Monday, March 17, 2008

Bear Stearns crisis makes case for gold

I'm not much of a gold bug, although I certainly can appreciate the case for a gold standard and the critiques of fractional-reserve banking. The current crisis that the government and the Federal Reserve are having so much trouble dealing with -- the fire they are pouring gasoline on -- certainly makes something of a case. Robert Samuelson, in a recent column, explains how convoluted the financing/banking system has become. Mortgages aren't often kept by the institution that issues them, but are "securitized" -- packaged with other loans and sold to inveswtros. The current crisis is likely to affect more of the economy because the system is so convoluted and not the least bit transparent. Without fractional-reserve banking, such convolution would be almost impossible. Bank runs like Bear Stearns couldn't happen, because banks could lend out only on nthe basis of the funds they have on deposit.

The other problem is loss of confidence in the dollar, due largely to thr Fed pumping in more Fed-created money into the economy. The Fed's response? Lower interest rates more so as to pump in even more funny money! It's a quintessentially short-term, not to say desperate approach, that will only make the problems worse in the long run. With a gold standard the government wouldn't be able to manipulate (and more often than not, mismanage) the money supply so irresponsibly.

1 comment:

Seraphine said...

The senior management at Bear Stearns, Citigroup, Merrill Lynch et al should have known better. It's crazy. They should be held liable, not for taking a risk, but for taking too big a risk with their firm's capital. They have a responsibility to shareholders, (and frankly, they are overpaid too).