ANGELA CHARLTON and EMMA VANDORE

Associated Press
October 14, 2008

PARIS - Europe put $2.3 trillion on the line Monday to protect the continent’s banks, a figure that dwarfs the Bush administration’s $700 billion rescue program, in its most unified response yet to the global financial crisis after a stumbling start.

The pledges by Britain and the six countries that use the euro helped soothe stock markets, along with a promise by top central banks to provide unlimited short term dollar credits.

The action by Germany, France, the Netherlands, Spain, Portugal, Austria and Britain came after weeks in which the governments often acted at cross purposes and sniped at each other — a piecemeal approach that failed to stop steep and frightening slides on financial markets.

“The time of each one for itself is fortunately over,” French President Nicolas Sarkozy said, following a Cabinet meeting that approved France’s spending in the framework of the plan.

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Adrian Douglas

Goldseek
Ocorber 12, 2008

Imagine a country such as Venezuela announced that it was bailing out an investment bank, then just days later said it was nationalizing its mortgage industry, and then just days later that it was bailing out its biggest insurance company, and then just days later its government pledged 700B$ to inject into its failing banks, and then just days later its stock market fell 20%. Would you feel comfortable having your money invested in such a country, in its stock market, in its bond market or in its currency?

I hope you answered “No” or “Hell, No!” to the above question! So why should you feel any different about the situation if the country is called “America”? I am going to show you that the US Bond market is on the brink of collapse and with it will come the collapse of the currency, just as you would expect to be the outcome of such ridiculously inflationary policies in any other country.

Figure 1 US 10 Year Note Price and MFA

In figure 1 the 10 Year US Treasury Note price is shown in black. The Market Force Analysis (MFA) is shown in red. From 2000-2003 the MFA was rising and in a bull trend identified by the trend channel labeled “1”. The bond price was generally rising (falling yields). In late 2003 the MFA exited the channel and entered into a declining trend labeled “2”. The bond price as a consequence was falling (rising yields). In early 2007 the MFA fell rapidly and exited the lower side of the channel. This seemed to be signaling an imminent rapid decline of the bond price. But then in mid-2007 the first news broke of sub-prime mortgage problems. There was a sudden rush to “prime” and safe debt in the form of Government Treasury debt. The MFA did a reversal and entered into a new rising trend labeled “3” and the 10Y note commenced a strong bear market rally. In early 2008 the MFA exited this trend and has been tracking sidewards suggesting a topping process. Ominously the bond price has made a pronounced double top and is looking ripe for a collapse. As the stock market had its worst week in history the financial press reported on short term treasuries rallying as the initial reaction of investors was to rush into “safe haven” treasuries. The 10 year note tells a different story. It initially rallied on Monday October 6 to 118 but by the end of the worst week in stock market history it had fallen to 113.5. Hardly indicative of a safe haven play!

All the bailouts and “recapitalization” plans of the Treasury and the FED are highly inflationary and require issuing massive amounts of Treasury debt. The bond vigilantes are waking up. They are going to dump bonds like they have gone out of style. Bond prices will drop like a stone (as indicated by the black arrow in figure 1), general equities will drop more and the dollar will nose dive.

This highly inflationary scenario will make money rush into the tiny precious metals market and explode their prices due to paltry supply. The lack of supply of the metals will mean that money will have to spill into anything silver or gold such as the mining equities. Money will also flow back into commodities because the money leaving the bond market and the equities markets will be just too large to be accommodated anywhere else.

On Friday October 10 as the stock market selling intensified and 10 Year note prices were falling CNBC Rick Santelli was saying this was a sign the credit market freeze was easing! This was as the LIBOR-TED spread reached an all time high!

What is more likely is that bond holders were waking up to the certain hyperinflation coming as a consequence of the largesse of the government’s massive rescue plans.

Many analysts are incorrectly talking of deflation. Falling stock markets or falling housing markets do not contract the money supply. The government’s bailouts and “liquidity” injections on the other hand increase it. John Williams shows at shadowstats.com that the money supply is expanding at 14% and when the government guarantees all bank deposits and probably all interbank lending I can’t imagine what it will be!

Imagine that instead of living through this nightmare yourself you were watching this complete financial drama unfolding in Venezuela. Who in his right mind would predict that Venezuela would experience massive deflation as a result of creating massive amounts of money and credit out of thin air? So why is it different for America? The laws of economics are not country specific.

Because the Cartel hit gold and silver in the middle of the night on Thursday October 9 many started invoking deflation theories. This is nonsensical and the bond market is about to confirm it!

We have seen the mega-shorts on TOCOM reduce their shorts in gold and silver to next to zero. They know what is going to happen to the prices of precious metals!

Many investors are starting to think that after this stock market rout and with a G7 package things will begin to improve. That is not the way things work! 20 years of excesses with even more monetary excesses about to be heaped upon us as a “rescue package” do not get unwound in 5 days. This is just the beginning. The bond market is the biggest market in the world (if we ignore the ridiculous, unregulated casino peddling OTC derivatives!). When the bond market heads south the money that has to find a safe haven somewhere else is in the trillions. Just a small percentage of this capital will blow the precious metals to unimaginable levels.

The authorities keep saying that they will “use all tools available to them”. They only have one…it’s an electronic version of the printing press. They will spin it in many different ways using jargon like “increased liquidity” and “injection of capital” and “buying equity stakes” and “buying toxic debt” but it all translates to “create more money out of thin air”. Gold and silver and the mining equities will be the place to be and soon thereafter commodities in general.

Clarity will come when the metals reach new highs and at that point a child of six will be able to say where to invest. Of course, that is the greatest incentive for the Gold cartel to prevent new highs being achieved! But new highs are already being achieved in the retail market and on e-bay. The silly manipulation on the COMEX will soon end.

Reduters

October 13, 2008

Money market rates eased on Monday after Europe’s central banks said they would lend commercial banks as much U.S. dollar funding as they need.

In the latest joint bid to thaw frozen money markets the U.S. Federal Reserve, the European Central Bank, the Bank of England and the Swiss National Bank also scrapped their existing dollar auction systems and replaced them with a new fixed rate system.

“Counterparties in these operations will be able to borrow any amount they wish against the appropriate collateral in each jurisdiction,” the Fed said in a statement.

“Central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets.” The Bank of Japan said it would also consider similar measures and the Fed said it would increase its currency swap lines with the ECB, SNB and BOE by an unspecified amount to fund the operations.

The moves were welcomed by traders and had an instant impact as three-month Libor dollar rates fell.

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Andrew Ross Sorkin

The New York Times
October 13, 2008

In what could set an important precedent, federal officials assured a big Japanese bank that its planned investment in the embattled Wall Street giant Morgan Stanley would be protected, according to people involved in the talks.

After two days of tense negotiations, Treasury officials urged a hesitant Mitsubishi UFJ Financial Group to proceed with its $9 billion investment in Morgan Stanley, which has sought the capital infusion to reassure investors and customers about its stability.

The deal is considered a crucial step in the government’s strategy for revitalizing the financial system by luring outside investment while it considers buying stock in banks directly. The transaction’s failure would deal a blow to that effort and potentially unnerve the financial markets.

The Treasury’s assurances amount to another extraordinary move by the government and could serve as a model for future deals. The tense, weekend talks were so critical to the financial markets that they drew in both the Treasury and the Japanese government.

Mitsubishi and the Japanese government pressed the Treasury Department over the weekend to guarantee that if the United States were to inject money into Morgan Stanley at a later time — a step the Treasury has ruled out for now — the move would not wipe out Mitsubishi’s investment.

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Paul Joseph Watson

Prison Planet
Monday, October 13, 2008

Private investment advisor Martin Hennecke warned this morning that the endless printing of money to bail out collapsing banks would lead to hyperinflation and the Zimbabwe-style destruction of the dollar, euro and sterling.

