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by Michael J. Kosares

8/27/07

A publication of USAGOLD-Centennial Precious Metals, Inc.
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Great Depression begins

USAGOLD's
Top 25 Quotes

on the Credit Crisis of 'O7

The financial market globally is up to its elbows in one of the strangest and most complicated credit crises in history. Events have come in rapid succession with mind-numbing effect. No sooner does the dust settle in one part of the market than it is kicked up in another. Through it all, the reactions on the part of the participants have been the stuff of a good financial thriller. We thought it would be interesting to catalog some of that reaction for you on one web page. So here they are - from the witty and profound to the scary and downright silly - our Top 25 Quotes on the Credit Crisis of '07.

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1. In one way, I'm sympathetic to the institutional reluctance to face the music. I'd give a lot to mark my weight to 'model' rather than to 'market.' - Warren Buffett, Fortune, 8/16/07 (On the financial institution practice of valuing subprime assets on the basis of a computer model rather than the free market price.)

2. The Federal Reserve was not founded to bail out Bear Stearns or a few hedge funds. It was founded to keep a stable currency and maintain its value. - Jim Rogers, Rogers Commodity Fund

3. For the second time in seven years, the bursting of a major-asset bubble has inflicted great damage on world financial markets. In both cases--the equity bubble in 2000 and the credit bubble in 2007--central banks were asleep at the switch. The lack of monetary discipline has become a hallmark of unfettered globalization. Central banks have failed to provide a stable underpinning to world financial markets and to an increasingly asset-dependent global economy. - Stephen Roach, Morgan Stanley

4. There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S. . . - Jeremy Grantham, Grantham, Mayo and Van Otterloo

5. Suddenly, the world is realizing that gold is still a safe haven asset. We've seen pretty substantial losses in equity markets. I think this is genuine safe-haven buying. - James Moore, theBullionDesk

6. I think Greenspan would have cut rates already. So I do think things are beginning to look different at the Fed. - Paul Kasriel, Northern Trust

7. At this juncture, the impact on the broader economy and financial markets of the problems in the subprime market seems likely to be contained. - Fed chairman, Ben Bernanke, Congressional testimony, March, 2007

Flood of foreclosures8. "If prices go down, we will have problems -- problems in the sense of spillover to other areas," Greenspan said. While he hasn't seen such spreading yet, "I expect to." - Former Fed chairman, Alan Greenspan, speech, March, 2007 as reported by Bloomberg.com

9. This is not a rescue. - Goldman Sachs Chief Financial Officer David Viniar after Goldman poured $3 billion into one of its hedge funds

10. This is a sort of preemptive rescue. - Eric Kuby, chief investment officer for the Goldman fund mentioned

11. When you're in a pit, the first thing to do is to stop digging. - James Ellman, Seacliffe Capital

12. The US financial system is teetering. Its USDollar currency is losing global support, with some outright revolts in crucial territories. The chief private sector export from the US financial sector has been fraud-ridden asset-backed bonds and their toxic credit derivatives. What should anyone expect? For years an institutional dishonesty within all things financial in the United States has been engrained, spreading, and become integrated with high levels of the USGovt. The Wall Street hucksters exported fraud. The backlash might be more severe than the soft soap gurus anticipate. Look for an international boycott. The shock waves in the US financial markets are preliminary symptoms of bigger events soon to come. Stability identified is nothing but quiet between tremors. - Jim Willie, Hat Trick Letter

13. The German banks' situation is not uncritical. - Alexander Stuhlmann, Germany's Landesbank

14. After all, in a credit crunch, cash is deemed to be king. In which case, gold owned outright has just been crowned emperor. - Adrian Ash, BullionVault

15. [C]apitalism without financial failure is not capitalism at all, but a kind of socialism for the rich. - James Grant, Grant's Interest Rate Observer

