Note: This article was first published on this blog on 19th March 2008.
It's frightening, especially when your savings or pension is at stake.
A number of big name banks and financial institutions, pillars of
fortitude and strength, are suddenly being shaken to their
foundations. Already here in the UK we've had Northern Rock go under
and now in the U.S. Bear Stearns has gone the same way. What's
happening, and how can we protect ourselves and our savings?
This article will attempt to answer that question and cover the
underlying and immediate causes of the crisis.
The Underlying Cause
The Federal Reserve Act of 1913 set up the Federal Reserve System as
the financial institution that controls US financial policy. It's
privately owned by foreign banking interests and lends the people and
government of the United States their own money, repayable at interest
on demand. That's why we have a debt-based economy.
The money we use as our means of exchange isn't real money and never
has been. It's only "promise to pay" money. That means it's only as
good as the private banking consortium that owns the Federal Reserve.
And they are bankers engaged in enriching themselves. They do this in
One of those ways is by lending many times the amount of real money
(gold and silver deposits) that they actually have, and collecting
interest on all of it. Sometimes they lend just a little too much of
what they don't really own, and a panic ensues. This has happened
regularly throughout US history - 1884, 1890, 1893, 1907, 1929-33,
1987, and now, to name just a few.
Another way they make their money is by trading in options and
derivatives. This is separated from gambling by only a fine line, and
when things go wrong, as they invariably do sooner or later for a
gambler, they will seek to deflect the losses away from themselves on
to everyone else. This brings us to the immediate cause of the present
The Immediate Cause
This time the trouble started in the "sub prime" market. Many of the
smaller banks lent money as home loans to people who couldn't raise a
loan in the regular financial markets owing to adverse credit history
or simply not having a sufficient income to cover the amount they
needed to borrow. In a large percentage of such cases it wasn't a
question of "if" they defaulted, it was "when".
With the rapid inflation of house prices that took place in recent
years, this problem became extremely widespread. Many loans were
placed by corrupt brokers who simply lied on the application forms
that their clients were earning more than they actually were. At the
same time, many loans were fixed at an artificially low rate for a
limited time, creating a financial time bomb due to detonate when the
fixed rate period expired and the borrower suddenly had to pay a
larger repayment each month, which in many cases was just not
Meanwhile many of the smaller lenders were becoming aware of the
dangers just around the corner, and bundled up many of these "sub-
prime" mortgages, the good with the bad, and offered them as packages
to larger banks anxious to get in on the act of profiting from the
house price boom.
The more risky loans were supposed to be counter balanced by the fact
that the safer loans carried a by now higher rate of interest,
ensuring a profit for the purchasers of these packages. This practice
was only made possible by the fact that banks can lend far more money
than they actually have deposited with them - up to ten times the
amount is the rule of thumb. It's called "fractional reserve". Or
"fraud" where I come from. It's perfectly legal, though. You see, the
bankers and their lawyers wrote the laws.
You may ask why there's a problem, bearing in mind that these loans
are secured on the borrower's house in each case. Therefore, surely,
if the borrower defaults the bank, or whoever now owns the equity,
simply repossesses, sells the house and recovers the money owed,
Well, no. Many of the loans were made on the basis of highly inflated
property valuations in the first place. And in the second place, as we
all know, house prices have tanked in recent months. It's a vicious
circle, with house prices falling and making matters worse, and the
worsening credit crisis in turn causing yet further falls in property
values as buyers dry up and banks become reluctant to lend for fear of
over extending themselves.
As cash flow worsens, more and more financial institutions are finding
themselves in trouble. As of mid March 2008 it's only Bear Stearns
that has gone under. Soon there will be a whole lot more, I'm afraid.
What we are witnessing may well be the unraveling of the whole
financial system of the west. The only beneficiaries will be those
huge institutions that own the Federal Reserve. They will be able to
consolidate their power over the world economy.
But what of us? The ordinary folk of the United States, Canada and
most European countries, and the other industrialised countries of the
world. How can we protect ourselves from what is happening?
Well, it's not the objective of this article to give financial advice,
but it would seem prudent at the present time to divest our money, as
far as possible, from anything to do with mainstream financial
institutions, and to place it into the only assets which seem likely
to come through unscathed. And in this writer's humble opinion they
are gold, silver, oil and water - real, tangible assets that can't be
created out of nothing, manipulated and then withdrawn from