit the Scope – The President and his economic team will work with Congress to ensure that no bank or financial institution that contains a bank will own, invest in or sponsor a hedge fund or a private equity fund, or proprietary trading operations unrelated to serving customers for its own profit.”

And second…

“Limit the Size – The President also announced a new proposal to limit the consolidation of our financial sector. The President’s proposal will place broader limits on the excessive growth of the market share of liabilities at the largest financial firms, to supplement existing caps on the market share of deposits.”

So far the market hasn’t liked it.

Since the ‘plan’ was announced last Thursday the Dow Jones Industrial Average has fallen 4%. As you can see from the chart below:

Dow Jones Industrial Average

 

Of course CommSec’s “Mr. Happy”, economist Craig James says not to worry:

“Fear has put its ugly head up again. I don’t think it’s going to be long-lasting this time. It’s a knee-jerk reaction to some proposed bank changes in the US and concerns in China. In Australia the overwhelming focus is the inflation figures. We’re looking for a fairly benign result, an increase of something like 0.7 or 0.8 of one per cent. That would be the sort of outcome the Reserve Bank wouldn’t be getting overly concerned about.”

Which rather reminds us of a cop stood at the scene of a traffic accident encouraging passersby to “move along, there’s nothing to see.”

We can expect to see plenty of similar claims from Australian mainstream commentators. They’ll tell you our banks won’t be affected by Obama’s plans because the ‘strong’ Aussie banks are different.

To conclude that Australian banks won’t be affected at all is somewhat naive. But look, we won’t jump the gun on that yet, we’ll wait for the so-called experts to put their foot in it first, then we’ll pillory them.

The problem with Obama’s plan is that it targets the effect but ignores the cause.

The real cause

Let me try and explain…

The two paragraphs that I’ve reprinted above, while they don’t go into specific detail, give you a clear outline of what the plan will involve.

It’s proposing to separate banking into ‘plain vanilla’ savings and loans banks on the one hand, and ‘fancy pants’ merchant or investment banks on the other.

The simple idea is that the ‘plain vanilla’ banks will take deposits from savers and lend out money to borrowers. While ‘fancy pants’ merchant banks will do, well, all the exciting stuff – finance hedge funds, manage investments, capital raisings, create and trade complex financial products…

And never the twain shall meet.

That, the claim seems to be, will result in a much stronger, safer and more responsible banking and financial system.

It may surprise you to learn that it’ll do nothing of the sort.

You see, what Obama and the mainstream commentators highlight as being the ’cause’ of the financial meltdown – “hedge fund or a private equity fund, or proprietary trading” – is actually the effect of the real cause of the meltdown.

They’ve got their causes and effects all mixed up.

Financial markets and banks didn’t collapse because of hedge funds, or private equity funds, or proprietary trading. The existence and actions of these groups is merely the consequence (or effect) of the real cause.

You can compare it to someone getting shot. Sure, it may have been the bullet that appeared to do all the damage, but it was the person who loaded the gun, aimed, and then pulled the trigger who should be blamed.

Like them or not, the banks were and still are, taking advantage of a distorted market. And it’s those distortions that are the real cause of the financial mess.

So, what are the distortions? Simply put it’s the fault of unsound money and government and regulatory manipulation. I know that may be a difficult concept to grasp considering all the blame has been shifted towards the ‘free market.’

Probably the funniest and most ironic aspect the last two years has been the way the mainstream press and economists have associated the idea of a ‘free market’ with the recent behaviour of the banking system.

That somehow the free market is responsible for 100-to-1 leverage. That the free market is the cause of super low interest rates. That the free market is responsible for banks taking excess risks. And that the free market is responsible for banks having to be bailed out by the government.

All of which is wrong.

The real truth is that you can draw a line back from those three problems – and any other you care to think of – all the way back to one of two causes: government and central bank manipulation.

Sure, the banks aren’t faultless. If you’ve read Money Morning for long enough you’ll know that we’re no fan of the banking system. But their actions are merely as a response to policies that originate with governments and central banks.

To explain what I mean, let’s take a brief look at three of the points I’ve highlighted above: excessive leverage, low interest rates, and excessive risk taking.

It’s all part of what I call a ‘Risk Shift.’

By that I mean, banks are encouraged to take risks due to a manipulated market. Like most risk takers they’ll push things as far as they can. Sometimes they’ll step over the line.

