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The Fed and the subprime mess

So far, it looks like the world’s central banks have been successful in averting a meltdown of financial markets. However, there may be more work (money to be printed) by the central banks as more problems surface. The latest to report problems in the market include China’s second largest bank, the Bank of China, which reported a $9.7 billion exposure to sub-prime loans. A consensus seems to be developing that the Fed will lower the fed funds rate at its September meeting.

Gary North has written for an insightful look into the Fed’s role in the subprime mess. North also discusses the ramifications of the Fed continuing to print money to bail out the holders of the subprime debt. If not immediately, then certainly later, the price of gold will be affected by the creation of more fiat money.

Now, before a bunch of readers jump all over me for having recommended a Gary North editorial, let me say that despite him having been one of the major voices behind making drastic preparations for the Y2K debacle that did not materialize, it does not tarnish North’s understanding of the financial markets. When it comes to money, North is one of the most erudite writers of the times.

One of the interesting things in North’s piece is a table showing the entities that own the subprime debt. Note how many governmental entities own it. Note also how many are supposedly sophisticated financial organizations, which are run by persons with MBAs, even PhDs. If these guys are so smart, why could they not have seen that lending money to persons without the financial ability to repay it was not a good idea?

Other supposedly sophisticated persons, perhaps the same, warn against investing in gold. Are these people you really want to listen to? Frankly, when it comes to money and gold, Gary North is a much better voice.

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