Asked by CNBC how the three currencies could be destroyed, Hennecke, senior manager of private clients at Tyche, highlighted the collapse of Iceland’s banks.

“They have a lot of external debt in other currencies so they wouldn’t be able to print up more of their own currency - meaning hyperinflation to get out of their debt - but the UK, the U.S. and the rest of Europe could do it….this is the first step down the road to hyperinflation,” said Hennecke.

Noting that there was a gold rush and panic buying taking place while gold dealers worldwide had to close their doors, Hennecke agreed that gold prices would explode as hyperinflation crept up, and said that relatively modest overall price rises in the precious metal were partly a result of deleveraging as well as, “manipulation as the central bankers and the politicians don’t want you to panic out of their debt and go into gold.”

Hennecke dismissed the new rescue plans announced over the weekend as merely new taxpayer funded money being printed up and thrown at the problem, which will lead to accelerated inflation.

Asked if he believed whether the Euro and the U.S. dollar could go the way of the Zimbabwean dollar, which has suffered annual inflation of over 200 million per cent over the last few years, Hennecke responded, “Actually it’s interesting to know that the world’s leading standard rating agency Standard and Poor has predicted that all the major western governments are heading towards default on their sovereign bonds - that was predicted way before the crisis even started and now with tax revenues drying up and much much more money needed for these bailouts and privatizations of the banks to prevent a bank run, clearly that is likely to be happening earlier (rather) than later.”

“Most investors are saying cash is the safest thing but it might just turn around with cash being one of the highest risk investments if this inflation accelerates,” Hennecke concluded.

Early last month, before the collapse of Lehman Brothers and the announcement of the $700 billion bailout package, Hennecke warned that the U.S. and Europe were both heading for depression and that the U.S. would eventually be forced to announce national bankruptcy.

Michael Hudson

Counterpunch
October 13, 2008

We are now entering the financial End Time. Bailout “Plan A” (buy the junk mortgages) has failed, “Plan B” (buy ersatz stocks in the banks to recapitalize them without wiping out current mismanagers) is fizzling, and the debts still can’t be paid. That is the reality Wall Street avoids confronting. “First they ignore you, then they denounce you, and then they say that they knew what you were saying all the time,” said Gandhi. The same might be said of today’s overhang of debts in excess of the economy’s ability to pay. First the policy makers pretend that they can be paid, then they denounce the pessimists as spreading panic, and then they say that of course students have been taught for four thousand years now how the “magic of compound interest” keeps on doubling and redoubling debts faster than the economy can squeeze out an economic surplus to pay.

The amazing feature of today’s crash is how many Wall Street firms actually believed that the game of musical financial chairs could go on before they had to stop dancing and indeed, escape from the room.

What has ended is the idea that “the magic of compound interest” can make economies rich without having to work and without industry. I hope we have seen the end of derivatives formulae seeking to make money by playing in a zero-sum game. A debt overhang always ends either in foreclosure of the debtor’s property, or in a debt annulment to preserve the economy’s overall freedom and equity.

This means that the postmodern economy as we know it must end – either in financial polarization and debt peonage to a new oligarchic elite, or in a debt cancellation, a Jubilee Year to rescue society. But when the government says that it is reviewing “all” the options, this reality is not one of them. Treasury Secretary Henry Paulson’s first option was to buy packages of junk mortgages (collateralized debt obligations, CDOs) to save the wealthiest institutional investors from having to take a loss on their bad bets. When this was not enough, he came up with “Plan B,” to give money to banks. But whereas Britain and European countries talked of nationalizing banks or at least taking a controlling interest, Mr. Paulson gave in to his Wall Street cronies and promised that the government’s stock purchases would not be real. There would be no dilution of existing shareholders, and the government’s investment would be non-voting. To cap the giveaway to his cronies, Mr. Paulson even agreed not to ask executives to give up their golden parachutes, exorbitant annual bonuses or salaries.

Plan A (the $700 billion to buy mortgage-backed junk that the private sector will not buy) failed partly because it let financial institutions avoid putting a fair value on the debt packages they were selling. Instead of telling the truth about their financial position by marking assets to market prices), they can “mark to model,” Enron-style. We have seen the result: A solid week of plunging stock market prices. The public media call this a panic, but there is nothing irrational about it. Who in their right mind would buy securities or buy into a bank without knowing what the securities were worth? Faith in junk mathematical models has ended.

So we still await a public response to the problem of how to write down debts. Whose economic interest will have to give: that of debtors, as increasingly has been the case over the past eight centuries; or that of creditors, which have fought back to create a neoliberal economy controlled by the FIRE sector?

It is not too late to decide which road to take, but Wall Street bankers and creditors have taken the lead in positioning themselves. Seeing which way the political winds were blowing, they moved to empty out the Treasury before the November 3 elections much like medieval citizens fleeing a horde of Mongolian raiders under Genghis Khan. “We’re moving. Clean out the cupboards,” much as Lehman Brothers emptied out their foreign bank accounts in Britain and elsewhere just before declaring bankruptcy, taking what they could and steering it to their best friends.

The pretense was that a bailout was needed to restore confidence. But the ensuing week showed that the claims were false. It didn’t turn the stock market around as promised. The Dow Jones Industrial Average fell 2,200 points from Wednesday, October 1 through the following Friday October 10 – eight straight trading days, not even pausing for the usual zigzags. Friday’s plunge was 100 points a minute for the first seven minutes – a 690 point drop to under 8000. Each 100 points was more than a 1 percent drop, which was reflected on the NASDAQ. Nothing could withstand the pressure of so many Americans cashing in their mutual funds overnight and so many foreigners in earlier time zones putting in sell-at-market orders.

Short sellers made one of the largest and quickest fortunes ever, and then covered their positions by buying back the stocks they had pre-sold. This pushed prices up even into positive territory just before 10:30 AM when George Bush began to speak. Half the financial stocks showed gains – a sign that the Plunge Protection Team had jumped in. But Mr. Bush said nothing helpful and stocks went back into freefall, ending down another 128 points despite the upcoming weekend G7 meeting. There was no talk at all of reducing debt levels – only of giving more money to banks, insurance companies and other money managers, as if “pushing on a string” somehow would lead them to lend yet more to an already debt-ridden economy.

If Congress really wanted to restore confidence, here’s what it might have done: First, mark to market, not to model. Investors no longer believe America’s Enron-style accounting, debt rating agencies or monoline risk insurers. They don’t trust U.S. banks to be honest about their financial positions. They worry about the fraud charges brought by attorneys general in eleven states against predatory lenders such as Countrywide and Wachovia that Citibank, JPMorgan Chase and Bank of America were so eager to buy.

So is it too late for Congress to change its mind and repeal the giveaway? If the $700 billion handout didn’t stabilize the unsalvageable for small investors, pension funds and even the financial sector itself, what did it do?

What the Fed has been doing while the media have not been looking?

Let’s put the giveaway in perspective. While Senators and Congressmen subject to voters’ choice were debating $700 billion for the major Wall Street contributors to both parties (admittedly only for starters, Mr. Paulson explained), the Federal Reserve already had given even more, without any public discussion and without the major media noticing. Since Bear Stearns failed in March, the Federal Reserve has used the small print of its charter to go outside its normal customers (which are supposed to be commercial banks), to give investment banks, brokerage houses and now large corporations almost indiscriminately some $875 billion in “cash for trash” swaps. (The statistics are released each week in the Fed’s H41 report.) Like Aladdin offering new lamps for old, the Fed has exchanged Treasury securities for junk mortgages and other securities that brokerage houses and investment banks did not have time to pawn off onto OPEC, Asian sovereign wealth funds or other investors.

The press lauds Mr. Bernanke as “a student of the Great Depression.” If he were, he should know that what led to the 1929 collapse were harsh U.S. Government creditor policies toward its World War I Allied governments. This created a situation where the Federal Reserve had to provide easy credit to hold interest rates artificially low so as to encourage U.S. investors to lend to Britain and Germany, which would use these dollar inflows to pay their Inter-Ally arms and reparations debts. Mr. Bernanke’s predecessor, Alan Greenspan, promoted easy credit simply for ideological reasons, to enrich Wall Street by enabling it to sell more debt.