The problem is that the risk limit has been shifted. The banks went to the line, crossed over it and then found out they could push the barrier further back. So they did.

When they reached the next barrier they found out they could go even further… and so they did. They shifted the risk ever further, and each time they were allowed to, not by the free market, but by government and central bank manipulation.

If it was left to a truly free market, the banks that crossed the line would have been punished. And those that didn’t cross the line would be disinclined to do so for fear of suffering the same consequences.

Sound money is the cure

Which brings us back to the concept of ‘sound money.’

You see, when you have a sound money system that is backed by gold – or is gold, the holders of the money (gold) know what it’s worth. They know that absent a massive discovery and recovery of a new gold resource the gold in their pocket is worth the same today as it was yesterday.

And that’s the most important aspect of a medium of exchange. There has to be faith in it. Faith that it will hold its value during the time that you’re holding it. Gold can do that because of its special qualities.

Paper money can’t hold its value because it has none of the same qualities of gold – apart from the ability to transport it easily. For instance, Wednesday’s consumer price index (CPI) number will illustrate this. You’ll find out the money in your pocket is worth less then that it was three months ago.

And about 90% less than it was forty years ago.

Here’s where the problems start. When you have unsound money, ie. a money system not backed or issued in gold, central banks and banks are able to do all sorts of funny things with your money.

When you’re using gold coins as the medium of exchange you know exactly what you have. However, when you’re using paper money you’re relying on the faith of the financial institution to have that paper money in their vaults.

But as you know, the amount of paper money isn’t the same as the amount of money on issue. The amount of notes and coins that have actually been minted and printed by the Reserve Bank of Australia (RBA) is only a fraction of the actual claims to money.

That’s all thanks to the fractional reserve banking system that allows banks to create money from thin air. Money that’s in excess of the notes and coins on issue. Think about it this way. When depositors put money into a savings account, the bank can use this as collateral to lend to borrowers.

The bank creates the money and places it in the borrower’s account which they then spend on building a house or buying a car. Yet the saver still has access to their savings. They can withdraw their savings and also spend it or invest somewhere else.

You deposit $100, the bank lends out $90 and keeps $10 in reserve. Yet you still have a claim on the full $100 which you can withdraw at any time. How is that possible when the bank has loaned it to a borrower?

It’s because at the tap of a button, the bank has just created the money to give to the borrower.

While the bank could theoretically do this under a gold backed currency it would be much harder to do so. If savers got wind that the bank was lending out all of your gold to someone else while still claiming it was holding the gold in the vault for you, it would create a ‘run’ on the bank.

Savers would demand their gold back. However, because the bank had been lending the gold to others it would not have all the savers’ gold in safe keeping and therefore would not be able to meet all the demands.

Under a sound money system a bank would be restrained from issuing excess credit. The bank would understand the risk of lending too much if it knew the consequence would be a run on the bank.

Of course there would be enough savers who would be happy to have their savings inaccessible for a period of time – a term deposit – so that they would know they can’t access their savings.

The bank would then be able to loan those savings in return for an interest cost knowing that the saver would not be able to make a claim on the savings until the term deposit had expired.

However, when you have a paper currency that has been forcibly instituted as the only legal tender by the government and the central bank, it creates the kind of problems you’ve seen in recent years.

The public grows accustomed to the paper money being sound because it’s ‘backed’ by the faith of the government and the central bank. You turn up to the bank and your money is there.

You can take it to the shops or exchange it with someone and they’ll accept it. Everything seems fine.

The problem is that because there is nothing apart from the ‘faith’ of the government backing the notes, the central bank and the banks are able to issue more notes and coins when they feel like it.

The result is inflation. The issuing of new notes and coins, and the expansion of credit by the banks, devalues the money already in existence.

Inflating the money supply

But that’s just the start of it. This helps to create the next phase where you have the excessive risk taking. Because the banks and savers and borrowers can see the effect of the increased supply of money – rising prices – they act to try and pre-empt the next rise in prices and asset values.

That causes them to take even bigger risks. Something we’re seeing in the Australian housing market now – “Quick, buy in now before it’s too late!”

The consequence for the banks is that there aren’t enough savers knocking on the door to deposit funds. So they need to get money from somewhere else.

That’s where complex financial instruments come in. By the way, having read the financial press in recent days you could be forgiven for thinking that all the risk taking happened after the US repealed the Glass-Steagall legislation that separated retail banks from merchant banks.