16. US sub-prime is just the leading edge of a financial hurricane. - Bernard Connolly, AIG

17. When the music stops in terms of liquidity, things will get complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing. - Chuck Prince, CitigroupForeclosed

18. Why is it possible to rescue S&L buccaneers in the early '90s and provide guidance to levered Wall Street investment bankers during the 1998 long-term capital management crisis, yet throw 2 million homeowners to the wolves in 2007? - Bill Gross, Pimco

19. So perhaps the most worrying single remark made by a responsible banking official during the current crisis came from Jochen Sanio, the head of Germany's banking regulator BaFin. He warned on Aug. 1 that his country could be facing the worst banking crisis since 1931 -- a reference to the collapse of Austria's Kredit Anstalt, which provoked a wave of bank failures across Europe. - Martin Walker, United Press International

20. Angelo Mozilo, chief executive of Countrywide Financial Corp, which is one of the chief victims of the sub-prime home loan debacle, said the housing crisis was the result of "one of the greatest panics I have ever seen". When asked if housing would lead the US into a recession, he said: "I can't believe ... that this doesn't have a material effect ... on the psyches of the American people and eventually on their wallet." - Phillip Inman, The Guardian

21. As calamitous as the sub-prime blowup seems, it is only the beginning. The credit bubble spawned abuses throughout the system. Sub-prime lending just happened to be the most egregious of the lot, and thus the first to have the cockroaches scurrying out in plain view. The housing market will collapse. New-home construction will collapse. Consumer pocketbooks will be pinched. The consumer spending binge will be over. The U.S. economy will enter a recession." - Eric Sprott, Sprott Asset Management

22. The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it. The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world. - Hamid Varzi, International Tribune

23. It's a crisis if everybody calls it a crisis. - Morgan Downey, Lasalle Global

24. It's inappropriate [for money market funds to invest in credit derivatives]. It doesn't have a place in money market funds. When I created the first money market fund, I said you have to have immediate liquidity, safety and a reasonable rate of return. You also have to have a situation where you're not giving people headline risk. - David Evans

25. The crisis in the US sub-prime mortgage market could bolster the gold price not only because gold provides a safe investment haven. The crisis is expected to slow GDP growth, spurring lower real interest rates and a weaker US dollar that will boost gold investment demand. Gold's traditional role as a safe haven asset in times of financial turbulence and instability is enforced in the current market as the metal recouped the majority of losses which occurred in a flight to cash in the beginning of August. Supporting this view is the fact that gold recovered despite a rise in the US dollar caused by a European Central bank intervention that boosted liquidity in Europe. - Dr. Peter Richardson, Craton Capital

Final Word

While compiling the quotes for this article, I could not help but note an irony: The most severe test of the Federal Reserve in the modern era dates almost 100 years to the day from the Panic of 1907 - the credit crisis that instigated the Fed's founding. The Panic of 1907 was characterized by bank runs and a stock market crash as investors fled the financial system. The current crisis, though it has produced similar results, is a much more complex and wilder breed of cat. Market commentator Henry K. Liu, offers a keen insight: "With the daily volume of transactions in the hundreds of trillions of dollars in notional value of over-the-counter derivatives, the Fed would have to inject funds at a much more massive scale to affect the market. Such massive injection would mean immediate and sharp inflation. Worse yet, it would cause a collapse of the dollar." Unpredictable circumstances such as these speak compellingly for gold ownership which, by the way, proved to be just as effective a safe haven in the Panic of 1907 as it is likely to be now.

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The Ed Stein cartoons are reprinted with permission.

Michael J. Kosares, founder and president
USAGOLD - Centennial Precious Metals, Denver
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Michael Kosares has over 30 years experience in the gold business, and is the author of The ABCs of Gold Investing: How to Protect and Build Your Wealth with Gold, and numerous magazine and internet articles and essays. He is frequently interviewed in the financial press and is well-known for his on-going commentary on the gold market and its economic, political and financial underpinnings.


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