Since last August we have watched as the sub-prime crisis turned into a credit crunch and from there into a… … liquidity crisis. Like a cancer spreading through the financial system it suddenly struck a vital organ, taking the seemingly controllable cancer into one the doctors are fighting to save lives.

Not only has the sight of banks refusing to lend to banks moved to a new level, major banking institutions are tumbling in the face of its onslaught. With the weekend’s, Federal Reserve rate cut on direct loans to commercial banks, by a quarter-point saying it will allow primary dealers to borrow at the rate in exchange for a broad range of investment-grade collateral the drama has had a gear shift change. The Fed also extended the maximum term of discount-window loans to 90 days from 30 days, but still has not accepted ownership of the assets against payment, so leaving the debt crisis intact. In the same weekend as it saw Bear Sterns collapse, it gave its hurried blessing to the deal of J. P. Morgan Chase & Co. wherein J.P. Morgan Chase & Co agreed to buy Bear Stearns for $2 a share after the shares had been trading at $30 less than a month ago. It seems the vultures are having a feast [even though they are now offering 10 a share]

Last week we were all aware of the threats to the money system, but now the Tsunami is hitting. Is the rescue a sign that the crisis has been conquered? Not at all! Most now doubt that it has even been contained with some thinking it has been engineered by the Fed to worsen. The cancer that started last August has now spread to the consumer from the blue collar worker through to executive level as they are changing from their “live now, pay later” culture to one of “pay now and live as best you can”. The checks eagerly awaited from the stimulus package from President Bush in May are now more likely to fight the debt fires than to go to more “living today”. As inflation begins to point to a higher cost of living, as the oil price now points to a further doubling to $200 and gold has vaulted the $1,000 level [although it then was dumped all the way back to just above $900], an awareness is dawning on all from the financial towers down to ground level that the empire of debt on which the last decade of boom has grown is shrinking far faster than thought possible. Since last August dubious mortgage debt to asset backed commercial paper [made up of mortgages, credit card debt, car loans and business loans] are finding it harder to stand as collateral for finance. To counter this shrinking credit, the Fed alongside European central banks, have pumped in billions of dollars worth of Treasury Securities, in the hope of stopping the atrophy. Interest rates were rapidly lowered and continue to be so with last week’s 0.75% drop, in the hope of easing credit and giving dubious debt more substance. Meanwhile the disease spread from “collateralized debt obligations” to “structured investment vehicles,” a more senior form of debt. But then, after a lull in which it was hoped the crisis had been contained, in December it reappeared when it began to be seen just how far the cancer had spread, as major world-class banks [from Europe as well as the States] reported the billions lost in write-downs of asset values on which their survival depends.

The next step has been to move further to make these debt instruments more palatable through acceptance of them by the Fed, the lender of last resort [through the “Term Auction Facility]. Mr. Bernanke climbed aboard his helicopter expanding this program to $100 billion a month in March, plus infusing another $100 billion into the financial system through its open market operations and created another $200 billion lending program to the big investment banks with mortgage backed securities as collateral.

Certainly unconvinced, the financial world still does not accept that these instruments have been ‘saved’ by the Fed as they remain only collateral for debt, not acceptable assets, yet. This remains a foundation of the financial world and the banks, on which the U.S.$’ global empire stands. Once these assets are accepted as assets in payment of debt, power will seep from the global banking empire. Meanwhile the U.S. $’s value is descending at an accelerating pace raising prices in the U.S. on everything. The oil price is holding high at never-before-seen-levels, not because of a shortage, but because U.S. and foreign nationals and institutions are fleeing from $ instruments into assets such as oil in the sure knowledge that their value will rise as those stemming from the $ will fall. Does the Fed have to competence to stop this collapse? Was the 0.75% drop in interest rates and Fannie Mae having another $200 billion to help in the mortgage industry sufficient to turn the U.S. housing crisis around? No! It will take a concerted action by all of the financial institutions, including the Bush Administration and the change of several of their principles, before an effective rescue can be mounted. And they are nowhere near there yet. Indeed they are still reacting to events of around a month ago.

And now Bear Sterns, one of the largest and most aggressive financiers of subprime mortgages has, in effect, collapsed. The task in front of the monetary system, not just the Fed is to prevent a vital organ of the monetary system from collapsing. The $30 billion credit line to facilitate the takeover of Bear Sterns still does not change the debt into a viable asset. To make the rate for borrowing from its discount window cheaper at 3.25% still won’t cut it. All this has done is to add an air of desperation to the picture. With the Fed’s taking over the portfolio of Bear Sterns and controlling all major decisions is getting close to turning debt into viable assets, but not obviously so. The Fed is now teetering on the bring of credibility as a “Lender” in a process very close to a nationalization of an institutions, such as the British Government’s nationalization of Northern Rock, the British bank.

The final move to date is the most worrying. It is that it will make available unlimited amounts of money to the 20 large primary dealing investment banks in Treasuries that deal directly with the Fed. The credibility of the system itself is now on the line with the value of the $ now promised an unlimited level of devaluation. Such is a catastrophic issuance of money. Meanwhile the attractiveness of Treasuries is waning, as the term of such loans, preferred in the market place, is shortening dramatically, a sure sign that a dangerous crisis is unfolding. When debt becomes attractive only when it is so short-term that it is deemed as almost cash, then the bank runs really begin. This has been seen in other parts of the world when disaster has struck.

The crisis is as global as the $ is. The run to gold is a sprint, despite the 10% pullback last week [in a strange, straight-line fall?]. Across the world people are realizing that a tsunami of capital is on the move, either disappearing or about to move into new lands wreaking havoc in selected markets as we are seeing today with most global equity market down 3% with much more to come as the word ‘depression’ is now replacing ‘recession’ in some quarters. The words “Exchange Controls” and “Protectionism” will be the new dramas to be visited on a hapless world any time now. Under such controls gold in Switzerland remains safe [Bullion Vault], but will we be protected against the long reach of the Authoritiesthrough you to Switzerland? It is better to be absolutely sure that you will be safe against this reach. After all the first time you will know what the new controls on capital will be they will have been imposed. We believe they are not far off now [Subscribers, please contact us for how to get this protection].

Meanwhile the U.S. monetary system is still short of capital and is under pressure to contract! Who’s next ? Has the $ stopped falling and gold rising?

” ..the U.S. monetary system is still short of capital and is under pressure to contract!?”

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