The Goldwatcher

The invisible hand or very visible financial regulation:

Ben Bernanke’s lecture  ‘Financial Regulation and the Invisible Hand’ was given to students at New York University Law School a year ago -  almost to the day. A week later a Goldwatcher blog included this extract from the lecture: ‘The growing market share of hedge funds has raised concerns about possible systemic risk…… the collapse of a hedge fund might come with little warning….many hedge funds are either highly leveraged or hold positions in derivatives or other assets that make their net asset positions very sensitive to changes in asset prices…..leverage also increases the risks to the broader financial system….. The failure of a highly leveraged fund ….could involve ….. heavy losses on counterparties.(that) could lead to further defaults or threaten systemically important institutions. …… market discipline can fail, as is illustrated by the hedge fund Long-Term Capital Management (LTCM), which was at the centre of an episode of severe financial stress in 1998.′   I didn’t understand Bernanke’s academic meander about the ‘invisisble hand’ at a time when he knew it was urgent for regulation with an iron fist to be introduced  and still don’t understand why action wasn’t taken until the  crisis erupted  a year later. Any announcements being broadcast now that the crisis is over can’t be taken at face value and must be considered in the light of all current risks. 

The hazards of leverage:  The balance sheets of the Fed, the Bank of England and other central banks are now being re-leveraged with debt securities - at the same time as  banks, hedge funds  and other parties are de-leveraging. Jeremy Grantham’s April 2008  letter ‘Immoral Hazard – Greenspan,  Bernanke and Volcker – A Study in Contrasts’ is revealing. (You have to register on  www.gmo.com to gain access to the site. Registration is free.) Grantham accepts that the present crisis is the worst since the great depression and raises the question why some  people believe ‘self justifying high quality blarney’ suggesting the crisis is all but over.  A Bloomberg interview with commentator James Grant is illuminating on depreciated central bank balance sheets and gold as an appropriate investment in these conditions.  

            It will be a few weeks before we know if initiatives by US lawmakers to find a formula that helps homeowners unable to meet mortgage payments becomes law. It will take longer before we know the extent to which the formula will be effective in arresting further dramatic falls in house prices.  And a few more weeks are also needed before the all important question of who the candidates and their running mates in the forthcoming US Presidential election will be and what economic polcies they will campaign on. Without this knowledge commentary on outcomes for the dollar tend to be chatter.  

Publication of The Goldwatcher and blog revisions: The Goldwatcher reaches the bookshelves in a few weeks time. For future postings on this blog to directly address key questions raised in the book the format for this blog is being revised. The first question is always ‘Why Gold?’  In 2008 the case for gold’s stateless money franchise with  utility as a hedge against financial market risks has been compelling. The case remains compelling unless we believe ‘the blarney’ that the global credit crisis is yesterday’s story.