Of course this is incorrect. Mortgage backed securities for example have been around since the 1980s, long before the Glass-Steagall act was repealed in 1999 – check out the book Liar’s Poker for an insight into how that bubble started.

Again, the creation of mortgage backed securities wasn’t the cause, it was the effect. Banks needed to get access to more cash so they could provide more mortgages to take advantage of the demand for housing that was being created by an increase in credit.

Not surprisingly, the merchant banks came to the party offering to bundle the regional banks’ mortgages into a package which could then be sold off to investors – pension funds, fund managers, etc.

As the idea caught on, more and more banks got into it. And because these mortgages would slide straight off their books into the hands of investors, the banks became less concerned about the ability of borrowers to repay the loans.

On top of that, strong arm tactics by the US government to virtually force banks to lend to those with lower credit ratings – mainly minorities – made the problem even worse.

But again, lending to minorities wasn’t the cause of the meltdown, it was the effect of the government interference.

Finally, the great ponzi scheme collapsed, because those that borrowed were unable to repay, and those that saved were unwilling to invest in those ‘assets’. And then it was realised that not only were investors investing directly in these ‘assets’ but investors were also investing in instruments based on those assets.

The excessive credit, excess leverage, and excess risk taking met its doom.

The free market would have sent the banks broke

But none of it was down to the free market. Certainly there were market forces involved. But it was market forces distorted by government and central bank manipulation. In a free market the banks would have been allowed to go bust.

And those banks that didn’t take part in excessive risk taking and leverage would have been rewarded by attracting new customers looking for a safer bank. A free market most certainly would not have bailed out the banks, and it most certainly would not have allowed them to carry on their same old tricks.

To think that somehow the problems that caused the financial meltdown have been solved or will be solved by more regulation and government manipulation is extreme naivety.

It will do no such thing. We can’t be sure that Obama’s plans will make things worse than they were, but they certainly will not make things any better.

Limiting the scope and the size of banks and their activity does no more than attempt to fix something that’s already been broken a thousand times.

We can see right now that the repeal of Glass-Steagall act in 1999 is being used as the scapegoat to blame everything on the free market. As if there was a linear connection.

There isn’t.

Make no mistake, relying on the ‘brains trusts’ of politicians and bankers to solve a problem to an event that they didn’t foresee happening will only succeed in ensuring the same problem reoccurs in the near future.

Cheers.
Kris.

 

60-Second Market Round Up
by Shae Smith

On Friday, the S&P/ASX 200 was down 102 points (2.10%) in the first 15 minutes of trading. The index settled slightly up and traded sideways for the rest of the day, finishing at 4,750.60, ending the day down 1.59%.

Again the Australian market has opened down this morning. But it will be a quiet trading day, as many people have aren’t working today in the lead up to Australia day.

The Dow Jones Industrial Average took another beating on Friday, losing 2.09% or 216 points to close at 10,172.98. The Dow has lost 5.1% over the past three trading days.

Investor’s nerves are being tested in the States at the moment. President Barak Obama’s banking restrictions continued the massive sell-off of the major American banks on Friday and people are starting to question if Ben Bernanke, the current chairman of the US Federal Reserve Bank, should be nominated again for the top job. His term expires on the 31st January. Read more about the US market here.

On Friday, in the UK, the FTSE was down 0.60%, closing to 5,302.99. The Footsie was down 2.8% overall for last week. The poor earnings for banks and the ‘Obama news’ has continued to unsettle investors in the UK.

The Nikkei was down 277 points (2.56%) to close at 10,590.55.

The price of spot gold in Australian dollars is trading at $1,213.55 while in US Dollars it is trading at $1,092.60. The price of silver in Aussie dollars is $18.89 and in US Dollars it is $17.01.

The Aussie dollar versus the US dollar is trading at USD$0.9032, and against the Japanese Yen JPY81.46

Crude Oil closed at USD$74.54

For the biggest movers on the market yesterday click here…



Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...
Share

Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


25 Comments For This Post

  1. GB Says:

    still disagree with money being backed by a non renewable resource. Kris maybe you can explain what happens, if anything, when the world has mined all the gold?

    here is a classic from the age – hope nobody has any money invested with these guys – i pasted a few quotes below

    1. “The uptrend is still in place until we’re proven wrong,” – no comment needed
    2. “actually a prudent economic thing” – an economic thing? Please tell me how to give you money??
    3 “…you’d think we’d be on the medium-term upward trend.” – do you know or just think?

