Dear CIGAs,

Anna Schwartz is 92 years old and is one of the world's most respected economists. She co-authored with Milton Friedman the brilliant work A Monetary History of the United States, and has worked with the National Bureau of Economic Research for 67 years. She retains her emeritus professorship at the Graduate Center of the City University of New York.

Dr. Schwartz has recently been speaking out on the ad-hoc nature of the bailout programs that Finance Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke have cobbled together recently. We find her interview in this past weekend's Barron's to be an extremely important read.

In it Dr. Schwartz discusses her prescription for how policymakers should change their approach.

1. "Stop managing by press release...Ad hoc program announcements have only undermined faith in the U.S. financial system..."
2. She suggests that they turn off the liquidity that is flooding the world banking system. "The federal government needs to turn off the liquidity spigot and quarantine bad assets."
3. Policy makers need to be more transparent. She says "It's like there's a bunch of guys that are making it up as they go along. They talk about transparency and what they present is opacity, programs that don't make sense, or are not yet fully laid out. This only increases the already high level of uncertainty and anxiety."
4. The problem of pricing illiquid assets must be addressed. "The problem comes from the introduction of new instruments and the difficulty in pricing these securities or pools of mortgages. The trouble is that mortgage pools are made of good, bad, and insufficient mortgages, and it's hard to name a price. To make matters worse, the rating agencies were used to rate the securities. And they came up with ratings in an arbitrary manner without really doing due diligence. Now no one has any idea of how to price these securities. And the rating agencies are lowering the ratings on some of the instruments to which they have given top grade."
5. The ability to determine who is solvent has yet to be addressed before banks are comfortable lending. "Another spinoff from mortgage-backed securities is credit-default swaps. There was no way of evaluating what effect a downturn would have on the derivatives markets and their counterparties. Few who deal in the derivatives market have a clear notion of their responsibilities. We have a bewildering array of instruments with uncertain prices. And as a result, we don't know who's solvent and who's not. The problem comes from a lack of ability to price the instruments, not a lack of liquidity. Evidence of the banks' unwillingness to lend can be seen in the most basic Federal Reserve statistics,..."
6. Do not disregard the inflationary effects. "Since mid-summer, Fed credit appears to have ballooned greatly, and that's behind the upward pressure in the consumer price index. The Fed pooh-poohs inflation because of a perceived slowdown in oil and gas prices. But theoretically any increase in the monetary base must be met with a tightening if inflation is to be avoided. Right now the Fed is pursuing a pro-inflation strategy by lowering interest rates and showering the banking system with liquidity. They're not even considering inflation."

We agree with Dr. Schwartz that the therapies being applied to fix the banking system have shortcomings and severe consequences. Expansionary fiscal monetary policies will lead to inflation down the road...how far down the road is the question.

We find it surprising that Dr. Schwartz did not receive the Nobel Prize for her work on economics. Nonetheless, what she has to say now is very important and we believe her voice should be heard.

Thanks for listening,
Monty Guild
www.GuildInvestment.com