Hoarders and Destroyers

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"Standing in the way of the natural operation of the market is increasing government intervention. . .And about the only good thing we can say about that is that it should be for gold."

The main issue is the one Ben Bernanke brought up earlier this week in London. The TARP money disappeared onto bank balance sheets and did not reappear as consumer or business lending. Nor could it. The money merely papered over the losses taken by banks and brokers and allowed them (for a time) to maintain adequate capital against the falling value of their assets.

Those assets, however, are still falling. According to the Dow Jones Wilshire 5000 Total Market Index, which roughly tracks the total market cap of publicly listed U.S. stocks, U.S. stocks lost nearly $5 trillion in value in the fourth quarter of last year.

Investors should fundamentally re-examine the issue of whether the financial system has stabilized at all from August of last year. "Banks are insolvent now," Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. told Bloomberg earlier this week. He estimates the Feds will have to pony up another US$1-2 trillion to keep U.S. financial institutions solvent this year. "Until you address this shortfall, banks will continue to be credit hoarders and destroyers as they shrink their balance sheets."

Spooked by big losses and a world full of struggling economies, not to mention a shrinking risk premium in stocks, who is prepared in 2009 to stay invested for the long haul?

By about 75 years (an average lifetime) after the last crash, there's almost no one around who remembers what it was like. Stocks and real estate have gone up for as long as these people can remember. The stage is set for another depression, caused by cheap money, bad loans and foolish investments of the boom generation. That's where we are now. Sounds grim. And it is.

Standing in the way of the natural operation of the market is increasing government intervention, which is going to drag the whole process out. And about the only good thing we can say about that is that it should be for gold.

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