A student of the Great Depression would understand the conflicts of interest between retail commercial banking and wholesale investment banking and money management that led Congress to pass the Glass-Steagall Act in 1933 – conflicts unleashed once again when Pres. Clinton backed then-Fed Chairman Alan Greenspan and Republican leader (and McCain hero) Senator Phil Gramm in leading the repeal of this act, opening up the floodgates to today’s financial double-dealing that has cost the American economy so much.

If Mr. Bernanke does know this history, his behavior is simply that of an opportunistic student of the art of political self-advancement, toadying to Wall Street in campaigning for one last great rip-off before the Bush Administration goes out of business. The Fed has given Wall Street newly minted Treasury bonds, added to the national debt out of thin air. It has done this without feeling any need to rationalize it by drawing absurd public-relations pictures about how the government may “make a profit for taxpayers.”

The Fed Chairman is not elected democratically. He traditionally is designated by the Wall Street financial sector that the Fed is supposed to regulate, acting as its lobbyist for creditor interests – the top 10 percent of the population – against that of the indebted “bottom 90 percent.” This “independence of the central bank” is trumpeted as a hallmark of democracy. But it is undemocratic, precisely by being isolated from public control.

The Age of Oligarchy

Treasury Secretary Paulson has no such luxury. The Treasury is supposed to represent the national interest, not that of bankers – even though its head these days is drawn from Wall Street and acts as its lobbyist. Mr. Paulson presented his almost totalitarian giveaway gruffly to Congress on a take-it-or-leave it basis, announcing that if Congress did not save Wall Street from taking losses on its mountain of bad loans, the banks were willing to crash the economy out of spite. “Please don’t make us wreck the economy,” he said in effect. As Margaret Thatcher used to say while selling off the British government’s crown jewels in the 1980s, TINA: There is no alternative.

In making this bold threat Mr. Paulson behaved as arrogantly as Lehman’s CEO Richard Fuld did when he tried to bluff Korea and other prospective investors into paying the full, fictitiously high book value for his company. (His bluff failed and Lehman went bankrupt, wiping out its shareholders, including the employees and managers who held 30 percent of its stock.) There turned out to be an alternative after all. Responding to the loudest public condemnation in memory, Congress called Mr. Paulson’s bluff.

What made his $700 billion Troubled Asset Relief Program (TARP) so much more visible to the media than the Fed’s actions is that Congress is involved, and this is an election year. The level of deception and false argument is therefore enormous – along with a few tradeoffs and tax cuts to distract attention. Erstwhile Republican opponent Sen. Jeff Sessions of Alabama came right out and said that “This bill has been packaged with a lot of very popular things to give it even more momentum,” so that (as The New York Times explained), “instead of siding with a $700 billion bailout, lawmakers could now say they voted for increased protection for deposits at the neighborhood bank, income tax relief for middle-class taxpayers and aid for schools in rural areas where the federal government owns much of the land.”

Left behind while Wall Street’s believers in the rapture of free markets were swept up to heaven by “socialism for the rich” have been mortgage debtors, student-loan debtors, the Pension Benefit Guarantee Corporation (PBGC, some $25 billion short), the Federal Deposit Insurance Corporation (FDIC, about $40 billion short), as well as Social Security which, we are warned, may run up a trillion dollar deficit thirty or forty years down the line. Only the wealthiest have been beneficiaries, not voters, homeowners and other debtors.

Still, Congress was panicked into acting on Friday, October 3, because a week earlier, September 26, stocks fell 777 points after Congressmen responded to an unprecedented volume of voter protest against the bailout. “This sucker could go down,” Pres. Bush warned as Wall Street’s lobbyists blamed the market downturn to the failure of Congress to preserve the “monetary system,” and specifically the banks and insurance companies that already had lost their net worth and were plunging deeper into Negative Equity territory. Democratic leaders Barney Frank and House Speaker Nancy Pelosi said, in effect, “Look what you’ve done! You irresponsible politicians are grandstanding on principle, and wiping out peoples’ stock market savings and threatening their pension funds. If you don’t give Wall Street firms enough money to cover their losses so that everyone wins, they’ll kill the economy until they get their way.” Well, they didn’t quite say this, but that was basically their message. It certainly was Wall Street’s message: “Wall Street to Economy: Your money or your life.”

So Congress gave in. Democrats ran like lemmings to “save the economy.” Yet the stock market fell a few hundred points, and kept on plunging all week long, much worse and much faster than had occurred right after Congress had initially defeated the bill.

The “Reality Problem”

What did the “free market” theory underlying the giveaway leave out of account? For starters, “the monetary system” turns out to be a euphemism for the fortunes of financial gamblers using junk mathematics (the Merton-Scholes derivatives formula) based on junk economics (blessed with Nobel Prizes) to buy, speculate and even to insure junk mortgages, junk bonds and junk commercial paper and derivatives based on their relative prices. So what is left out first of all was full knowledge of the value of what is being bought and sold. Mark-to-market models leave the price up to the investment bankers. If trust existed and there really was honor among these thieves, a government bailout would not be necessary, because “the market” could clear.

“Free market” ideology assumes that each party will act in his or her self-interest. If this is so, why should foreign governments accumulate more dollar claims on the U.S. Treasury, which already owes their central banks $4 trillion? When there hardly were enough Treasury securities to go around even as the United States ran unprecedented federal budget deficits, U.S. officials urged these banks and sovereign wealth funds to buy packaged mortgages yielding a higher rate of return. And at least by buying these bonds, foreign governments would not be accused of funding America’s war in Iraq that most of their voters opposed. But investors made a fatal mistake in believing U.S. representations of the value of their junk-mortgage packages. This trust has now been lost, all the more so since the bailout’s permission to keep on “marking to market.”

Congress thought that its $700 billion would distract attention at least until the November 4 election. But to no avail. Markets fell 157 points on Giveaway Friday, and kept on going down another 800 points on Monday, October 6 (to about 9500) before bouncing 500 points off the floor, only to fall even more through Friday. So the giveaway failed in its stated purpose to rescue stock market investors (“peoples’ capitalism”) or their pension funds. But that was not its real purpose. The time simply had come to clear out and take whatever one could.

Making banks and insurers in the zero-sum derivative game whole, so that winners can collect their bets while losers can sell their bad investments to the Treasury, is supposed to re-inflate the credit pyramid. The idea is to solve the debt problem with yet more debt to prop up housing prices once again to unaffordable levels! This is not a long-term solution, but it would give insiders enough time to arrange a do-over and get out of the game more quickly, to sell out their junk mortgages and junk bonds to the proverbial “greater fool” – in this case, the “greater fool of last resort,” the U.S. Treasury, as long as it can be run by Mr. Paulson or, under Mr. Obama, perhaps the former Goldman-Sachs official Robert Rubin.

The banks are to “earn” their way out of their negative equity position by selling more of their product – credit – to increase the economy’s debt levels and hence receive more interest payments. The problem is that most families are already “loaned up.” They have no more discretionary income to pledge to carry more debt. Without writing down their debts, there will be no fresh lending, and hence no source of credit and purchasing power for new autos, appliances, goods and services in general. Debt deflation is being imposed on the “real” economy. Creditors and speculators alone are to be made whole.

If no revenue was available for future Social Security, public health care and repair the nation’s depleted infrastructure before this giveaway, think of how bare the cupboard must be now that the government has run up the recent trillions of dollars in new debt rather than writing off a penny of the bad mortgage debts being blamed for causing the debacle.

