Fiscal insanity? Bank on it

Chaos and red ink were the order of the day early last week after our government let it be known it was going to sue a number of banks for bad behavior during the real-estate bubble.

While I do agree that many banks misbehaved and paid bonuses on what were certainly phantom or illusory profits, if the government keeps hammering away at them, whatever pound of flesh it extracts will have to be given back as bailouts on the other side, unless it abandons its too-big-to-fail policy.

I'm not saying the issue shouldn't be dealt with, but it would be useful if the government had a coherent plan. Perhaps we should just dismantle the banks, bring back some variation of Glass-Steagall, and put capital ratios in place that make outrageous leverage impossible.

Or, better yet, we could require directors and officers to have real financial liability. That might align the interests of all concerned a little more rationally. Sound crazy? That was, in fact, the law of the land in the U.S. in the early 20th century, and it is current policy in one of the world's better-performing economies -- Brazil -- right now.

No doubt there are a whole host of things that could be done that would allow banks to function as they have in the past, without the taxpayers bailing them out while the gunslingers who run them get rich.

They've got their own troubles

Currently, however, it seems our banks are the least of the world's worries, as news from Europe once again drove the action worldwide. European markets caved in on Labor Day, losing about 5%, with the banks there absolutely destroyed. (Certainly Europe's banks are no better than ours; in fact, they are probably worse.)

In a move that sent reverberations throughout foreign exchange markets, the Swiss National Bank decided Sept. 5 it was going to print unlimited amounts of francs to stem the rise of its currency against the euro (by pegging it to the latter). So we can add Switzerland to the list of countries engaged in massive amounts of money printing.

Meanwhile, there was additional drama Wednesday, as the world awaited the German Federal Constitutional Court's decision regarding Germany's participation in various euro bailout schemes. The court ultimately did not put the kibosh on current resuscitation efforts, but it did put restrictions on future ones by requiring that the Bundestag approve them.

The euro's future is in their court

For the most part, whatever complications that might lead to have been ignored, as Europe's battered markets breathed a sigh of relief after the decision. However, bank stocks in Europe did not respond all that well, so I don't know how long the good cheer will last. Judging by Friday's plunge, not long at all.

The European Central Bank may be able to kick the can down the road a little ways if it slashes interest rates and prints enough money (although it can print only so much). But it seems more and more clear to me that the days of the euro as we know it are numbered.

If you step back, you can see that there is a "race to debase" by central banks that is only barely beginning to be understood by the mainstream. As this bonfire of the currencies rages on, it has never been more obvious that we are headed back to some sort of gold standard, though it will take time and pain to get there.

I expect we will continue to see wild motion in many markets, which will lead to knee-jerk reactions in others. Separating the noise from the signals will be particularly challenging over the next month, as governments try to deal with (and battle) the fact that 40 years of Keynesian economics and money printing (resulting in over-indebtedness) have been a failure. Nevertheless, the end game seems to be upon us, even if how it plays out turns out to be a multiyear process.

Now hear this

On Wednesday I did a wide-ranging interview with Jim Puplava from Financial Sense that covered some interesting new ground on gold, mining, the end of the paper money era and other related subjects. It was pretty thought provoking, if I do say so myself.

At the time of publication, Bill Fleckenstein owned gold.

This column is a synopsis of Bill Fleckenstein's daily column on his website, FleckensteinCapital.com, which he's been writing on the Internet since 1996. Click here to find Fleckenstein's most recent articles.