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Follow on Google News | Predictions That Came TrueI was going through my archive yesterday and came across this article which was first published in September of 2007. The accuracy of the predictions here have caused me to excerpt pieces of it for your edification.
By: ResourceX During a conference call this past Friday, Don Coxe, who is the Chairman and Chief Strategist of Harris Investment Management, and Chairman of Jones Heward Investments, stunned listeners when he suggested that there was a rumour that “there’s rumors the Saudis are going to move off their peg to the Dollar”. The rumor comes on the heels of the Fed’s 50 basis point rate cut, which is being hailed on Wall Street as appropriately aggressive and reviled in the Bond market as inflationary. I think its bald-faced bailout of the credit system, and is a ham-handed attempt to restore faith in the monetary system worldwide. If you’re like me, your faith was gone long ago, and sure, the markets are exuberant in their short-term reaction, but the U.S. Dollar has sunk to new lows versus most currencies. If a real rout of the U.S. Dollar materializes in the form of wholesale dumping of dollars from foreign reserve holdings, then obviously the U.S. is going to suffer severe economic recession. In a letter written to the Financial Times on September 19th by Richard Dale, professor of International Banking at Southampton University in the U.K., he relates the following cautionary tale: In May 1984, Continental Illinois, then the seventh-largest bank in the US, suffered a devastating run. Having only a small retail deposit base, the bank had expanded its loan book rapidly by borrowing heavily in the wholesale money markets. When doubts began to arise about the quality of Continental’ The Comptroller of the Currency stated publicly that the bank was solvent and adequately capitalised; The Northern Rock crisis is almost a precise re-run of the Continental Illinois collapse. The immediate cause of the problem – over-rapid balance sheet expansion funded through wholesale markets – is the same. The progressive official interventions – statements on solvency, open-ended liquidity support and now the guaranteeing of deposits – are being repeated. But confidence has yet to be restored and the ultimate ownership of Northern Rock is in doubt. There are two clear lessons in all this. First, once confidence is lost it is very difficult to get it back: if there is criticism of the Bank of England, it is not that it bailed out Northern Rock but that it underestimated the potential for a contagious financial collapse. The Bank should have offered 100 per cent deposit insurance on day one of the crisis and before queues started to form outside Northern Rock branches. Second, depository institutions that engage in large-scale maturity transformation (borrowing short and lending long) should be funded largely from captive retail deposits and not from fickle wholesale markets. How the UK Financial Services Authority overlooked this fundamental precept should be a matter for investigation. Finally, when the dust eventually settles on this global banking crisis, there may be a case for reviewing the fusion of banking and securities markets that has occurred following the abolition of the US Glass-Steagall Act a few years ago. Arguably, the core banking system should be kept separate from the innovative risk-taking that is the lifeblood of the securities markets. Embedded in a story on the front page of the Financial Times on September 19 was this little snippet in an article entitles “Lehman Results Bring Cheer to Wall Street”: “Lehman overcame a 47 per cent decline in revenues from fixed-income capital markets. Its earnings were boosted by a lower tax rate and the use of a new accounting rule allowing it to book as profits the reduction in market value of some of its debts”. Alex Pollock of the American Enterprise Institute astutely commented, “In other words, if the “fair market value” of your debt goes down – perhaps because the bond market considers you a worse credit risk – while you owe exactly the same amounts to your creditors as you always have, you can then declare a “profit”. The “fair value” accounting theorists have thereby arrived at absurdity.” George Orwell appears to have accurately predicted the governments willingness to employ “doublespeak” # # # To learn more about ResourceX, please visit: www.resourcexinvestor.com To learn more on this article, please visit: www.midasletter.com Website: www.resourcex.com End
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