02/03/2017 - Dr. Albert Friedberg: Central Banks Are Lending Against Poor Collateral At Subsidized Rates
Austrian School Economist-based Hedge Fund Manager Dr. Albert Friedberg: “Governments are no longer willing to endure the short-term pain that is necessary to cleanse the economic system of mal-investments and over indebtedness. Lombard Street’s old adage (late 19th century) that central banks should lend freely against good collateral and at prohibitive rates in a financial crisis is no longer the reigning principle. Today, the opposite is true: central banks lend freely against poor collateral at subsidized rates. Andrew Mellon’s austere advice to President Hoover at the onset of the Great Depression to “liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system…” — the kind of advice that helped the US recover from the post-WWI depression in record time — was not heeded, and the depression of the ’30s dragged on until the onset of World War II. Today, of course, Mellon’s advice is heresy of the highest order. Increasingly, governments move to abort naturally occurring corrective trends with the result that necessary economic adjustments never occur. The price will one day be paid, but the bearish bet will have expired by then. The practical consequences of this soul-searching examination is to put an important restraint on catastrophic bets, defined as 50% or greater declines in major indices or in systemically important industry sectors like banking that lead to a generalized financial crisis. In short, we will need to exercise extraordinary circumspection before we make bearish bets that hinge on economic and financial upheavals of historic magnitude. These sorts of bets should be considered only when the burden of proof is overwhelming and only if and when limited risk options these conditions not be obtained, a defensive posture, by way of a buildup of cash and near cash instruments, will be adopted.”
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