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Investments for the Rest of Us: Negative Nancy

By David F. Brochu
I received an email last week from a reader suggesting (I'm paraphrasing) that if all us Negative Nancys would stop focusing on the bad stuff instead of the good, the economy might improve. You know what? She's right.
Confidence is the foundation of any robust economy. That's why those charged with managing our national monetary and fiscal policy aggressively labor to convince the American people that all is well and that the future looks brighter. But when these same officials are so bereft of faith in their ministration they resort to breaking the rules and cheating the system, it can be difficult to feel optimistic.
Consider the following new stories, all as maddening as they are true.
In 2008, Timothy Geithner, who recently resigned from the U.S. Treasury as Secretary, was head of the New York Federal Reserve and called at least one major bank to inform them of an impending interest rate cut. Thus informed, the bank had the opportunity to trade ahead of the announcement, netting billions of dollars in profit.
Why did the head of the New York Federal Reserve cross such an obvious line? That was most certainly on the mind of at least one of the Fed Governors at a meeting that followed close on the heels of the rate cut. The minutes from that meeting make clear that, for some unknown reason, Mr. Geithner thought his actions were warranted and that he was sufficiently insulated from the laws the rest of us follow that he could act with impunity.
Turns out, he was correct. The minutes from the meeting, which were requested by Mayor Bloomberg under the Freedom of Information Act, were released five years after the event. Coincidently, by then, the Statute of Limitations on prosecutions had passed.
Least anyone think the malfeasance is confined to one branch of government, we have the Justice Department charging Standard and Poor's (S&P) with fraud over their ratings of mortgage debt leading up to the 2008 financial crisis. S&P, along with Moody's and Fitch, are most certainly guilty of any number of violations. But S&P is the only one of the three to be charged. Is it a coincidence that S&P is the only rating agency to downgrade U.S. sovereign debt?
It would appear that the fiction spun by our government is sacrosanct. Governments are not unlike people and when events don't adhere to the proscribed script, denial sets in. If the deception becomes strong enough, defending it can take on strange and often destructive forms.
Consider the LIBOR scandal. LIBOR, the Loudon Inter Bank Offer Rate, is a reference rate, a rate of interest used to set rates for other financial instruments. The U.S. Treasury is another such rate. Unlike the U.S. Treasury, LIBOR is not an actual investment; it doesn't trade. Rather, it is set by bankers at the major banks, who communicate the rate they are paying to borrow money overnight and average them into one number.
Turns out this number had been manipulated for quite a few years. Traders at the rate-setting banks would conspire to push the number up or down depending on what position they had in the market. Considering that LIBOR is used to set rates on trillions of dollars of financial instruments, one wonders how no one in authority knew about it. They did.
Ben Bernanke, chairman of the Federal Reserve, and Timothy Geithner, head of the New York Fed, both knew, at least by 2008, that LIBOR was rigged. But they did nothing. Why would the two most powerful bankers in the world not step forward to stop a fraud being perpetrated on millions of people? It's simple: in 2008, LIBOR was far too high. Ben and Tim needed the rate to come down and stay down. Just so happens the traders who were fixing the rate kept it below what the banks were charging each other, in some cases far below. Coincidence?
In another example of "do as I say, not as I do," chairman Ben Bernanke has been extolling the virtues of our FIAT monetary system and the weakness of the former gold standard to anyone who will listen. To listen to big Ben, the gold standard is an antiquated relic from medieval times. Meanwhile, our central bank and central banks around the world have purchased more gold than at anytime in the last 50 years. There's also compelling evidence that the central banks have been actively manipulating the price of gold, depressing the price movement.
These are not negative stories; they are simply what is happening. Everyday, the evidence is mounting that the scaffolding of the fiscal and monetary fiction we are being sold is collapsing. However, it need not be tragic. All monetary systems break down. Economies, being human inventions, change and grow much like their builders. These changes need not be feared if they are recognized for what they are. But cling to the past and live in denial for too long and an uncomfortable transition can become a calamitous upheaval requiring years of healing.
Breaking the rules and manipulating outcomes, whether done by individuals or institutions, are clear signs that the artifice of denial isn't working as it once did. For human beings, denial often is followed by acceptance. Let us hope that the individuals perpetuating the institutional denial wake up before it is too late.
For my part, I will try to keep my eyes and mind open to what is, rather than what I want to be. I remain convinced that the America people are doing the same; they already see what our leaders do not and are ready to make the sacrifices necessary to work our way through the transition that has already begun.

David F. Brochu, CFP, is president and CEO of KLEOSSUM advisers, an independent investment advisory firm for individuals and group retirement plans located in Tech Village in Conway. For more information, e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. , call (603) 733-4290, or visit online at www.KLEOSSUM.com.
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