    He also doesn’t understand that if china cools down growth in roads, property, bridges etc… that requires enormous amounts of our resources how that could possibly affect our economy and the stockmarket

    http://www.theage.com.au/business/economic-worries-wont-derail-rally-analysts-20100125-mtf1.html

  2. Greg Says:

    I think you guys are missing the point. The gold standard didn’t save the world from a massive depression in the 1930′s . The reason for this is that most of the money in circulation was NOT gold but money based on debt (bank loans).

    A common misconception is that when banks lend out money, they are lending money deposited by their customers. However, they are not taking money out of their customers’ accounts but they are still handing out cash to their borrowers or crediting their borrowers’ accounts. In other words, the banks are CREATING money and as long as banks can create money, what money was originally based on (whether it is gold, silver, beads, shells or fiat currency) is irrelevant.

    If banks have the ability to create money, then they have the ability to control the money supply. There is a common (but unconfirmed) belief that the major banks caused the great depression by deliberately contracting the money supply.

    If we want a stable money supply then we must end the ability of the banks to create money. This means that borrowing/lending of money can only be achieved in two ways: the handing over of one’s own cash or the transfer of money from one bank account to another bank account.

    Ironically, if the banks can’t create money then a gold standard would be a disadvantage. This is because the money supply could not expand with the increase in population and GDP and we would have frequent problems with recession and deflation. With a fiat money system, the government could regulate the supply of money to account for population and GDP.

    I appreciate that many people would not be happy with politicians having the ability to create money to buy votes but it would have to be better than allowing foreign owned banks to create money and use it to extract wealth from a country via usury.

  3. cb Says:

    GB, The Age is a dog. It is an establishment lackey worse than perhaps most.

  4. cb Says:

    Greg – what is the difference between leaving the goat in charge of the cabbage and the fox in charge of the hen house?
    My answer: one will be a more bloody business than the other, but otherwise the outcome is going to be the same. Moral of the story: You need the discipline imposed on inherently undisciplined people. Fail to do that, and they will print money for their own benefit and dilute the purchasing power of everybody else’s earnings and savings.

    One of the reasons why gold and silver, instead of tea leaves and cabages have been used by people across cultures and millenia as money is because these cannot be multiplied and charmed into existence without genuine hard labour and the expansion of serious resources and energy. That means that no scoundrel can scam society out of the courrency’s purchasing power, no matter what. Human nature being what it is, you need such a safeguard, or end up sorry.

    God is said to be non-renewable, but the supply of new gold from mining is pretty constant, around about 2% per annum. If GDP and genuine growth, instead of inflation as it is at the moment, outstrips this 2% mark, then you will experience some mild deflation, where your earnings and saved money will buy for you more and more, instead of buying for you less and less. Isn’t this precisely the encouragement we would need for saving more during the good times for that rainy day? Also, without savings, there is no capital, and whithout capital there is no capitalism. There is more to be said for gold than superficially would meet the eye.

  5. cb Says:

    PS – are you new to this forum? People here are well aware that bankers have a licence to print money into existence through mortgages and other loans, and that that is precisely what they do. And, one of the main complaints here is that they are indulging in same way to much.

  6. puntpal Says:

    I dont really get the currency concerns – I will be honest, but like I have said before I do have faith in people realising their currency is being devalued before it gets out of control. I also think the price of gold etc… would sky rocket and this would also send a sign to restore faith in a currency.

    The beauty of liberal democracies is that the people can change things, and this includes the Government. So if ever there was an issue that would get a government thrown out, surely ruining the currency would be it.

    Sorry but I think all of this infaltion scare mongering is misguided, from what I have read we will deflation for a long time and they would have to pump 10 or 20 times the amount of money into the economy to cause inflation.

  7. Dave Kidd Says:

    So Kris is writing about the USA again, adding to the mistaken belief amongst many media misled Australians that everything of importance for Australia originates in the USA. He seems to be criticizing Obama’s approach to improving the banking system for ‘trying to ‘unscramble the egg’ rather than throwing the whole thing out – including the pan – and starting again.’

    What Kris needs to acknowledge is that it is rare for the design of any complex machine or system to be perfect at the beginning. Most good ones are the result of evolution involving numerous changes. So Obama is quite correct to be attempting further evolution of the American banking system. Without testing, there is no certainty that any brand new system designed by himself, his advisors, or Kris would be any better.

