Dear Dr. Bernanke:

I wanted to write to thank you for helping the price of Gold and to encourage you to keep up the good work. I know you will. I've never been a fan of Gold throughout my investing career, but the Fed's policies over the last 10 years have changed my mind.

I also wanted you to be one of the first to know that I am advising my readers to start putting a significant amount of their money in Gold. I recommend long-dated Gold futures, Gold ETFs (like GLD), and Gold producers (such as NEM, TRA, and CGHRF.PK). I especially like the smaller miners as they have more upside potential.

In spite of the run up, Gold continues to be a great investment. Burgeoning inflation is likely to push the price higher, as markets move from discounting Gold relative to stocks and bonds to putting a premium on it.

If I'm misguided, please let me know. But I trust you'll be there to pump lots of liquidity into the banking system.

I'm confident you will continue to argue that the appreciation of commodities and the weakness in the dollar are not important indicators of inflation. The true indicator is core inflation. The slowdown in housing and the economy will lead to core disinflation in 2008. In anticipation of this disinflation and to prevent the economy from falling into a recession, you and the FOMC will continue to lower rates.

After all, the credit crunch in the banking system is monstrous. The market and the press (in spite of so much talk) are underestimating the threat.

Just two weeks ago, your institution (the Federal Reserve) released a report that got little attention. The report showed that large bank capital had declined by $40 billion since the beginning of August. According to Merrill Lynch economist David Rosenburg, "This has never happened before over such a short timeframe and this is rather serious because such a steep and sudden compression in large-bank capital has the potential to create a negative lending environment...The large banks have been forced to take commercial paper back on their balance sheets and as a result are choking on assets they did not plan on having - thereby tying up regulatory capital." This trend could "significantly inhibit" economic growth.

According to the Financial Times, "Big U.S. commercial banks have seen $280 billion of new debt come on to their balance sheets since the credit squeeze, threatening to undermine economic growth by inhibiting their ability to make new loans. The banks have been forced to take on to their books large amounts of commercial paper and leveraged loans after investor demand for such assets dried up in the summer."

As you probably know, while these numbers sound quite large, they are only the tip of the iceberg. According to Moody's, the credit rating agency, assets held by bank-sponsored special investment vehicles ("SIVs") were $320 billion in July. Two SIVs announced several days ago that they will be unable to pay their debts. Such moves could force more liabilities onto the balance sheets of banks, further constraining liquidity and possibly even threatening the banks' own solvency.

Through fractional banking and the rules that you set at the Federal Reserve, banks are allowed to have 20 times the amount of liabilities as their net capital. Because SIVs are off-balance sheet, banks can now have even more than 20 times. In addition, many SIVs have their own leverage, sometimes up to 10 times. In other words, only a slight move down in the value of SIV or other assets means that banks could be insolvent.

Dr. Bernanke, you need to move quickly to inject more liquidity into the system. 50 bps is not enough. A lot more interest rate cuts are needed. A lot.

Look at Citigroup as an example. Citigroup has just $65 billion in shareholder equity. Yet Citigroup alone has more than $80 billion in exposure to SIVs and another $80 billion to conduits. According to the Associated Press, "Citi said it was suspending share buy-backs because its capital ratios had weakened partly due to the large amount of commercial paper and leveraged loans it had taken on."

You must act now. The cycle is viscous. If banks don't have enough capital, they won't lend. If they aren't lending, what will the American consumer do? And what will support housing prices? Houses are already unaffordable. Imagine what will happen if lending dries up even more! And what will keep the LBO, hedge fund, and derivatives markets running?

So please ignore those cynics who don't understand the severity of the problem. Don't worry about the price of Oil, Wheat, or Gold. Let them rise and let the dollar fall. Because the U.S. economy needs $2 billion a day in foreign cash to make up for its overconsumption and lack of manufacturing, more interest rate cuts could send foreigners fleeing the dollar. The dollar could drop by 50%. That's good. That's exactly what we need to save the banks and housing. Who cares if a further drop in the dollar leads to fleeing capital, a further tightening of credit, and a rise in long-term interest rates? Who do these cynics think where are? Argentina? Please. We are the U.S. and A.

I know you're going to act. After all, PIMCO is now on board with Paulson's SIV plan. PIMCO's support comes as a surprise after Bill Gross, the chief investment officer, criticized the effort as "a little lame" in a television interview. Hmmmm. He must have gotten some assurances that the government hears his call for the Fed to lower rates at least another 100 bps.

Anyway, you know the banking system better than I do. I'm sure you're way ahead of me, and I'm sure you're planning even more interest rate cuts and more core inflation rationalizations.

So thanks for the good work, and please tell your friends to listen to what I'm telling my readers: "Don't sit there and moan about how the Fed is taking away your savings. Do something about it. Protect yourself and make some money in the process. Buy Gold."

P.S. While you're at it, can you do something to quiet that Greenspan guy? Now that he's out of office, he can tell the truth and it keeps hurting the markets. He's desperately trying to disassociate himself from the inflationary policies of the Fed, in a last ditch effort to save his legacy. Just the other day, according to the Associated Press, "Greenspan suggested it would be best to let SIVs and banks bear the burden of holding bad assets by making them lower prices as much as necessary to sell them, rather than setting up a fund that some see as a bailout for the banks...'What creates strong markets,' he said, 'is a belief in the investment community that everybody has been scared out of the market, pressed prices too low and there are wildly attractive bargaining prices out there.'" Doesn't he get it? The government must do something. You can't be Fed Chairman and sit idly by while a recession occurs. He never did. Why should the burden fall on you?

When asked about his own attempts to bail out the banking industry while he was in office, Greenspan "said the 1998 Fed-sponsored rescue of Long-Term Capital Management worked because it took a set of assets that would otherwise have been dumped at firesale prices off the market, allowing prices to find a true equilibrium. But he said today 'we are dealing with a much larger market.'" Wasn't the entire argument behind bailing out Long-Term that the market effect was so large it threatened global stability? Ah, how short memories are.