We can see where this is leading. The wealthiest 1 percent of the population will come into possession of even more returns to wealth than the 57 percent that they are now taking. In contrast to the Statue of Liberty’s inscription “give me your poor … yearning to breathe free,” the Fed – and now the Treasury, with Congressional blessing – is taking from the public purse and giving to America’s wealthiest investors and insiders. This “Robin Hood in Reverse” program is being done without strings, without asking banks to stop paying dividends, exorbitant executive salaries and golden parachutes, and without taking over banks with negative net worth of the kind that many homeowners are experiencing.

Nobody is talking about a debt write-down or moratorium. The subprime mortgage problem could have been solved by writing down just $1 or $2 trillion of the face value and interest rates of predatory loans. Instead, the $10+ trillion in financial-sector damage in recent weeks reflects Wall Street’s fraudulent packaging and sale of junk mortgages at unrealistically high prices, using junk mathematics to calculate junk derivatives and sell them to gullible investors who believe that the pretenses these mathematics, credit ratings and projected income have a basis in reality.

The amazing feature of today’s crash is how many Wall Street firms actually believed that the game of musical financial chairs could go on before they had to stop dancing and indeed, escape from the room. I remember one day back in the 1970s when I warned Frank Zarb of Lazard Freres about the likelihood of Third World debt defaults, and suggested that the firm should do an ability-to-pay analysis. “We don’t have to do any such thing,” he replied. “We have the schedule of what they owe right here in this IMF report.” It was a thick printout of the scheduled debt service for an African country that soon became insolvent. But Wall Street’s mentalité was that of Herbert Hoover on the eve of the Great Depression: A debt is a debt, and that is that. The response is to blame the victim, as if the irresponsibility lies with debtors rather than creditors.

No reversal of the Bush tax cuts is offered to re-inflate the economy, no move toward more progressive taxation of Wall Street speculators who pay only a 15 percent “capital gains” tax rate instead of the much higher income-tax and FICA withholding rates that wage-earners pay. (Wall Street has its own golden parachute program, so why should it pay for Social Security for the rest of society?) There is to be no reduction in the special tax benefits for real estate, whose tax favoritism led to the crisis by “freeing” more income from the tax collector to be pledged to mortgage bankers as interest. The Bubble Economy is to be re-inflated by Fannie Mae, Freddie Mac and the FHA lending to help buyers bid up housing and commercial office prices once again to a rate that promises to impose debt peonage on homeowners.

The budget deficit will soar, without any prosecution of tax evasion scams by UBS or KPMG. Instead of a fiscal or regulatory comet driving these dinosaurs to extinction, the climate has turned more conducive to their proliferation. Our Age of Deception is to be locked in even more tightly. The Congressional bailout’s suspension of mark-to-market rules to rely on Wall Street’s “self-regulation” should win a prize for Oxymoron of 2008 as investors have no clue as to what financial assets are worth. No wonder lending has dried up, especially to banks themselves.

Just as financial victims fail to vote and support their self-interest, predators also turn out to pursue self-defeating “free market” strategies. The financial sector’s short-termism is the greatest enemy to its survival. It has translated its wealth into a fatal political control of its legal climate, blocking [with the explicit support of Barack Obama, Editors] Congressional efforts to rewrite the oppressive bankruptcy laws that credit-card banks lobbied so hard to pass, [with vital help from Joe Biden, the senior senator from credit card company HQ, the state of Delaware, Editors] crucial. These hard bankruptcy terms prevent the courts from renegotiating homeowner debts to keep property occupied, accelerating the real estate price collapse. The result is today’s negative equity, posing the question of just who is to bear the cost of bring debts back in line with the economy’s ability to pay. Will it be the financial institutions that sponsored asset-price inflation and lobbied for deregulation of lenders? Or, will it be the debtors who thought they were riding the wave to get an inflationary free lunch?

Instead of requiring creditors to absorb losses on the excess of debts over what can be paid, the debts are being kept in place, not scaled back to what the economy can pay. The government is to make creditors and computerized derivatives speculators whole – and will act as collecting agent for the overhead of bad debts the economy has run up.

Today we can see the debt-fueled bubble of asset-price inflation that Alan Greenspan trumpeted as real wealth creation for what it really is – credit creation to bid up real estate, stock market and packaged-debt prices. Tangible capital formation has been left out of account, as if postindustrial economies no longer need it.

Will voters see the asymmetry in Congress’s failure to offer debt relief for homeowners as real estate prices plunge below the mortgages that are owed? Will its members be blamed for not rewriting the nation’s bankruptcy laws to free families from debt peonage – and free housing markets from the price declines that result from today’s proliferation of foreclosure sales? For that matter, will there be no relief for corporations having to cut back investment in order to service their junk bonds and other debts with which Wall Street’s corporate raiders and “shareholder activists” have loaded then down?

Evidently not.

Stephen Lendman

Global Research
October 13, 2008

Since 9/11, the notion of an October surprise has been around. The idea going something like this. Another real or manufactured terror attack. The dominant media stokes fear. The public is again traumatized. The Bush administration pledges all effective measures to protect national security. Formerly seizes total power. Suspends the Constitution and declares martial law. Mass detentions follow. Beginning with dissenters and elements of the public considered “dangerous.”

	Today’s crisis isn’t an accident or from happenstance. It was planned.

This may be coming with the 3rd Infantry’s 1st Brigade Combat Team back in the US as of October 1. According to the Army Times, as “an on-call federal response force for natural or manmade emergencies and disasters, including terrorist attacks.” Augmented by USNORTHCOM.

According to Wayne Madsen’s recent article titled “FEMA sources confirm coming martial law,” it gets worse. He cites “knowledgeable” FEMA sources saying that “the Bush administration is putting the final touches on a plan (to declare) martial law in the US with various scenarios anticipated as triggers.” Economic collapse. Massive social unrest. Bank closures. Street protests. Violence in response, and another stolen election.

Early in the month, a different October surprise arrived. Not the expected one. Not yet at least. The Wall Street Journal put it this way: “The Dow Jones Industrial Average (DJIA) capped the worst week in its 112-year history with its most volatile day ever, as hopes for a major international bank rescue plan were overwhelmed at day’s end by another wave of selling.”

The DJIA dropped 22% over the past eight trading sessions. Investors were “shell-shocked.” Many spent Friday “trying to protect themselves from further declines. The past week’s (October 6 - 10) 18% decline “and Friday’s 1018.77 point swing from low to high were the biggest since the Dow was created in 1896.” The VIX measure of market fear hit 69.95. By far its highest level ever, and some investors think it may touch 100 in the current climate. Until now, the Dow’s worst week was in 1933. Trading volume also set a record at 11.16 billion shares.

“Market crash shakes world” headlined the Financial Times (FT). Mass trauma, fear and uncertainty sent tremors everywhere, and no one knows if Friday ended it. Maybe just began it. First markets crater. Then world economies, and finally the inevitable human fallout. Affecting many tens of millions everywhere. Innocent people paying dearly.

Morning headlines say it all. And they’re getting grimmer. On October 10, the Wall Street Journal said the “Market’s 7-Day Rout Leaves US Reeling. Stocks in a Slow-Motion Crash….After Year of Declines, Investors Lose $8.4 Trillion of Wealth.” Most scary is what’s ahead and how much more people can or will tolerate.

The Financial Times was just as grim headlining “Global equities plunge….Japan leads Asian market rout…Wall Street in biggest fall since 1987 crash.” Once the nation’s largest company, General Motors may now face bankruptcy. Its October 10 stock fell to its 1950 valuation and now has a market capitalization of just $2.6 billion. Shockingly expressed in one headline saying “Wheels falling off for General Motors.” Add the engine and chassis, too.

Ford Motor’s outlook is little better. Its stock price is the lowest in decades, and one analyst warned that “the accelerating deterioration in industry fundamentals will be a serious challenge to liquidity (for both companies and Chrysler) during 2009.” JD Power and Associates was even grimmer saying that the global auto market may experience an “outright collapse” in 2009. And we’re only talking about autos.

