Welcome to our Friday mailbag edition!

Every week, we get great questions from your fellow readers. And every Friday, I do my best to answer them.

This week, the conversation turns to the Federal Reserve… ex-Fed chair Ben Bernanke’s handling of the 2008 crisis… and whether we’ll ever go back to a gold standard…

Have you written a book that completely explains how the Fed works? If you have, please send me the name so I can purchase it and learn.

– Gray W.

Hi Gray, thanks for your interest in my books.

Many of my books discuss various aspects of the Fed, historically and as it’s behaved since the financial crisis, so it depends on what you are looking for exactly.

My favorite for broad context on the Fed would be in All the Presidents’ Bankers. In that book, I wrote extensively about the history of the origins of the Fed.

I also wrote about how the Fed has operated since its inception in 1913 through 2014, when the book came out.

For more recent behavior of the Fed since the financial crisis of 2008 with respect to Wall Street, I’d encourage you to check out my 2009 book, It Takes a Pillage.

Regarding the Fed as a powerful actor on the global stage, you can check out my 2018 book, Collusion.

And to see how what the Fed has done impacts The Great Distortion between the markets and the real economy that we have today, you can check out my latest, Permanent Distortion.

I shared a few excerpts in these pages. Read them here, here, here, and here.

I would like to hear from Nomi, what would she have done differently in 2008?

The bailing out of the banks sounded outrageous, especially because they protected the BIG WIGS’ salaries but did not protect the families from losing their homes.

But if Bernanke would have not bailed them out, what would have happened?

– Maria C.

Hi Maria, thank you for your question and comments.

I wrote about the alternatives to bailing out the banks in my 2009 book, It Takes a Pillage.

If you have a copy, it’s in Chapter 2, called “This Was Never About the Little Guy.” I also shared an excerpt in these pages, which you can read right here.

The alternative, to me, comes down to the numbers.

There were about half a trillion dollars’ worth of subprime loans that were in default. That’s out of $1.5 trillion that were extended to borrowers during the years that led up to the financial crisis of 2008.

Yes, some of those loans should not have been extended because the borrowers could afford to repay them from the beginning.

But a lot of the risks inherent to those loans weren’t properly disclosed to borrowers. Also, certain lenders were very loose with the information that they required from borrowers to provide these loans.

That was one major fault of the Fed: not regulating the bank lending process when it could have.

But nonetheless, the large Wall Street banks were able to engineer assets using these loans to the tune of $14 trillion. That’s a factor of 28 times.

Even if the subprime loans that banks bought to stuff into these assets had not defaulted, the entire exercise was a house of cards. Or like an upside-down pyramid destined to topple over.

Imagine you have a flat tire, and you can only pump in 1/28th of the air the tire needs to function properly. The tire isn’t going to be safe.

Plus, Wall Street was lending money to institutional buyers of those assets – using the assets as collateral!

When the subprime loans at the bottom of this upside-down pyramid scheme stopped paying interest out as expected, the entire scheme toppled.

I would not have bailed out the banks for doing that. Instead, I would have made those mortgages whole to stop the defaults, and fined the banks for that difference.

The cost would have been half a trillion dollars and not the trillions we have spent since.

Perhaps one or two more banks would have toppled during that time as a result. But that was the risk they took. And it would have been a whole lot cheaper.

I often hear people talk about a return to a gold standard. What’s your take on this?

– Terry B.

Hi Terry, thank you for writing in.

You’re asking a very important question, and one that I believe is on the minds of many of our readers and subscribers.

What I’ll say is this…

There isn’t enough gold in the world to go back to a full gold standard. What do I mean by full? Let’s use the U.S. as an example.

That would mean the fiat currency (U.S. dollar) is backed by full confidence in the U.S. government to make good on its debt obligations, and on the overall strength of the economy.

There is simply too much fiat currency in the world to have a situation where it’s convertible to real gold. That said, there is room for a quasi-gold standard.

What would that look like?

Instead of every dollar (or any other major currency) being convertible to real gold… only a portion of the value of each dollar would have to be backed by a certain amount of gold.

That’s the gold the Fed (or other central banks) would have to store in reserve.

That would put a cap on the amount of fiat currency that the Fed (or other major central banks) could just create at whim. That’s because they would have to hold at least a portion of real gold to back some of the fiat currency they create.

Under that scenario, people or governments would be able to convert a portion of dollars into gold, but not all of them.

I hope that helps answer your question.

And that’s all for this week’s mailbag! Thanks to everyone who wrote in.

If I didn’t get to your question this week, look out for my response in a future Friday mailbag edition.

I do my best to respond to as many of your questions and comments as I can.

You can write me at [email protected]. Just remember, I can’t give personal investment advice.

Happy investing… and have a fantastic weekend!



Nomi Prins

Editor, Inside Wall Street with Nomi Prins