Erratum–The following article is being re-sent and contains corrections including the statement that Mr. Dominique Strauss-Kahn is the head of the International Monetary Fund (IMF) and not the Bank for International Settlements (BIS). Please accept our apologies for the error.
THE INTERNATIONAL MONETARY FUND (IMF) HAS SET THE TONE, AND THE WORLD IS STARTING TO HEAR OF DOMINIQUE STRAUSS-KAHN
We suspect that he will be more famous than Britney Spears (among the intelligentsia of the world) before the current derivatives crisis is over.
Dominique Strauss-Kahn is the well respected new head of the International Monetary Fund. We expect his statements will be heard again and again around the world. He has said that he does not think we will get rid of this crisis just with monetary tools, but a new fiscal policy is probably needed.
If we may say it in a humble way, Mr. Strauss-Kahn is endorsing the type of program that we suggested in these pages several months ago. As the brilliant Jim Sinclair, and others including ourselves have been pointing out for years, over-the-counter (OTC) derivatives, are threatening to bring down the world financial system. This current crisis revolves around mortgage-related derivatives, but it is bringing to light a web of counter-party risks created by other derivative instruments.
Governments have rightly panicked and central banks are moving rapidly to provide liquidity to the system. But as we have been pointing out, using an individual country’s monetary policy [inflating the currencies and lowering interest rates] alone is not enough to staunch the bleeding.
Mr. Strauss-Kahn is suggesting that fiscal policy by major governments must also be a major part of the solution. This is not trivial, he went onto say that the IMF would release new global economic data showing a "serious slowdown and it needs a serious response". Mr. Strauss-Kahn is more than a financial heavyweight…he is a responsible one. One who wants not to make money or garner prestige for any country or institution, but one who wants to see the world financial system survive. Thus, he has pointed towards a solution.
A GOVERNMENT BAILOUT OF BANKS AND LOANS IS COMING IN THE U.S….AND POSSIBLY IN SEVERAL OTHER COUNTRIES TOO, BUT HOW LONG WILL IT TAKE THE GOVERNMENTS TO ACT WITH MEANINGFUL FISCAL POLICY?
We have argued that the governments and central banks in the U.S. and Europe, and possibly places like Japan, Australia, and Canada will need to buy debt and/or take over bankrupt banks and financial companies. Of course the debt that they buy will be worth less than they pay for it and the companies they take over will be bankrupt, but a lot of the losses can be recovered with a new wave of capital from government sponsors, and a return of confidence in the markets.
The taxpayers will foot the bill, some of which will be recovered with the return of confidence and rationality in the markets…and with punishing of the fraudsters who caused the problems in the first place.
We know that if the U.S. government throws good money into this, as they did in the Savings and Loan crisis, they will want a body count of jailed mortgage brokers, appraisers, escrow agents, and possibly bankers and other types who engaged in various types of fraud while creating and marketing what appear to be clearly fraudulent loans and securities.
In addition to a bailout, there will also be politically popular, but largely economically ineffective handouts like the economic stimulus/tax rebate package in the U.S. Tax reductions and bigger budget deficits in most all developed countries will lead to declining currencies and rising gold and other precious metals. Not to mention rising food prices.
At Guild Investment Management, we continue to research the countries, sectors, industries and companies that benefit from these changes, and invest accordingly.
We look forward to hearing from you. As this is a service business, we are at your service. Thank you for listening.
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