    Not to mention the problem of what is and is not possible in American politics. Obama is one just individual, severely constrained by America’s war industry, its jewsmedia, dangerously powerful corporations, religious nuts and self-serving lobbyists of all sorts. Even if Obama fervently wanted to implement the most perfect banking system the world had ever known, do you think those constraining him would recognize it and let him do it?

  8. GB Says:

    Jim Chanos presentation on China and why he is shorting it. If he is correct then it really is bad news for us

    I liked the bit where he said China is currently planning on building millions of square feet of office space which is enough to give every person in china a 5 x 5 office cubicle!!!

    Goes for a while but is worth the ‘realist view’ if you have time to watch it

    http://www.bloomberg.com/avp/avp.htm?N=av&T=Chanos%20Sees%20%60Overheating%20and%20Overindulgence'%20in%20China&clipSRC=mms://media2.bloomberg.com/cache/vF8DfPdMjqD0.asf

  9. Greg Says:

    Hi cb. Yes I am relatively new to Money Morning but I have done a detailed study of Fractional Reserve Banking and the history of banking in general. In a closed economy, FRB would not be a serious problem because the amount of money created could be regulated. However, since the Australian economy was opened up to the international banking community, there is no limit to how much money can flood into this country (save for the official “cash” rate as set by the RBA) and this is a serious problem.

    Deflation does indeed mean that money becomes more valuable but you have not considered the rest of it. Deflation also means that businesses have to sell things for less than they paid for it (a recipe for bankruptcy) and that there is insufficient money available for investment. In other words, production has to decrease to keep track of the money supply and that creates massive unemployment.

    In the past, precious coins often became “debased” (mixed with base metals) to allow the money supply to grow. In that environment, bank notes became a more secure way to hold on to your money and this is what lead to FRB.

    In any event, the gold standard did not stop governments from cranking up the printing presses. I have in my possession a book from 1931 titled “Elementary Bookkeeping for Australian Students” by Philip J. Turvey. In that book there is an interesting statistic; In July 1928 the total value of unredeemed (for gold) notes in Australia was £44,103,226 while the total amount of gold reserve was £22,666,503 representing 51.39% of the note issue.

    Australians are generally not tolerant of governments that don’t live within their means – especially when reckless spending causes a sharp rise in inflation. This was one factor which saw the Whitlam government tossed out on its ear in the 1970′s and we will probably see the Rudd government go the same way once the downside of his “stimulus” package starts to bite.

  10. Dave Kidd Says:

    Greg wrote: ‘If banks have the ability to create money, then they have the ability to control the money supply… If we want a stable money supply then we must end the ability of the banks to create money.’

    I agree, and I do believe the banks create money although I have never heard them admit it, and I don’t recall any of our supposed political leaders ever telling us how they do it. Whenever scaremongers predict dire inflation as a result of printing too much money it is usually the government which gets the blame, but it seems likely that the banks, continually loaning out money they don’t own, must have a far greater impact on inflation.

    Greg went on: ‘I appreciate that many people would not be happy with politicians having the ability to create money to buy votes but it would have to be better than allowing foreign owned banks to create money and use it to extract wealth from a country via usury. ‘ Possibly. But why should the control of our money supply be entrusted to politicians? It’s quite a complicated juggling act that needs to be got right, yet politicians as a whole don’t seem very smart at such things. They even claim they can’t even operate publicly owned businesses successfully on our behalf, their explanation of why they have been privatizing and contracting out their responsibilities. Perhaps the best way of controlling our money supply would be to contract out the responsibility, perhaps to a small team of academics who have some expertise in statistics, mathematics, and whatever else it takes.

  11. Adam Smith Says:

    Bravo! Excellent article…too many unhappy people who are lashing out at the symptoms and not to root cause of cheap money supplied by the Fed. Cheers from bankrupt California!

  12. cb Says:

    Does anyone know what happened to Kevin Rudd’s most pressing issue of the decade of not so long ago? Some stupid little rat seems to have gone completely to ground with it. Anyhow, here is a most compelling, authoritative account of the state of the play regarding climate change by a man I admire more and more, Lord Christopher Monkton. His account and comments are very much contextualised to Australia, but anyone who cares about this issue will benefit tremendously by the well considered and well argued views expressed in the course of this interview. Enjoy.
    http://www.2gb.com/index.php?option=com_content&task=view&id=6295&Itemid=134

  13. michael francis Says:

    Spotted Reserve Bank Governor, Glen Stephens the other day panning for ‘fools gold’ at Sovereign Hill .

