Fantasy world

The Fannie/Freddie episode is the latest sign of decadence that characterizes the current US financial infrastructure. Lately, there has been a lot of talk about going "Back to Basics". The slogan has been associated to the political domain, however, it is within the financial sector that going "Back to Basics" is most needed. Above all, it is urgent to review the way western economies base their currencies. The world cannot rely solely on trust based currencies. We must reestablish the connection between paper money and hard assets.

Going back in history, I believe that we are now unwinding the consequences associated to the end of the Bretton Woods agreement. By abolishing the gold convertibility of the dollar, then US President Richard Nixon set the foundation for today's crisis. Since then, decades of artificial monetary creation by the US Federal Reserve, together with Bush's political doctrine of deception, have completed the job. Despite the dollar's recent rebound, most likely the work of joint global central bank intervention, long term the currency remains flawed.

Given that a healthy US dollar is the cornerstone of today's trust based global financial system, if things become even worse in the near term, only one of two options can alleviate the situation. First, a major boost in the trustworthyness of US institutions, namely the White House, the Treasury and the Federal Reserve. Unfortunately, that seems unlikely. Second, a shift to a system similar to the one that emerged in the aftermath of the Great Depression. Something close to the Bretton Woods agreement. Although a political and operational challenge, I believe this would be the best in the world's long term interest.