Government and Banking, Who Rules?

By: Julian D. W. Phillips | Wed, Oct 29, 2008
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The events of the last two weeks have presented enormous 'moral' hazards for governments and the banking industry. When we call them moral hazards we are not talking about biblical morality, but the principles behind government [Democracy] and banking [Profit and Prudence].

The effective takeover of the major banks, on both sides of the Atlantic, has brought the interests and politics of government into banking, a place ill suited to such governance. You may well say that the government shareholding does not represent such interference. If that is the case then there was no point to the purchase of such a shareholding, except the hope of an eventual profit.

Bankers, driven by prudence in lending, will still have an aversion to lending after their bailout by government and see the injection of capital as profit opportunities for bankers in safe investments, a 'cushion', which by definition, would exclude broad based lending to an economy in recession, where capital and interest payments will become riskier as economies slide down into what could become a depression. The injection of capital may well save the banks but their role, as source of funds for the economy, will still be reduced considerably.

So there is the moral dilemma! But it is more than that, for the duty of government and now bankers, is to help the economy, lending the money they have had virtually given to them, by the Fed, that has kept them in existence, is it not? The sight of a shrinkage of credit card credit is bringing this issue down to street level!

But then the U.S. will have made one step towards the more Socialistic model of Europe, where the same will have to apply, or else the saving of the banking industry will be at the expense of the taxpayers under their charge. Clearly, the job of central banks is to maintain price stability and growth in the economy. That surely overrides the profit & prudence priorities of the banks, of which they are now part owners?

China's communistic model of total control of business and banking [without democratic principles there to interfere?] works to support the burgeoning Chinese economy and will be made to do so in the future. This is a country that rules bankers, commerce and everything else in that country. But Europe and the U.S. have principles that will not be changed [except temporarily?]. This is why the Chinese government has confirmed that growth in China, in the future will be 9%+.

But in the U.S. and Europe the separation of banking and government is absolute, with the independence of the Federal Reserve and [more complicated] the European Central Bank. Or is it? Surely, needs force a change in these principles if the economy is at risk?

As the government and the Fed rescue the banks and take equity positions in them, who will rule afterwards, bankers or government? The answer will point the way forward for the economies of the developed and emerging worlds. The Fed must re-invigorate the economy, as their obligations demand, but their minority holding in the banks emasculates their investment and simply makes them hope for future profit, in a few years time?

With paychecks reducing or disappearing, house values falling and likely to fall for the next year as well, money needs to flow right out into the streets of the middle and lower classes, on which the economy has and will depend. If it does not get that far, then the vultures will feast. Surely that should be part of the process of saving the economy too? The day after the announcement of the availability of 'unlimited funds' to the financial institutions and its guarantee to ensure no financial institution will fall, the Dow Jones tumbled again realizing that the recession is headed towards us like a train still, with the vultures in its slipstream. So the Fed must do more still.

Bankers credit criteria will kick in and prevent them from releasing loans to the general economy so must it fall too, as the markets are now telling us?

So who will rule the economy - Politicians or bankers? It was Lord Rothschild who said give him control of money and he cares not who makes the laws.

The battle is upwind and we can smell it!

Sadly the moves made to date by central bankers have not addressed the underlying problems simply tended to the symptoms. This begs the question, are they capable of making the system work after healing its disease or is it crippled?

These questions have become more than important now, they have become critical, for we have seen the crash, and we still smell the fear, the fragility, the lack of trust and confidence. It is no longer a danger it is on us and must be rectified. Until our skepticism is removed by the reality of burgeoning growth stemming from the States, we will remain suspicious.

Is your wealth effectively structured to avoid the pernicious effects of the regulatory climate that we have moved into? It should be and we can help you to do so professionally and within the law. Please contact us for any help regarding this at:

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Julian  D. W. Phillips

Author: Julian D. W. Phillips

Julian D. W. Phillips
Gold Forecaster

Julian D. W. Phillips

"Global Watch: The Gold Forecaster" covers the global gold market. It specializes in Central Bank Sales and details, the Indian Bullion market [supported by a leading Indian Bullion professional], the South African markets [+ Gold shares shares] plus the currencies of gold producers [ Euro, U.S. $, Yen, C$, A$, and the South African Rand]. Its aim is to synthesise all the influential gold price factors across the globe, so as to truly understand the global reasons behind the gold price.

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