Look at banks and world finance. The source of today’s crisis and reason global economies are reeling. Economists like Nouriel Roubini were once scoffed at. No longer. He warned for months that “the risk of a total systemic meltdown is now as high as ever since the credit crunch is gripping European banks as well” and spreading globally. Affecting good ones as well as bad. Trashing the baby with the bath water. Erasing savings for tens of millions everywhere. And for seniors who may not have time to recoup.

The crisis didn’t emerge like Topsy. It’s been simmering for years, and in July 2006 historian Gabriel Kolko warned about it in an article titled “Bankers Fear World Economic Meltdown.” He noted how:

the “whole nature of the global finance system has changed radically in ways that have nothing whatsoever to do with ‘virtuous’ national economic policies….The investment managers of private equity funds and major banks have displaced national banks….moving well beyond regulatory structures….Traders have taken over from traditional bankers because buying and selling shares, bonds, derivatives and the like now generate the greater profits, and taking more and higher risks is now the rule….They often bet with house money (and) low interest rates….let them do things….that were once deemed foolhardy.”

Compounded by the irrational development of global finance, liberalization and loose regulations. Playing fast and loose and betting on the come. The potential gains are enormous and so are the risks of a major financial crisis. A meltdown. Now we’ve got one that global institutions are “utterly inadequate” to deal with.

Kolko warned then that “the entire global financial structure (was) becoming uncontrollable….financial liberalization produced a monster….contradictions wrack the world’s financial system (that’s) both crisis-prone (and) immoral. (We) may very well be on the verge of serious crises.” Now we’ve got one and in dire straits.

Because “a kleptocratic class (took) over the economy,” according to economist Michael Hudson. A criminal element betting on high returns through computerized gambling “and when bad bets are made, bailouts are the (payoff) for campaign contributions.” For having friends in high places as well.

Today’s crisis isn’t an accident or from happenstance. It was planned, according to economist and critic F. William Engdahl in his recent article titled “Behind the Panic.” To “shape the future of global banking” through creative destruction. Panic incited by a well-designed “long-term strategy.” To change the “face of European banking.” Weaken it with toxic junk. Asset Backed Securities. Force enough of it into liquidation or cheap enough to buy at fire sale valuations. The idea being to “create three colossal global financial giants - Citigroup, JP Morgan Chase, and Goldman Sachs.” Add Bank of America and make it a foursome. Then use their “muscle to ravage European banks.” Even if they wreck the US and world economies. Resuscitate them so they can “advance their global agenda over the coming years.” To dominate world finance and increase US hegemony in the new century.

That’s the scheme, and Engdahl calls it “a fight for the survival of the American Century.” Built on “the twin pillars of American financial (and military) dominance,” but the game is far from over. “Battle lines are drawn.” EU nations have their own ideas. Stabilization and recovery plans as well that differ from Washington’s and look much sounder. It remains to be seen where things are heading and whether competing nations can work together and do it effectively. They haven’t much time.

Washington’s Efforts to Shape the Last Century

Engdahl recounted some of them in his important book on war, geopolitics, oil and finance: “A Century of War.” He explained how Washington designed “the greatest confidence game” ever. A “special hegemony” to:

– print limitless amounts of dollars;

– accumulate huge trade deficits;

– “inflate (the) currency beyond imagination;”

– have the government pay bankers interest on its own money; and

– create an unprecedented public and private debt to enrich the few at the expense of the many.

Up to now it worked. Let America rule the world. Control its energy and finance. Avoid serious challengers and crush potential ones.

From the early years of the last century, US muscle flexing took many forms. From conflicts to geopolitics to controlling world resources to financial warfare. JP Morgan and other Wall Street notables were experts on the latter. Creating panics for greater power. Like today’s with similar aims.

In 1969, Richard Nixon had his own scheme with the country in recession. Interest rates were cut. Dollars flowed abroad. The money supply was expanded, and in May 1971 America recorded its first monthly trade deficit. It triggered a panic US dollar sell-off. Gold backed the currency then. Reserves were one-quarter of official liabilities, and (on August 15) Nixon unilaterally imposed a 90-day wage and price freeze. A 10% import surcharge. An 8% currency devaluation, and he closed the gold window. Suspended dollar convertibility into the metal and ended compliance with Bretton Woods’ core provision. He pulled the plug on world economies. Shook them and on February 12, 1973 did again. With a further 10% dollar devaluation that created the worst global instability since the 1930s. What lay behind his actions?

To buy time ahead of a bold new monetary “paradigm shift.” To revive a strong dollar and US hegemony. By a “colossal assault” on world industrial growth. Through an engineered oil embargo. A 400% increase in oil prices. A flood of petrodollars to be recycled into US investments and purchases. Big Oil and major banks to profit hugely at the cost of economic crisis. The worst since the 1930s. Causing bankruptcies, unemployment and stagflation.

Under Jimmy Carter in 1979, Fed chairman Paul Volker advanced his own radical monetary policy on the pretext of fighting high inflation. It was another Washington scheme to preserve dollar hegemony. Keep it the world’s reserve currency, and do it by crushing industrial growth to let political and financial power prop up dollar strength.

It worked by raising interest rates from 10% to 16% and then 20% in weeks. The US and world economies plunged into deep recessions, and the dollar began a strong five year ascent.

In the 1980s under Ronald Reagan, Mexican president Jose Lopez Portillo wanted to use his oil revenue to modernize and industrialize the country. To make it stronger and more independent. That prospect was anathema to Washington and it reacted. With a scheme to demand rigid repayment of Mexican debt at exorbitant rates.

In 1981, it began with an orchestrated run on the peso. Stories were circulated about an impending devaluation and capital flight. Portillo instituted an austerity plan, and his government cracked under pressure. The peso was devalued 30%. Mexican industry was devastated. Industrial production cut. Bankruptcies followed. Millions of Mexicans suffered grievously. The nation became effectively insolvent. It had to accept IMF help. Took on large amounts of debt, and major banks profited hugely by working with the government and IMF. Socializing the debt. Spinning it off to tax payers and privatizing gains through structural adjustment looting. Similarly in other countries. Causing mounting debt. Charging onerous interest rates, and earning greater profits from hundreds of billions of dollars in servicing costs.

Reagan-era deregulation caused the S & L crisis. A lesser version of today’s. By letting banks invest in speculative real estate. Engage in massive fraud. And get the right wing Cato Institute to say: “If Congress had set out in 1980 to create an environment that would lure all the crooks and frauds in the country into one industry, few would have been more suitable than” this one. “It was easy (finding) disenchanged S & L owners who were willing to sell out for a reasonable price, and once one had an S & L charter, opportunities abounded.”

It ended up bankrupting hundreds of banks. Shrunk the industry from 4500 in 1979 to about 2200 in 1991 and hundreds more afterward. It also cost taxpayers around $200 billion. Pocket change compared to the trillions needed for the current crisis.

In the 1980s, Japan was the country that could say “no.” At decade’s end, it was the world’s economic and banking leader. Because reckless speculation left American banks in deep crisis. Japan operated more prudently. It prospered, and challenged American dominance. Washington feared former communist countries would adopt its model. This was anathema. It might shut out US companies. Show Japan’s way was superior so it had to be stopped.

The 1985 Plaza accord was the scheme. To get Japan to exercise monetary and fiscal measures to expand domestic demand and reduce the country’s external surplus. At the same time, the Bank of Japan held interest rates at 2.5% from 1987 - 1989. To stimulate US goods purchases. Instead cheap money went into Japanese stocks and real estate. It created two colossal bubbles. A lost decade followed, and the economy is still recovering and under new duress from the current panic.

The 1990s Asian crisis was also manufactured. In summer 1997, it hit. For no apparent reason beyond rumors that the Thai baht was in trouble, and Thailand had too few dollars to back it. “Asian Contagion” was unleashed. Hot money came in earlier. Then exited electronically. From Thailand, Indonesia, South Korea, the Philippines, and other Asian Tiger countries. Through a Washington-engineered scheme because these nations’ economic model bested America’s and threatened it.

