Gold News

Government vs. the Banks: Who Rules?

"Let me issue and control a nation's money and I care not who writes the laws..."

THE EVENTS OF OCTOBER 2008 have presented enormous "moral hazards" for governments and the banking industry worldwide, writes Julian Phillips of the

When we call them moral hazards, we are not talking about biblical morality, but rather the principles behind elected government (i.e. democracy) and banking (which used to mean prudence as much as profit).

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. But if that were the case, then there would have been no point taking such a position, except in the hope of an eventual profit.

Bankers, now driven back by the credit crisis to apply prudence when lending, will still have an aversion to extending new credit – even after their bailout by government – and would rather see the injection of capital as profit opportunities for bankers in safe investments. This "cushion", 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 may become a depression.

So the injection of tax-payers' capital may well save the banks. But their role, as the source of funds for the broader economy, will still be considerably reduced.

If governments do take their seat on the banking boards – and they tell bankers to be less prudent and lend funds to the overall economy – then you will have politicians in banking, and profit and prudence will come out of banking (as is happening now in the UK). That shift may lift the economy, however, and without such a step, the broad economy will pay a heavy price to bankers, many of whom the taxpayers have just saved.

If bankers continue to rule lending absolutely, then government will continue to be their servants. The moral hazard is greater than simply this moral dilemma, however, for the duty of government – and now of bankers, as well – is to help the economy, lending it money that has been given to them by the central banks (meaning the Fed, Bank of England and ECB). The sight of shrinking credit card debt brings this issue right down to street level.

But in doing this, the United States will have taken one more 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 – as mandated by today's democratically elected governments – is to maintain price stability and growth in the economy. And that surely overrides the profit and prudence priorities of the banks, of which they are now part owners. But across Eurasia, China's communistic model of total control over business and banking (and without democratic principles interfering) also works to support the economy, and will also be made to do so in the future.

China is a country where government rules bankers, commerce and everything else. In the United States and Europe, in contrast, the separation of banking and government has been absolute, with the independence of the Federal Reserve and (albeit more complicated) the European Central Bank.

Can that separation persist? Surely, needs force a change in these principles if the economy is at risk. The Chinese government has confirmed that growth in China's GDP will continue at 9% plus. Won't such government-decreed targets now appeal to Western rulers as well?

As the government and the Fed rescue Western 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 both the developed and emerging worlds. The Fed must re-invigorate the economy, as its obligations demand, but its minority holding in private US banks emasculates that 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' traditional, more cautious lending criteria will now persist, preventing them from releasing credit to the general economy. The stock market is telling us an all-out depression looms. And it was Lord Rothschild who said, just after the French Revolution of 1789, that "Let me issue and control a nation's money and I care not who writes the laws."

Sadly, the moves made to date by central bankers have simply tended to the symptoms, not addressed the underlying sickness – a surfeit of credit. This begs the question whether government staff are they capable of making the system work after healing its disease, or is it rather crippled instead? Such questions have become more than important now, they have become critical.

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 upon us. Until our skepticism is removed by the reality of burgeoning growth stemming from the United States, investors and businesspeople worldwide will remain suspicious.

JULIAN PHILLIPS – one half of the highly respected team at – began his career in the financial markets back in 1970, when he left the British Army after serving as an Officer in the Light Infantry in Malaya, Mauritius, and Belfast.

First he worked in Timber Management and then joined the London Stock Exchange, qualifying as a member and specializing from the beginning in currencies, gold and the "Dollar Premium". On moving to South Africa, Julian was appointed a macro-economist for the Electricity Supply Commission – guiding currency decisions on the multi-billion foreign Loan Portfolio – before joining Chase Manhattan and the UK Merchant Bank, Hill Samuel, in Johannesburg.

There he specialized in gold, before moving to Capetown, where he established the Fund Management department of the Board of Executors. Julian returned to the "Gold World" over two years ago, contributing his exceptional experience and insights to Global Watch: The Gold Forecaster.

Legal Notice/Disclaimer: This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. Gold Forecaster/Julian D.W. Phillips have based this document on information obtained from sources they believe to be reliable but which it has not independently verified; they make no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of Gold Forecaster/Julian D.W. Phillips only and are subject to change without notice. They assume no warranty, liability or guarantee for the current relevance, correctness or completeness of any information provided within this report and will not be held liable for the consequence of reliance upon any opinion or statement contained herein or any omission. Furthermore, they assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information, provided within this report.

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