2 articles in FT today touch upon the same topic from different angles. I have been talking about monetary levels since the August 07 panic.
First article argues for control of debt levels by central banks. The invisible hand did make a mess of things because the investment banks and their hedge fudge clients only had interest in increasing leverage taking too much risk and reaping the rewards of taxing the flow, and when it blows up, you blow up. Reader Arthur B calls this asymetric risk. The great depression saw the introduction of legislation limiting the leverage and fraction the commercial banks could have between debt and capital/deposit. Investment banks were, unfortunately, free of that constraint. They went up to 50x leverage. 10 is not enough, 50 is too much, it doesn't take a genius to say "so what about 35 for the ibanks, 2 for the hedge funds?" Controlling debt levels is the key, as when it goes in reverse it WILL kill capital. Too much debtism kills capitalism. By the same token, uncovered CDS, or speculative CDS where you do not own the underlying bond should be banned: it demultiplies the effect of bad debt, and this is systemically dangerous as it increases the debt levels in the case of default.
The second article is a gold-bugs dream. The gist is simple, under fiat money politicians and bankers, the unholy pair, will print themselves money to get out of trouble. It is called quantitative equilibrium right now in the US. Gold prevents this as the government cannot create gold. Hard money proponents distrust governments but forget as reader Army Nova reminded us taxes on wealth had to be raised to 90% during the depression. Before taxes reach 90%, I will be long gone. Reader barry kelly also pointed out that fractional banking still exists under gold. Me, gold-bugs piss me off, sound money can be achieved with sound government, so gold bugs are by definition wary of any form of government and are usually libertarians or anarchists.
I want to be more optimistic. Articles like this one, in a publication like the FT just piss me off. There is one reason gold was abandoned: Keynes and depression economics. At the end of the day it is about money levels, through debt creation in the system. It should be transparently regulated and this is what both articles really talk about: the need for sound money.