Tiger countries grew by protecting their markets and barring foreign companies from owning land and national firms. They also restricted Western and Japanese imports to grow their own economies and homegrown industries. Again anathema so it had to be stopped.

The countries were hammered. Forced to devalue their currencies and get IMF help. With strings. Accepting debt bondage. Opening their markets. Structural adjustments. Privatizations. Spending cuts. Mass layoffs and constrained wages and benefits. The whole toxic package in return for aid. The regional toll was devastating. An estimated 24 million lost jobs. Its growing middle class destroyed. A black hole of misery for around 20 million people. Forcing them to do anything to survive. Crushing the Asian miracle to let Western brands replace local ones. Bargain hunters get great deals at fire sale prices. The New York Times called it “the world’s biggest going-out-of-business sale.” The region now hammered again from the current crisis. No secret where it was manufactured. No telling how it will end up. No guessing many millions feel pain and are fearful.

No end to other notable examples. Two especially stand out. The 1990s ones affecting post-Soviet Russia and South Africa. In each case, neoliberal “shock therapy” was devastating. It empowered an oligarch class in Russia. Let them strip mine the nation’s wealth and offshore it to tax havens. Impoverished tens of millions of people. Bankrupted 80% of farmers. Caused mass unemployment. Created a permanent underclass. An annual 700,000 a year population decline and much more.

South Africa fared no better. Despite Nelson Mandela’s pledge to support black economic empowerment. As president he surrendered to capital. The consequences were horrific. Far worse than under apartheid. Double the unemployment rate and number of people in desperate poverty. Millions of poor blacks without homes. Another million evicted from farms. One-fourth of the population with no running water or electricity. Around 60% with inadequate sanitation. A 13 year life expectancy decline since 1990. Appalling human wreckage much like what happened in Russia and elsewhere. To empower capital at the expense of people. Heading for America and in one week took a quantum leap.

Spreading everywhere. On October 2, enough for The New York Times to say that Latin American leaders have gone from “schadenfreude to fear(ful).” Hugo Chavez skipped the UN General Assembly opening to visit China and said Beijing is more relevant than New York. Venezuela and Bolivia expelled their US ambassadors, and Brazil’s Lula da Silva railed against an American regional naval presence and said his nation’s warships must be on alert in response. He’s also furious at Wall Street and Washington for the current crisis and said: “We did what we were supposed to do to get our house in order. They spent years telling us what to do and they themselves didn’t do it.”

Argentina’s Christina Fernandez de Kirchner was also bitter in stating: “We are witnessing the First World, which at one point had been painted as a mecca we should strive to reach, popping like a bubble.” And the Chicago Tribune quoted an Inter-American Dialogue expert saying that “whatever credibility the US had in the region, on economic management, that’s clearly gone.”

Forty world specialists from 20 countries attended the International Conference of Political Economy in Caracas, Venezuela from October 8 - 11. To analyze and propose South-based, alternative solutions to the financial crisis. Venezuela’s Minister for Planning and Development, Haiman El Troudi, highlighted his country’s relative strength. Its impressive economic growth (at 6% in first half 2008), and recommended that Venezuelans repatriate their US investments given the current climate. To protect them from unsafe American banks.

He and President Chavez also criticized the IMF and called for it to “dissolve….kill itself.” They were harsh on the World Bank as well. Chavez added that “We are decoupling from the wagon of death.” El Troudi said we are witnessing the end of neoliberal hegemony. Others agreed that a new model is needed. The old one clearly failed.

The Current Panic and Meltdown

Credit today is frozen. From a debt crisis, not a liquidity one. Markets are reeling as a result. Crashing in free fall from severe financial stress. From the largest ever leveraged asset and credit bubbles. Multiple ones. Imploding. Starting with housing. Causing widespread mortgage defaults and huge financial institution losses. Multi-trillions more asset dollars at risk. Compounded by banks reluctant to lend. Fearing they won’t be repaid. Prices are falling. Trust is eroded. Losses mounting from destructive deleveraging. Mortgages, stocks, bonds, commodities, credit, private equity, hedge funds imploding more intensively than since the Great Depression.

Forcing troubled companies to the wall. Each one exposing others. Some too big to fail but they did. Getting investors to run for the exits. Selling good assets to cover bad ones. Freezing up money markets. Making short-term Treasuries the only safe bet. Getting world governments scrambling for solutions. Already in recession and getting worse. Fearing an intensified financial crisis. A systemic collapse.Turning a deepening recession into a global depression. A disaster only urgent, well-designed, and coordinated actions may prevent. But no assurance anything will work this late.

Here’s what Nouriel Roubini and others recommend. Mirror opposite of EESA that will do more harm than good:

– additional rapid rate cuts globally; at least to 1% in America; much lower in the EU, Asia and elsewhere;

– guarantee all deposits until stability is restored at least;

– partially nationalize troubled banks; recapitalize them with public funds; in some form that now seems the plan according to The New York Times in its October 11 article headlined: “White House Overhauling Rescue Plan;” capital to be injected into banks by buying non-voting shares; what’s known is Henry Paulson’s October 10 statement that “We can use the taxpayer’s money more effectively….if we develop a standardized program to buy equity in financial institutions;” it remains to be seen what, in fact, happens; Paulson represents Wall Street; not the public, national or world interests;

– he’s not for reestablishing responsible regulation to curb market excesses; what economists like Roubini recommend;

– freeze all home foreclosures; establish a 1930s type Home Owners’ Loan Corporation (HOLC) to refinance homes and prevent foreclosures; let foreclosed homeowners retain their properties and pay affordable rent;

– ease the debt burden of distressed households; cap credit card and other high consumer loan interest rates at much lower levels; put cash in peoples’ hands; lots of it; at least several hundred billion dollars for starters; more if needed; as much as it takes;

– provide solvent financial institutions with as much liquidity as they need; corporate sector companies as well, including small businesses;

– save solvent companies; liquidate troubled ones too far gone;

– fund massive stimulus to revive the economy; for public works, infrastructure, education, alternative energy, unemployment benefits, job training, tax rebates to the needy, and state and local governments strapped for cash; money for what’s needed most and that can do the most good;

– get stronger, more solvent countries to help weaker, more indebted ones; and

– move on these policies fast; world governments have little time left to save themselves; there’s no assurance they can; and these measure don’t address our destructive military Keynsianism; permanent war economy and need to redirect those funds for constructive homeland needs; mirror opposite of a reported a new Pentagon document requesting an additional $450 billion over the next five years.

Reeling from One Policy Response to Another

First came EESA. The Emergency Economic Stabilization Act. To reward fraudsters and not address the root of the crisis. Nor help millions of troubled households. Homeowners in foreclosure. Others threatened. The public traumatized by the most calamitous economic events since the 1930s.

Europeans formed their own plans. Different from Washington’s. On October 10, G-7 finance ministers met to discuss policy. In early evening, they presented an action plan. Long on promises. Short on specifics. The New York Times reported that: “Many investors had hoped the ministers would (propose) more concrete steps” and quoted Peterson Institute of International Economics deputy director, Adam Posen, saying: “This fell short.” But he wasn’t giving up entirely or saying what they have in mind or will later decide can’t work.

They agreed to:

– act decisively with all available tools to support financial institutions and prevent their failure;

– unfreeze credit and money markets; assure banks and other financial institutions “have broad access to liquidity and funding;”

– ensure banks and financial intermediaries “can raise (sufficient) capital from public (and) private sources;” to rebuild confidence and get them again lending to households and businesses;

– ensure national deposit insurance protection is sound so people have confidence in the safety of their deposits; and

– take appropriate action “to restart the secondary markets for mortgages and other securitized assets;” assure accurate valuations and transparency according to “high quality accounting standards.”

Besides the US Treasury planning to “buy equity in financial institutions,” AP reported on October 12 that the 15 euro-zone countries will “temporarily guarantee future bank debt to encourage lending….for an interim period and on appropriate terms” for up to five years. Recapitalizing banks is part of the plan. The hope is to unfreeze credit and get markets operating normally again.

According to The New York Times on October 12, “each country will announce concrete figures for the measures they expect to take individually.” Belgian finance minister Didier Reynders said “There is no question of setting up a European fund.” A final proposal will be presented to the full 27-member EU summit later in the week, and individual parliaments will have to vote on it.

Key to understand about whatever emerges in final details or any that follow - world governments will loot their treasuries to save powerful capital interests. Despite bold pronouncements we can expect more of ahead, practically nothing will be done for many tens of millions of people globally in greatest need. At best for them….crumbs.

In the coming days and weeks, we’ll see statements become policies and how world markets react. Given the immensity of the crisis, no one’s sure if anything can work. Nor is it reassuring to hear George Bush say remain calm. We’ve got things under control. On October 10, the Dow dropped 300 points while he spoke.

In an October 13 Barron’s interview, noted money manager Jeremy Grantham (now age 70) was asked if he thought we’d learn anything from the current crisis. His response: “an enormous amount in a very short time, quite a bit in the medium-term, and absolutely nothing in the long-term.”

He’s been bearish since last year but added that “the fundamentals are turning out worse than” he expected. “The terrible thing - after all this pain - is that the US equity market is not even cheap.” It was so high in 2000 that it hasn’t come down to trend, but it’s getting close. However, “the really bad news is that great bubbles in history always overcorrect.” He believes S & P 500 fair value is around 1025 compared to its 899.22 October 10 close. But “typically bubbles overcorrect by quite a bit, possibly by 20%. This is very discouraging,” so he’s not rushing to buy but he fears he’ll act too soon. He predicts a market low in 2010.

Where he sees things going from here was also posed. He’s highly respected as an expert, and yet he emphasized “how little (he) understand(s about) all of the intricate workings of the global financial system. (He) hopes that someone else gets it, because (he) doesn’t. And (he) has no idea, really, how this will work out….(It’s) so intricate that all (he) can conclude, by instinct (and from history), is that it will be longer, harder and more complicated than we expect.” Quite an assessment from a man called “the philosopher king of Wall Street.”

The Human Cost of Manufactured Crisis

Ordinary people are hit hardest. Millions will suffer grievously for years as a result of this totally avoidable crisis. Fraudsters who caused it are rewarded. Innocent homeowners, households, and workers are punished. Mercilessly. The result:

– trillions of dollars lost; likely trillions more ahead;

– millions of lost homes, homeowners behind in their payments, or threatened with foreclosure in the worst housing crisis since the Great Depression; ultimately may exceed it given current estimates of up to 10 million foreclosures before stability and recovery;

– likely well over a million 2008 personal bankruptcies and much higher numbers in 2009 compared to 800,000 in 2007 and 573,000 in 2006; figures below the 2000 - 2005 1.5 million average before passage of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act; according to Samuel Gerdano, American Bankruptcy Institute director, consumer over-indebtedness “made worse by the home mortgage crisis” is the problem; it won’t likely recede in the near or intermediate-term;

– rising unemployment; not the spurious 6.1%; including discouraged workers and people working part-time who want (but can’t find) full-time jobs, economist John Williams puts the real figure above 12% and rising;

– consumer over-indebtedness; maxed out on credit but needing more of it to survive; and charged usurious rates to get it;

– declining wages and benefits in the face of soaring expenses; making it all the harder to cope;

– food banks and homeless shelters facing increasing demands but forced to turn away people for lack of resources; and

– things overall are worsening; to the edge of the abyss according to some; even the most optimistic fear what’s coming; who can know; no one dares be complacent.

Whatever final policies emerge. In whatever form they take. Unless they address the human dimension, they’ll do nothing for people in most need. Growing millions. Desperate and in trouble. Their issue is economic and ethical. The G-7 statement addressed neither. It dealt only with saving Wall Street. Industrial capitalism. A better idea is let them die and replace them with a new order. A workable one. Respecting people, not capital.

Steve Watson

Infowars.net
October 13, 2008

British Prime Minister Gordon Brown has called for a new Bretton Woods system, saying that the financial crisis should be used to make world leaders agree to fresh rules and regulations under a long planned new global financial order.

“Sometimes it takes a crisis for people to agree that what is obvious and should have been done years ago, can no longer be postponed,” Brown told an audience earlier today.

Speaking at Thomson Reuters’ editorial headquarters, Brown called for “a new financial architecture for the global age”, stating that the Bretton Woods system devised after the second world war was out of touch with the new world order.

Brown said: “This crisis demonstrates beyond doubt that a global capital market requires much stronger global cooperation and supervision. And we need to ensure that we have an effective global early warning system to alert us across continents to economic and financial risk.”

Brown contended that the current financial system is “too clouded with opacity, conflicts of interest, irresponsible risk-taking, and when problems occur countries have tended to look inwards and deal with them in isolation when it is clear they should look outwards and join in international co-operation.”

“We are proposing a world leaders’ meeting in which we must agree the principles and policies for restructuring the financial system across the globe,” Brown added.

His speech came after the UK government announced it would bail out three high street banks - RBS, HBOS and Lloyds TSB - to the tune of £37bn. Since that announcement, shares in the banks have plunged on the stock market.

Brown’s call echoes that of elite figures such as CFR member Jeffrey Garten and Timothy Geithner, president of the Federal Reserve Bank of New York, who have both recently called for a “new global monetary authority”, a de-facto global financial dictatorship, operating across borders and forcing nations and corporations to register and adhere to strict monitoring and regulations.

The call is also similar to plans recently touted for a new centralized system of financial supervision across the EU providing greater regulatory powers.

 

Watch a Reuters report on the story:

Paul Joseph Watson

Prison Planet
October 13, 2008

Despite the dramatic fall in gold prices from Friday’s high of around $930 an ounce to today’s current low of $830, sales of actual physical gold continues to trade for anything up to $300 over spot price, proving again that official COMEX gold future numbers are completely divorced from reality and banker manipulation is rife.

Panic buying of physical gold has gripped Europe as consumers fear their savings accounts are no longer safe in light of numerous bank failures, prompting dealers to run dry on gold bullion which in turn is driving up premiums.

Since buyers are finding it near impossible to get gold bullion from recognized dealers, many are turning to Ebay where auctions for one ounce Krugerrands and Maple Leafs are fetching anything up to £150 ($260) over spot price.

Over the weekend, when gold was around £500 an ounce, a Krugerrand went for £645.75. A one ounce bullion bar, with nearly 3 days of the auction still to run, has already attracted a bid of £670 - a whopping $336 above current spot price, despite the fact that bars are usually subject to lower premiums than gold coins.

Respected bullion dealers who charge lower premiums because they are able to buy gold in bulk are still slapping customers with $150+ premiums - and judging by the continued dearth of one ounce coins such as the American Eagle and the Austrian Philharmonica - people are perfectly willing to pay the exorbitant premiums.

The true value of gold is what people are prepared to pay to obtain it, and judging by that criteria, the actual value of gold is currently around $1,100 an ounce based on a conservative estimate.

The official spot price of gold is currently around $830, but this merely represents a rush by investors to sell their paper contracts in search of liquidity and as a means of jumping back on the stocks and shares bandwagon.

As Alex Wallenwein at The Market Oracle points out, “Gold is gold, paper is paper, and “Comex gold” is nothing but paper masquerading as gold while simultaneously pretending to be the price-setting medium for actual gold in the world. Now, finally, Comex-gold is in the process of being unmasked.”

“Real investors in real gold are enjoying their shopping spree – except that the spree turned into a treasure hunt as the shelves and display cases of gold dealers look more and more like the supermarket shelves in the old Soviet Union - bare.”

“With this split, this disconnect, between Comex illusion and gold reality, one thing or the other will have to give, and it won’t be physical gold that gives.”

Numerous fund managers and top investors like Jim Rogers are now predicting that global central banks’ insistence on printing their way out of economic turmoil is setting the stage for a hyperinflationary holocaust, a knock-on effect of which will be gold’s acceleration towards $2,000.

But as many have pointed out, gold price manipulation is rife as central banks desperately attempt to stem the flight from paper currencies into gold, a process that anecdotal evidence strongly suggests is happening across Europe at an alarming pace.

Prof. Rodrigue Tremblay

Global Research
October 13, 2008

  "The basis for optimism is sheer terror." Oscar Wilde

 [After the March 2008 Bear Stears bailout] "As more firms lost access to funding, the vicious circle of forced selling, increased volatility, and higher haircuts and margin calls that was already well advanced at the time would likely have intensified. The broader economy could hardly have remained immune from such severe financial disruptions."Ben Bernanke, Fed Chairman (March 2008)

 “In accounting 101 we learn that high yields equal high risk. We know the CEOs had an incentive to disregard this because they were getting huge bonuses.” David Hartzell, dean of the University of Delaware’s business college and a former vice-president of Salomon Brothers  

“Intensifying solvency concerns about a number of the largest U.S.-based and European financial institutions have pushed the global financial system to the brink of systemic meltdown.” Dominique Strauss-Kahn, Head of the IMF (October 11, 2008) 
 

The Bush administration’s way of dealing with the ongoing financial crisis has been frantic, but probably less than adequate. In fact, tragic errors may have been made that must be remedied as quickly as possible.

The most damaging error may have been to let the global investment bank Lehman Brothers fail ($691 billion of assets at the end of 2007), on Monday September 15. This fateful date may have to be remembered in the future. This was the largest failure of an investment bank since the collapse of Drexel Burnham Lambert in 1990. In contrast, the Fed and the U.S. Treasury moved quickly in mid-March (2008) to save a similar global investment bank in distress (but half the size of Lehman), Bear Stearns, by quickly lending and guaranteeing $29 billion to the large universal J. P. Morgan Chase bank in order to absorb it. —(N.B.: Let us keep in mind that it was the collapse in June 2007 of two internal Bear Stearns hedge funds that had been heavily invested in mortgage securities that kicked off the full-fledged market panic that unfolded in August 2007, and which today has turned into a full-fledged international financial crisis).

Why was the same treatment not offered to Lehman? Possibly because of a personal lack of empathy between Treasury Secretary Henry M. Paulson Jr. (a former chief executive of rival investment bank Goldman Sacks) and Lehman’s CEO Mr. Richard S. Fuld Jr., or possibly because the Bush administration wanted to make an example that all investment banks, no matter how large, could not count on being rescued by the government. The Bush administration did not even bother to appoint a trustee to supervise Lehman’s liquidation in order to make it orderly.

Such a liquidation of a large international bank, known for its worldwide interconnections and unsound banking practices, was nearly a repeat of the mistake made in letting the large Vienna-based Creditanstalt bank fail, on May 13, 1931. This was a bank that had borrowed large amount of money in London and in New York to finance its activities. Its failure created a domino effect among other international banks that had lent to each other in the international credit chain. So much so that the failure of the Creditanstalt forced them to severely tighten their lending to absorb their sudden losses.

Seventy-seven years later, in 2008, the Bush administration’s decision to let the Lehman Brothers bank fail has produced a similar ripple effect throughout the international financial system. And, perhaps more important politically, it signaled to the markets that the Bush administration was willing to let a dangerous debt deflation and an ominous credit crunch proceed. This may turn out to have been a most tragic mistake.

Indeed, Lehman’s bankruptcy forced the global investment bank to quickly write down its huge portfolio of debt, a fair amount of it in derivative products. But since banks are creditors of each other, especially Lehman which dealt with large institutions, this had the consequence of spreading the American financial disease all over the world, and especially in Europe. Why? Because Lehman’s London office was a huge center of sale and distribution for its more or less toxic derivative products all over Europe. Indeed, many European banks had invested in Lehman’s securitized paper, and when it failed, they were left with large losses. As a consequence, they had to curtail their domestic lending and that’s the reason the credit crunch is now moving to Europe.

The second mistake was to address the “liquidity problem” of American investment and mortgage banks without tackling at the same time their underlying “solvency problem”.

As we wrote right at the very beginning, on August 24, 2007, the financial crisis in the U.S. is not only a classic “liquidity problem”, when banks find themselves short of cash to pay immediate redemptions and withdrawals while their longer term loans are secure, but also and above all a “solvency problem”, because the huge losses that banks had to absorb when they wrote down the value of their toxic assets-backed securitized paper, eroded their capital base to an extent that they became de facto insolvent. Market operators saw that and they sold the banks’ shares short and the price of these shares plummeted.

With many banks’ solvency now in doubt, inter-bank lending has nearly stopped, and because of a ‘flight to safety’, the Ted spread [the difference between three-month U.S. Treasury bills yields and yields on three month eurodollar contracts, as represented by the London Inter Bank Offered Rate, called Libor] exploded, and banks cut down their lending. Credit became tight and scarce. Because banks as a whole ordinarily lend between 10 and 12 times their capital base, the most liquid money supply (M1) began to contract in real terms. Even money market funds suffered heavy losses, and a run on them was in full swing when the Treasury stepped in a month ago to offer an emergency $50 billion guarantee.

The U.S. economy may be approaching what can be called a classic “liquidity trap”situation, wherein the Fed is lowering interest rates while lending through its discount window and printing money on a high scale, however the liquid money supply figures, in real terms, are not increasing, but are rather falling. Thus, there is no immediate inflation, but the money supply is contracting as banks reduce their lending and make a rush to T-bills (their yields nearly fell to zero). The short-term result is a net deflationary effect for the overall economy and on the stock market (although the long term bond market sees inflation ahead, and long term rates are rising). —The result is stock market crashes in repetition.

In fact, this is precisely what has happened over the last few weeks, not only in the United States, but also in the U.K and in other European countries. This is a very dangerous development for the real economy, because money data in real terms are a leading indicator of the future course of the economy. Six or nine months down the road, the consequences of the credit crunch will appear in production and employment declines, because the credit crunch has the effect of placing a serious squeeze on most companies. Since the credit contraction really began in June (2008), the early part of 2009 is bound to show severe economic weakness.

On Friday, September 19 (2008), the Bush administration announced its solution to the growing banking crisis. It made public the $700 billion Paulson plan  (US Emergency Economic Stabilisation Act, EESA) that primarily focused on creating a government market for some of the bad mortgage-backed securities on the banks’ books. —But this was only half of the problem. The other half of the problem was the need to stop the money supply from declining, by restoring bank credit lending and allowing companies to have access to working capital financing. The goal here is to prevent banking problems from morphing into a general contraction of consumption and capital investment plans, thus slowing down production and raising unemployement in the coming months.

For this to happen, however, banks must be allowed to find badly needed new capital. But in a time of crisis, with stock markets declining, it is doubtful that much private capital can be found. The recent association of Warren Buffett with Goldman Sachs may be more of an exception than a rule.

When private capital is not available, the government has no other choice but to inject equity (by buying the banks’ preferred shares) into the national banking system, while taking steps to safeguard the public interest by obtaining common share warrants that can be resold profitably later, when the situation stabilizes.

 In conclusion, we may ask if it is possible to avoid a repetition of the U.S. Great Depression of the 1930s or the more recent Japan’s protracted recession of the 1990s, both the result of a similar severe banking crisis? The answer is yes, if the vicious cycle of asset price decline, banking credit crunch and money supply contraction can be avoided, or, at the very least, stopped and reversed. —In economics, as in medicine, it is never too late to do the right thing.