  14. cb Says:

    Following on with the topic of climate change, here is a very sensible assessment by the Institute of Public Affairs Australia on where we are at and what should be done following the Copenhagen debacle:
    http://ipa.org.au/news/2050/lack-of-global-agreement-offers-a-chance-to-cut-our-losses

  15. cb Says:

    And finally, the IPA’s sensible and balanced assessment of Climategate itself:
    http://www.ipa.org.au/publications/1775/climategate:-what-we've-learned-so-far

  16. cb Says:

    lol, Michael. Do you think this is just a hobby for him, or is he preparing for tougher times after crashing the Australian economy?

  17. cb Says:

    Ah, that darn link: the apostrophy seems to mess it up. You might have to copy and paste the address it into your browser’s window to get to the page directly. http://www.ipa.org.au/publications/1775/climategate:-what-weve-learned-so-far

    Otherwise, you can find it on the IPA’s website under the title: Climategate: What we’ve learned so far

  18. cb Says:

    For the followers of Steve Keen, here is a brief interview he gave with Max Keiser.
    http://www.archive.org/details/MaxKeiserAndSteveKeenInterviewOnBbc5live24Jan2010

  19. Rocket Says:

    Banks can continue to lend money (create new money) if their assets continue to increase in value. Australian banks (and home owners) are heavily invested in property which means our economy is very much reliant on the property market. In reality property has become the new gold and the Government will do anything to prop it up. The real threat to property prices will be mortgage interest rates above 8% but the Government will have to stop its stimulus and reduce its deficit to prevent this. Looks like Rudd and Swann(Or Abbott) will finally have to make some tough decisions this year in the budget.

  20. Drew Says:

    Hi All,

    Did anyone see this article in the Daily Telegraph about Westpac reducing its LVR?
    http://www.dailytelegraph.com.au/news/sunday-telegraph/tighter-credit-rules-to-halve-home-loans/story-e6frewt0-1225822838856

    It’s a good article (and not a story that was widely publicised) but they still managed to sneak a few quotes in from a property spruiker. Like this from a Mortgage Choice broker:
    “It’s a very worrying development because if others follow suit, we could see the majority of first-home buyers priced out of the market.”

    It might be a worrying development for this Mortgage Choice broker because his commissions will be slashed if there’s a property crash. But for potential first-home buyers, I reckon this is great news. Because ironically, it is this cut in bank LRVs that could bring about a crash in property prices that the banks have been so desperately trying to avoid. A crash that will price first home buyers back into the market.

    My guess is that that in 4 years time, house prices will be at least 40% cheaper.

    And if I’m wrong, I’m going to walk to the train station in the mornings, instead of driving.

  21. GB Says:

    It seems i was wrong and china will boom forever – the WA chamber of commerce “… predicts business and consumer spending will match and even surpass levels from immediately before the global financial crisis within months” and “The local impacts of the global economic slowdown will soon be a distant memory as WA enters the new decade…”

    he said: “within months” – does that mean that interest rates will also be back at 10% within months??

    http://au.news.yahoo.com/thewest/business/a/-/business/6720211/forecasts-put-wa-back-in-boom-business/

  22. cb Says:

    Liar, liar, the chief warmist’s pants are on fire!!!
    It looks like the IPCC’s Chairman himself will be forced to resign before too long, but guess who is in the headline video shots with him? You have to see it to believe it:
    http://www.youtube.com/watch?v=CVhhYyCsvBM&feature=player_embedded#

  23. Ciao Says:

    The key question for both Krys and several of the readers are:

    1. Could there have been sound money without a Gold standard?

    2. Could there have been a real estate bubble and services economy without a funny money facilitated current account deficit?

    I contend yes to the first question if debt service costs and rents become measured as part of the CPI basket after the current bubble has burst. The CPI basket itself must in future be acknowledeged as being constantly subject to manipulation and attack by inflationists and consequently there must be an Austrian minded oversight of money supply excess; one that is not the instrument of rate adjustment but the reserve power that calls severe trade weighted & money supply imbalances and adds such penalty rates required to redress them.

