Gold & the Flood of Cheap Government Money

The BRITISH PRIME MINISTER, Gordon Brown, says the current mess in world finance and credit is the fault of “irresponsible” bankers.

Well, he would say that, wouldn’t he?

• A d v e r t i s e m e n t

Let’s not forget that Mr.Brown claimed the credit for 10 years of unbroken growth here in Britain. For those 10 years he copied Alan Greenspan – the ex-US Fed chairman – by holding interest rates unusually low, aiming to encourage investment and demand, which is a near-sighted economist’s way of avoiding mild recessions.

But this low-interest rate medicine stimulates both the supply and the demand for those products which Mr.Brown now blames bankers for promoting. It leads directly to a world of crazy finance, because low rates punish caution.

In a time of state-sponsored easy credit all projects get financed by incautious banks with cheap, centrally supplied money. There is no market for cautiously lent money, priced correctly for the risk involved. Why would anyone pay more for funds from a cautious bank when cheaper funds are available from easier sources?

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This is why the profits of incautious banks grew, and why their stock prices multiplied. Meanwhile careful bankers sunk. As Brown (and Greenspan) injected ever more money into the economy the cautious banks began to lose their customers, their managers, their share values, and their independence. This Darwinian extinction of caution is the direct result of a monetary environment which was hostile to cautious bankers, one which favored those banks with an appetite for cheap money.

So be in no doubt about the cause of the credit crunch. It was too much cut-price credit, and the blame for the supply of it rests squarely on the likes of Gordon Brown and Alan Greenspan.

So much for the blame. What now?

It seems almost everyone – from both the right and the left of the political spectrum – agrees that the world needs more government intervention in the form of bail-outs and increasing regulation. We’re getting it, too.

Yet once we have grasped that the underlying cause of this disaster was credit creation by government itself, we should perhaps be a bit wary of putting governments ever more in charge.

Full article here