And yet the market meltdown continues, and the casualties continue to mount, with Bear Stearns the latest–and surely not the last.

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That’s what it costs the government to forge a penny, thanks to the rising price of metal. A nickel costs 10 cents. Congress has concluded that’s a pretty bad deal.

A House subcommittee chaired by Rep. Luis Gutierrez, D-Ill., convened a hearing Tuesday on a proposal to change the composition of both coins. Republicans and Democrats like the concept, particularly its promise to save taxpayers $100 million a year by using cheaper metals at the U.S. Mint. If the legislation clears the House and Senate and President Bush signs it, you could be plucking steel pennies off the street before year’s end.

First, however, there are bureaucracies to navigate and interest groups to appease. There are lobbyists and powerful home-state imperatives. There are questions of constitutionality and whether the penny should exist at all. There is Ron Paul, the Lake Jackson Republican congressman.

And despite Gutierrez’s plea for immediate action, it appears there will be months more debate before Congress votes on fixing the penny problem.

The Mint has coined American money since 1792. Until recently, Mint officials say, no American coin had ever cost more to produce than it was worth.

Global metal prices began shooting upward in late 2003, driven by increased demand for raw materials, particularly in India and China. The price of copper quadrupled in the last five years. Nickel more than tripled, and zinc nearly did the same. The Mint lost $99 million on penny and nickel production in the 2007 fiscal year.

Paul called the current proposal an unconstitutional delegation of power. America, he said, has failed to maintain a gold standard or silver standard for its currency. “Now,” he said, “we cannot even maintain a zinc standard.”

It is now clear that no end is in sight to the turmoil, and the reason for that is that the Fed and the US treasury are no closer to solving the underlying problem than they were eight months ago. The crisis will only end when house prices stop falling and banks stop racking up huge losses on their loans. Doing that, however, will require the US government to intervene directly in the real estate market to end the wave of foreclosures. Ideologically, it is ill-equipped to take that step and, as a result, property prices will fall and the financial meltdown will go on and on.

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The central bank yesterday used its financial muscle to back the bail-out of the stricken Wall Street investment banking giant Bear Stearns, which will be taken over by rival JPMorgan Chase at a fraction of its worth last week.

But analysts believe the threat to the financial system, which continues to flow from the collapse of the sub-prime mortage market last year, is getting too big for the Federal Reserve.

“This is now beyond the Fed,” ANZ international economist Amy Auster said.

“It is not going to be able to deal with this situation on its own.”

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Another prominent economist has warned that the bottom may soon drop out of the dollar completely as the currency hits fresh lows and continues to sink worldwide.

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http://www.marketoracle.co.uk/Article2797.html 

“Call it spite if you must. But if the world’s No.1 currency – and the world’s No.1 source of debt finance – both fail to outstrip inflation, investors will slowly go mad. Mad enough, in fact, to buy a mere lump of metal, used as a store of value for more than 5,000 years, that still pays precisely zero.“

The final spike in bullion occurred when the Hunt brothers tried to corner the silver market, forcing up gold in tandem through arbitrage links. It collapsed within days.

If you strip out the Hunt anomaly, it is fair to say that gold established a “safe-haven” level of $600 – or $1,500 in today’s money – that roughly lasted through the final phase of the Carter malaise, the oil shock, and the collapse of confidence in the monetary order.

By this benchmark, last week’s jump to $869 looks tame. Yet gold is undoubtedly flashing warning signs. The price has jumped 42 per cent since the US credit markets suffered their heart attack in August. It has tripled since Gordon Brown sold over half Britain’s reserves, deeming it a barbarous relic. That conceit has cost taxpayers £3.4bn, after adjusting for returns from dollar, euro, and yen bonds.

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Twenty billion dollars here, $20bn there, and a lush half-trillion from the European Central Bank at give-away rates for Christmas. Buckets of liquidity are being splashed over the North Atlantic banking system, so far with meagre or fleeting effects.

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So central banks are now becoming even more creative in dealing with the liquidity crunch and starting to do the kind of stealth policy rate reductions that they performed last August and September. The ECB just announced a special liquidity operation that will allow financial institutions to borrow for two weeks unlimited amounts at a rate of 4.21% (close to its policy rate of 4%); the two-week euro Libor had been 4.9% before the announcement. So the ECB is providing a temporary monetary policy easing of 70bps for a two week period.

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