    2. My answer is no here, for all the current account deficit countries. There is no point of difference for Australia’s recent “hold” effected on the real estate bubble because the funny money is still very much in play (at least until recent days or as reflected by speculators in past months interest rate swaps) for a country that has exploited both a carry trade & a sovereign guarantee of bank funding that has not been available to any other major economy (don’t count NZ because they too are on Australian 4 pillar balance sheets courtesy of their branch offices). So that means the bubble will pop here even louder than it has in the US, UK, and the PIIGS the second the AUD dives (and that could be any day now).

  24. cb Says:

    Ciao – You may be right, but your proposal would have the disadvantage of remaining more susceptible to manipulation and obfuscation than a simple gold standard, which would be straightforward and much more easily monitored. Alas, wherever money is to be made, there will be a Madoff, and the risk of excess printing of paper, even under a gold standard, is ever present. This is what Nixon did, and a few other presidents before him, until the US outright defaulted by refusing to settle their trade imbalance in gold, and instead formally abolished the gold standard.

    So, I am not quite sure what to say. Under whatever standard, including a gold standard, if those entrusted with the safeguarding of the nation’s earnings and savings purchasing power decide to be crooks, then that is what they are going to be, and the good people will be the ones to suffer. My personal conclusion from this would be that the only way one could protect oneself against such risks would be to keep the cash portion of one’s savings in actual, physical metal.

  25. cb Says:

    Wow, the tide seems to be really turning, when even The Age is publishing an opinion piece like this:
    http://www.theage.com.au/opinion/politics/be-alert-but-wary-on-climate-claims-20100126-mw7z.html



GET THIS NEW REPORT : 5 Things You Can Do To Boost Your Retirement Pot


In this report we’ll give you strategies, tips and advice to help you kick-start, or revive your retirement savings right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

New Frontier Investor

The last investment megatrend birthed stock gains of 11,095%, 20,621% and 50,760% over 20 to 40 years.

If Kris Sayce is right, gains from this next megatrend won’t just reach those heights...

They’ll SURPASS them...

To see why, click here.

Iron ore leadgen

  • ^NDX3976.066+17.033 - +0.43%
  • ^FTSE6773.44-34.31 - -0.50%
  • ^AORD5621.600+6.500 - +0.12%
  • ^AXJO5630.400+7.500 - +0.13%
  • AUDUSD=X0.9325
  • USDJPY=X102.818

PAN [predict literally ban]

interest rates leadgen

Australian Small-Cap Investigator

Why Holden’s future lies
beneath the soil in
Tasmania…

 
And not just the future of Holden…but Toyota,
Hyundai and Mazda too


CLICK HERE FOR THE FULL STORY

investing success leadgen

TDR [war in the pacific ban]

Resource Sector leadgen

Gowdie Family Wealth

Which type of family are you?


  1. The kind that ends up in court
    battling over inheritance money…

  2. Or the kind that knows how to
    protect, pass on and grow wealth forever.

Click here if you want the kind of family
that grows its wealth for generations.

The Money For Life Letter

A giant wrecking ball is about to smash Australia’s retirement system to smithereens...
 
And unless you take the evasive action outlined in this Special Issue, everything you’ve saved and invested over your whole working life could soon be GROUND to DUST.
 
Click here to read.

Gold Stock leadgen

Revolutionary Tech Investor [BANNER moonshot]

Graphic Ad 1 – Blue Chip Stocks Report


More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

I’d find it much harder to live without the services provided by the private sector. As for the publ [Read More...]

If too many retirees leave the workforce without enough money put away in superannuation, the pensio [Read More...]

If you answer ‘yes’ to the following questions, then you’re hoarding your investments. Don’t despair [Read More...]

Most large super funds have limits on where they can invest superannuation. This means many investor [Read More...]

Russia and its supporters have nothing to gain from attacking civilians. Russia and Putin were winni [Read More...]

The ‘recovery’ has been a fraud from the get-go. The US economy is stuck in a low-growth…semi-depres [Read More...]

Economic data out of China has improved on the back of targeted stimulus. The result? Time to get bu [Read More...]

Just because governments and central banks around the world are trying desperately to levitate world [Read More...]

Perhaps soon, perhaps not — the US stock market will have one of its worst days. Bear markets and ma [Read More...]

China’s moves are as much about food security as they are national security. Whether its fish, fuel, [Read More...]

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery