“Once the global economy emerges from the current financial crisis, which it will, the countries that do well on our index are those that are best prepared to bounce back and perform well in the longer term,” Jennifer Blanke, director of the WEF’s global competitiveness network told The Financial Times.

And the United States is at the top. That’s the good news.

The bad news is that the safety of U.S. banks dropped to 40th this year from 26th in the WEF’s 2007 – 2008 report.

“Despite rising concerns about the soundness of the banking sector and other macroeconomic weaknesses, the country’s many other strengths continue to make it a very productive environment,” the report said of the United States.

But such a fall in the rankings for bank safety is a bit frightening for U.S. banking customers already spooked by the collapse of investment bank such as Lehman Brothers Holdings Inc. (OTC: LEHMQ) and regional banks such as IndyMac Bancorp Inc. (OTC: IDMC).

Summing a Country’s Competitive Balance Sheet

The WEF analyzes 110 economic indicators in 12 different categories for each of 134 countries to come up with its overall GCI ranking. One of those 12 areas is financial market sophistication, which is made up of factors such as “venture capital availability,” “strength of investor protection” and even “regulation of securities exchanges.”

But perhaps the most important factor in this category is the soundness of banks.

Confidence in a nation’s banks is what keeps citizens from stuffing dollars under a mattress. Banks need deposit assets to keep the wheels of U.S. industry turning, as deposit assets are used to fund the short-term credit markets that are so vital to the daily operations of many corporations.

And it’s an area where the United States ranks a disappointing 40.

Coming in behind such well-developed nations as Canada, which tops the list, or even Hong Kong in the 11th spot, might not seem so bad. But even the small African nation of Namibia ranks in at 17, illustrating the United States has some definite room for improvement.

While there are plenty of surprises at the type of the bank safety list, there aren’t many such surprises at the bottom. Algeria comes in dead last with Libya just above it.

Of the “BRIC” nations – Brazil, Russia, India and China – most moved up the list this year against better-developed nations. China landed in the top 30 for the first time as it moved up four spots to reach 30, but China’s banking system is still near the bottom of the list at 108. India, however, slipped two spots to 50 from 48 due to a widening budget deficit. India’s banks also slipped, falling to 51 from 46.

Meanwhile, Brazil was the biggest mover with an eight-spot jump to 64 on the overall list, and also tops the United States when it comes to the soundness of its banks with its 24th spot on the banking safety list. Oil revenues gave Russia a gain of seven to move to 51 from 58 the year prior, but Russia’s banks clocked in at 107 on the soundness rankings.

Slipping Bank Titans?

The United States wasn’t the only nation to find its ranking slipping in the bank safety category. The United Kingdom made a stunning plunge from 4th in the 2007 – 2008 survey, to 44th in the current one, after the emergency nationalization of banks such as Northern Rock PLC (PINK: NHRKF).

Even Switzerland, synonymous with banking to many, was hit hard by the global banking crisis, as it slipped from its top spot in last year’s banking soundness rankings to 16th this year. Swiss giants such as UBS AG (UBS) got caught with over-exposure to U.S. subprime mortgage-backed securities that necessitated government intervention while #2 rival Credit Suisse Group AG (ADR: CS) was forced to raise fresh capital.

Nations from Sweden to the United Kingdom to the Netherlands have all introduced government-sponsored packages to help support ailing domestic banks and avoid the fate of nearly bankrupt Iceland and Pakistan.

The United States $700 billion bailout package is by far the largest, but even that might not be enough to return the domestic banking industry back to safety.

The U.S. financial landscape has been changed forever as firms such, as Lehman Brothers – old enough to have weathered the Great Depression – toppled under the crushing weight of a credit market. The strong – Bank of America Corp. (BAC), JPMorgan Chase & Co. (JPM) and Wells Fargo & Co. (WFC) – have bought out the weak.

Bank of America bought both mortgage lender Countrywide Financial Corp. (CFC) and former standalone investment bank Merrill Lynch & Co. Inc. (MER). JPMorgan bought both regional bank Washington Mutual Inc. (OTC: WAMUQ) and the failed Bear Stearns Cos. Inc. Wells Fargo is buying Wachovia Corp. (WB).

But in the wake of such massive acquisitions, the United States is left with huge nationwide banking complexes dangerously close to the 10% regulator’s cap any one bank is allowed to have of domestic market share.

And with 117 financial firms on the Federal Deposit Insurance Corp.’s (FDIC) “Problem List” at the end of the second quarter, more bank acquisitions and rescues could be on the way. The FDIC’s list for the third quarter won’t be published until November.

The FDIC’s coffers have already taken a hit from the rescue of IndyMac and with the recent bailout law raising the cap for FDIC-insured deposits, it doesn’t seem like much of a stretch to imagine the nation’s banking insurance coming up short if one of the largest banks were to fail.

Bank Safety Plays

The FDIC doesn’t publish the names of the banks on its watch list, but luckily there are some simple ways to help ensure your banking deposits are safe. Here are three quick and easy steps from Money Morning Investment Director Keith Fitz-Gerald that you can take to determine if your bank is safe or not:

1. Click over to Bankrate.com’s Safe & Sound ratings page. There you can plug in your bank’s name and see how it scores on the basis of 22 objective measures designed to gauge the capital adequacy, asset quality, profitability and liquidity of thousands of banks. “If your bank doesn’t make the cut with a higher rating, then switch to one that does,” says Fitz-Gerald.

1. Use the FDIC’s electronic deposit insurance estimator to see if your assets are covered in full. With the recent signing of the bailout legislation into law, the FDIC now covers accounts up to $250,000 at any one bank in any single account or $250,000 per co-owner for joint accounts. Traditional and Roth IRAs, SEPS and other retirement accounts on deposit at an FDIC-insured bank or savings institutions are insured up to $250,000 separately from any other deposits you may have at the same institution. “But remember,” said Fitz-Gerald, “this is mainly deposit accounts and doesn’t include stocks, bonds, mutual funds or life insurance policies.”

1. Double-check your ownership. If a portion of your assets is uninsured, getting full coverage may just be a matter of changing ownership or spreading out your accounts to different banks. “Like most things the government doesn’t make this easy, so that means more paperwork,” Fitz-Gerald said.

Source: Global Credit Crisis Takes a Toll on Former Titans of Banking

“It’s getting increasingly evident that this is a once-in-a-century type of phenomenon,” he told the ever-fragrant Maria Bartiromo in an interview with CNBC this week, “not the standard type of liquidity crisis that we have seen in the past.

“It’s verging on the issue of solvency.”

To gauge the true scale of this crisis, Greenspan went on, just consider the fact that it took sovereign credit to stabilize first the UK and then US financial systems. When Northern Rock (NHRKF) went belly-up last Sept. and then Bear Stearns (BSC) blew up this spring, Treasury bonds had to be lent out like adjustable-rate home loans circa 2006, covering short- term black holes with government debt.

Without these loans of government bonds, the banks simply wouldn’t lend to each other. They needed securitized tax payments to gain the credibility needed for raising new funds in the market. Short of offering government debt to put up as collateral, they found the cost of borrowing money – when they found any money to borrow – simply too high to bear.

“It’s still very evident from [inter-bank lending] spreads that we have not gotten closure yet,” Dr.Greenspan continued, pointing to the ongoing premium charged for loans backed by anything other than sovereign credit. So to fix the problem – or at least tease it out for months if not years – clearly the world needs more government bonds for the big banks to borrow and put up against cash loans in the market.

“It’s essentially, fundamentally the price of homes in the United States which are determining…the ultimate collateral of mortgage- backed bonds, pretty much around the world.”

Looking ahead, he concluded that “we’re still nowhere near the bottom of the home-price thing” – the word “thing” standing in for “crash…collapse…crisis…deflation” and all the other phenomena Greenspan must still believe can never apply to real-estate prices.

As key contractor, if not the architect, of today’s pan-global banking crisis, he chose to keep US interest rates way below the rate of inflation – making debt pay and savings a suck of real value – for three years straight starting in August 2002.

That period marked the first run of sub-zero returns paid-to-cash since the inflationary ’70s, back when loose money worldwide led to a bubble in prices that needed 20% interest rates to revive the world’s faith in the Dollar.

The start of this decade also saw the gold price- dormant-to-dead ever since the US took that strong medicine at the start of the ’80s – double inside five years.

“First warning,” as Marc Faber wrote in his Gloom, Boom & Doom Report of Sept. ‘07, of trouble ahead.

“Ultra-expansionary US monetary policies with artificially low interest rates led to bubbles all over the world and in every imaginable asset class. The price of Gold more than doubled in nominal terms and against the Dow Jones Industrial Average.”

So why didn’t gold take a dive when Greenspan’s successor – Ben Bernanke – tip-toed his way back to 4% real rates of interest in late 2006…? Because early gold buyers never believed the Fed would succeed in keeping rates there. With housing now a political issue – and home ownership a god-given right for even the flakiest debtors – the first sign of trouble would cause a collapse in real rates, destroying the value of money in the hope of achieving “Reflation Part II”.

Hey, it worked after the Tech Stock bubble blew up. Why not again? And faced with a much greater crisis, or so Ben Bernanke believes, he’s managed to out-Greenspan the Maestro…pushing real US interest rates way down to minus 3% and worse.

Take gold as a marker of stress, and the true extent of today’s crisis becomes clearer still. Bear Stearns’ fire-sale to J.P.Morgan in mid- March – which required an open-ended loan of $29 billion from the Federal Reserve – saw gold jump to $1,032 per ounce. We think it’s signal that Alan Greenspan ignores it.

“Central banks, of necessity, determine what the money supply is,” as he told Congress in a 1999 hearing. “If you are on a gold standard or other mechanism in which the central banks do not have discretion, then the system works automatically.

“The reason there is [now] very little support for the gold standard is the consequences of those types of market adjustments are not considered to be appropriate in the 20th and 21st century. I am one of the rare people who have still some nostalgic view about the old gold standard, as you know, but I must tell you, I am in a very small minority among my colleagues on that issue.”

Today, almost a decade later, the Federal Reserve and its peers across the world are trying to prevent the money supply from shrinking again. That was the fear amid the “Deflation Scare” of 2002, which caused the Fed to ordain sub-zero rates, creating not only the bubble in housing but also the collapse of true money values against oil, food and pretty much all raw materials.

The world’s nostalgia for gold, in response, has seen it treble in price vs. the Dollar and more than double against the Euro, Yen and British Pound. But the cheerleader for cheap money when running the Fed, Alan Greenspan points instead to government bonds when gauging the size of today’s crisis. A true policy wonk, Greenspan thinks only of political bail-outs to protect the system, rather than considering how private investors might choose to protect themselves and their wealth.

Heaven knows they won’t get any help from Bernanke’s repeat of the Maestro’s “reflationary” error.

Adrian Ash
for The Daily Reckoning Australia

Source: Gold Standard Doubles as the Greenspan Fed Makes Real Interest Rates Negative

Point is, though, the government has ploughed another £3 billion into Britain’s most damaged bank. That’s a lot of money when you consider that, at its peak, the Rock was worth only £5 billion. It’s especially huge given that we will likely never see it again.The funding takes the form of a debt for equity swap. Basically, the government has agreed to waive £3 billion of debt in return for shares in the bank. There’s a strong likelihood that these shares will ultimately prove to be worthless.

So the question is, why is the government doing this? Why, at a time when the public finances are in such a state, is it putting £3 billion into a broken business that’s heavily exposed to a falling property market?

I worked in one of the Northern Rock’s mortgage centres in 2004 and 2005. A lot of our business involved the now infamous Together product — the one designed to help first-time buyers by lending them up to 125% of a property’s value.

As part of the job we naturally got to see applicants’ private financial details. Bank statements. Wage slips. Employers’ references. Loan repayments. How much it cost the applicant to drive to work. I suspect some of the applicants I saw will struggle in a recession.

I was not surprised, therefore, to read yesterday that up to 5% of Northern Rock’s mortgage book is thought to be in negative equity. The figure is expected to rise to 20% over the next year.

So why is our strapped-for-cash government putting more money into Northern Rock?

I’ll tell you why — fear. In terms of the banking industry Northern Rock was never in the ‘too big to fail’ club. But in terms of the north east economy, a precipitous collapse could have sent shockwaves. That, at least, is the fear in Westminster.

The government is resorting to old school, 1960s-style Keynesian economics. Propping up a lame duck with public money to avoid the spectre of job losses.

We shouldn’t be surprised. As I wrote here last Thursday, the government has got into the habit of giving the jobs figures a leg up.

Maybe the government is right to try and support the local economy in this way. I’m not convinced by this argument. But the politicians seem to be, so why can’t they just say so?

Instead, we have this silly pantomime of pretending that an overexposed and failed mortgage lender will return to profitability in a couple of years time.

Even though the economic downturn will sour its loan book. Even though falling house prices reduce the value of collateral. Even though its savings arm is prevented from competing aggressively for funds (European competition law bans this as the bank receives state aid).

Labour wants to avoid job losses in one of its heartlands. It wants to avoid negative headlines.

That’s the main reason it will continue to support Northern Rock. But it’s not the reason we’ll be given.

Will oil carry on falling?

Oil was at $119 this morning. That’s quite a drop from its high last month of $147.

Oil bears are starting to write the invitations to their picnic. But they should refrain from being hasty. There are two wild cards that could send the price back up whence it fell.

One is Iran. Israeli prime minister Ehud Olmert has stepped down. Mooted as a replacement is Tzipi Livni, a former Mossad agent whose mother robbed a train as part of a Zionist campaign against the British. If Israel takes a more hawkish line on Iran, might this spook the oil market, and send the price higher?The other wildcard is the hurricane season. If an ill-placed storm knocks out producing capacity, that too could cause the price to jump.

If we do see such an event, it could cause a mini chain reaction, as colleague Frank Hemsley explains:

“A lot of blame was levelled at speculators for the dramatic rise in oil prices. Everyone, it seemed, was jumping on the most exciting bandwagon in town.

“Now speculators are driving the price back down. The FT reports today that over the last week, for every buyer of insurance against a rise in prices in 2009 there were almost 10 buyers of protection against a fall.

“In other words, ten times as many traders are betting on a fall by buying put options. The Wall Street banks, who are the originators of these options, have to sell oil futures to hedge their position… which pushes the oil price down.

“All we need is a shock to reverse this trend, and send the oil price up. That would send the short sellers scrabbling to cover their positions, sending the oil price higher still.”

A bullish sign for platinum?

FTSE giant Xstrata (XTA) has bid £5 billion for Lonmin, a producer of platinum group metals (PMGs). Lonmin has rejected the hostile approach. It reckons it undervalues the company’s assets.

Xstrata’s bid could be interpreted as a bullish sign for platinum. Indeed, technical analysts are suggesting PMGs are oversold.

So should you be adding platinum to your portfolio right now? Here’s our commodities expert Garry White with his view…

Until tomorrow,

Ben Traynor, Editor

Source: Why Is The Government Supporting Northern Rock?

‘The squeeze’ is a media term. It refers to the impoverishment of Mr and Mrs UK. Prices are rising. Meanwhile many — especially homeowners — are seeing their real wealth fall. The squeeze is getting squeezier. This spells danger for the majority of UK investors. HSBC reports that current account holders in Britain have less in their accounts than they did a year ago.

Last year the average customer had a daily balance of £1,050. Today it’s down to £1,000.

That may not seem like a big drop. Only 5%. But add that up over every HSBC customer that has eaten into their funds. Add in similar customers from other banks.

There’s quite a bit of money to be accounted for. What’s happening to it?

Some is undoubtedly being siphoned off into higher interest accounts. A rainy day is coming. We all know it. And Britons who can afford to are topping up the umbrella fund.

The following report reveals the JACKPOT!.

Past performance and forecasts are not a reliable indicator of future results. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Fleet Street Publications Ltd. Customer Services: 0207 633 3600.

Our answer is simple. Invest in those companies which are not overly reliant on UK earnings. Especially those making money in growing economies. The best British companies have invested abroad. They offer a diverse, global opportunity that offers some protection from our own domestic wobbles.

Our investment team has picked out three such companies, which we believe you should own right now.

Taiwan — the original Asian Tiger

“What’s so great about Taiwan?” I asked.

“It’s got tons of cash and some of the best companies in the world,” replied my colleague Manraaj Singh. “It’s like China, but 50 years from now.”

Taiwan and China haven’t been on speaking terms for half a century. But that appears to be changing.”Some of the best, most dynamic companies in China could be about to get a new lease of life,” says Manraaj. “After the falls in Asian markets there are some fantastic opportunities out there. If these Chinese firms get access to Taiwanese capital… pow!”Find out why an announcement last week could give the Asian investment story a huge shot in the arm — and what you need to do to get in on it.

Until tomorrow

Ben Traynor

Source: Are Your Investments Being Hit by ‘The Squeeze’?

That problem is redemptions.

Now, his fund has done well. He’s been long oil, long gold and short the stock market (sure, it seems an obvious position now, but it’s surprising how few took it). Yet many of his investors are pulling their money out. And in funds where the performance has been less impressive, the rush for the exit has been more dramatic.

Why are investors fleeing hedge funds? Perhaps to cover bills elsewhere, or perhaps simply because they’re panicking. And as we all know, the golden rule when panicking, is to panic first.

But this rush for the exits is taking its toll on stocks that have nothing to do with the credit crunch…

Why redemptions can trigger a domino effect

When you invest in most hedge funds, there will be a ‘lock-up’ period – a period in which investors agree to tie up their money and not make withdrawals. Once that period ends, investors can usually redeem their stakes at the end of the next quarter, provided they give enough prior notice, usually 45 to 90 days. But in June we saw a major rush for the exit.

The trouble is, this can trigger a domino effect. If a hedge fund has to return significant amounts of cash, the manager may then be forced to sell assets to raise the money, even if he would otherwise hold on to them. But this sell-off then drives down the price of the company he’s selling, which hits the performance of his fund, which makes more investors want to pull out.

Let’s look at an example.

RAB Capital (LON:RAB) has about $6bn under management. Their founders, Michael Alen-Buckley and Philip Richards, were considered two of the most astute investors around. They understood the industrial revolution in China and elsewhere in Asia, they foresaw the great boom in commodities, and they got in early. Without their funding, much of the boom in junior mining companies that we saw in the early noughties would not have been possible. RAB made millions. However, the decision last year to buy Northern Rock(PINK:NHRKF) as it was in freefall put a sizeable dent in the company’s reputation, not to mention its bank balance.

RAB Special Situations (Aim:RSS) is one of their better known funds. It listed in 2005 at £1 a share. It’s a closed-end fund, which means that even if you sell the stock, they don’t then have to sell off a corresponding position in the underlying assets, unlike an open-ended fund. This means the fund will sometimes trade at a premium or and sometimes at a discount to the underlying value of the assets it holds (its net asset value, or NAV).

On July 8th, JPMorgan (NYSE:JPM) announced it had sold a million of its four million RSS shares. You can see what this selling has done to RSS. The fund has fallen off a cliff.

The fund is now trading at about 63p, even though it has a net asset value of 111p. That’s a big discount. It seems strange that JP Morgan would sell its position down so aggressively at such an obvious discount, but with the state that financials are in at the moment, the group may simply be keen to have as much cash to hand as possible.

The obvious trade for investors in RAB’s unquoted fund to make now is to redeem their position and buy RSS, the quoted fund. They’re effectively buying the same underlying assets at a big discount. But that would put even more redemption pressure on RAB.

How hedge funds are driving stock prices lower

In any case, one company that RAB had a significant position in is ICS Copper (CA:ICX), a nice little junior miner with some interesting copper assets in Zambia. But the Zambian copper plays have been badly beaten up this past year.

ICS has been on a near-relentless decline since August last year. In late June of this year ICS’s sell-off accelerated and the stock almost halved in a few weeks, going from 40c down to almost 20c. This happened to coincide with the second quarter hedge fund redemption season and with JPMorgan’s selling of RSS.

Read the full article

Source: Why the Credit Crunch Will Hammer Stocks as Well as Property

Commodity Trend Alert editor Eric Roseman is issuing a stark warning: Your bank could be next.

If you have money in the US banking system, he recommends you put it instead in Treasury bills or exchange traded funds (ETFs) that invest in short-term Treasury securities like SHV or SHY.

IndyMac Bancorp (NYSE:IMB) just became the latest mortgage casualty in the United States this month. More importantly, the headline-grabbing closure officially triggered the first attempted run on a US bank since the 1970s.

IndyMac’s collapse also marks the first time since the advent of the sub-prime mortgage crisis a year ago that a U.S. mortgage thrift has failed.

Last September, Britain’s Northern Rock (PINK:NHRKF) plc, a midsized mortgage lender, collapsed. Even though the Bank of England bailed the mortgage lender out, newspapers worldwide portrayed images of Northern Rock customers scrambling to access their funds for an entire month. It was eerily reminiscent of Depression era breadlines.

On July 14, IndyMac, the nation’s 10th largest mortgage lender, borrowed a page from Northern Rock as major financial newspapers depicted crowds waiting to access their funds.

IndyMac reopened its doors under federal supervision on Monday. They promised homeowners a lifeline from impending foreclosures. The FDIC also stepped in to protect funds up to US$100,000. However, US$1 billion dollars of IndyMac’s roughly US$19 billion in deposits was NOT insured affecting about 10,000 customers. But the FDIC has stated it would seek to return up to 50% of uninsured customer deposits.

If you’re holding the bulk of your savings at a U.S. bank — including the largest money-center banks, I strongly suggest moving those assets to TD Ameritrade. Use those funds to purchase Treasury bills or exchange traded funds that invest in short-term Treasury securities like SHV or SHY.

Also, other discount or full-service brokers will work, but just make sure to invest your funds in Treasury designated securities.

Also, consider mutual funds that offer “Treasury” or Government Securities” money-market funds. These products, offered by low-cost Vanguard Group among others, are safe, liquid and maintain a high degree of credibility since assets are 100% invested in short-term government paper.

The only cash sitting in a bank today should be to pay ongoing expenses, bills, etc. Don’t keep the bulk of your precious savings or liquidity stashed in a bank.

Until financial markets stabilize, head for the relative safety of government designated securities and products. These are uncertain times. Act now.

ERIC ROSEMAN, Investment Director

Source: Northern Rock Comes to America: Will Your Bank Be Next?

What did you expect? They were no angels, says Bill Bonner in The Daily Reckoning. It never hurts to have friends in high places. And Fannie and Freddie had the deepest pockets in town.

Now it’s payback time and  - surprise, surprise – the government is bending over backwards to ensure Fannie and Freddie won’t fail. All with taxpayers’ money, of course. More from Bill…

Friends in Washington come at a price… but the two mortgage companies had the deepest pockets in town – generously paying fees and expenses for a long list of former members of Congress and Capitol Hill hacks. The $170 million paid to lobbyists was just the beginning. Executives of the firms were also among the biggest contributors to political campaigns and to politicians’ pet programs and vanity charities.

What a glorious scam! The two pretended to be important parts of private enterprise… partaking in the grand scheme of risk/reward along with all other capitalist businesses… but they had the world’s biggest government standing behind them all the time; it was all reward and no risk, right from the beginning. Fannie and Freddie could funnel millions in profits from homeowners to politicians…and then, when they got into trouble, lay the losses onto shareholders and taxpayers.

Source: Fannie and Freddie: Playing With a Stacked Deck

So it’s little wonder that gold has rallied sharply in the past week or so, to more than $970. But what is it about gold that actually makes people want to own it when the financial system is in turmoil? Investors say it’s a hedge against inflation; it’s the anti-dollar; or they just see that everyone else is buying it, so they pile in afterwards.

But what is the point of owning a lump of metal that doesn’t pay a dividend, isn’t edible and actually costs you money to keep safe? To understand why gold is the ultimate safe haven in this financial crisis, we have to get to the root of our current problem. And that’s money…

How it all started: a brief history of money

Why do we need money at all? The barter system had plenty of attractions – it can’t be taxed, for one thing. But it’s inefficient. Say I sell spades, and you sell dressing gowns. For any deal to happen you must want a spade at just the moment I happen to want a dressing gown. So even the most primitive societies developed some kind of payment system, or money, that was accepted by everyone in exchange for goods and services.

Money has to have two qualities. It must be portable and it must have a purchasing power that lasts, so it can be used at a later stage. Shells, cocoa beans, even feathers have been used over the years as money. At one stage Roman soldiers were paid in salt, from where we derive the word, ’salary’. These early forms of money were ‘commodity money’.

Gold and silver were widely used. Their rarity gave them value – a great deal of worth could be stored in a single gold coin – as did their immutability. Gold doesn’t tarnish. You could dig up a gold coin buried in the ground a thousand years ago and it would be more or less intact. And just as gold preserves over time, so does its purchasing power. An ounce of gold would have bought a Roman Senator a jolly decent toga and perhaps a pair of sandals; today the sterling equivalent (£500 or so) would buy your local MP a respectable suit and shoes.

To facilitate trade, gold was turned into coins of a certified weight and purity by goldsmiths. The goldsmiths, who had built vaults to store their gold safely, also began to store the gold of their fellow townsmen, issuing a certificate as receipt for the gold deposited. Over time these certificates were used in the marketplace as if they were the gold itself. World trade had slowly moved from a ‘commodity money’ to a ‘representative money’.

Seeing that very few depositors ever removed their actual gold, instead using their certificates for trade, goldsmiths realised they could make money by lending out certificates against depositors’ gold. Despite the inherent duplicity in the scheme – lending what is not yours to lend – it worked. The depositors did not lose anything. As long as there was no bank run, their gold was all still safe in the goldsmith’s vault.

Depositors, however, soon wanted their share. Rather than taking back their gold, the depositors simply demanded that the goldsmith, now in effect their banker, pay them a share of the interest. The goldsmith paid one rate on deposits and then lent at a higher rate.

But in times of panic some borrowers would demand their real gold back, instead of the paper certificates. Before long, you had the dreaded run on the bank, with the banker not having enough gold and silver to redeem all the paper he had put out. It would have been straightforward to outlaw this new lending practice, but the large volumes of credit the bankers had created had become vital to the success of European commercial expansion, so, instead, the practice was legalised and regulated. The monetary system had moved on from representative to debt.

Bankers agreed limits on the amount of loan money that could be lent out, limits still much larger than the amount of gold and silver on deposit. Usually the ratio was nine loaned units to one actual unit in gold and these regulations were enforced by surprise inspections. It was also arranged that, in the event of a run, central banks would support local banks with emergency gold. Only if there were runs on a lot of banks simultaneously would the bankers’ credit bubble burst and the system come crashing down,

Read the full article

Source: The Root of this Financial Crisis, and Why You Must Buy Gold Now