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LaRouche - moeenyaseen - 09-08-2007
"THEY'RE ALL BANKRUPT!"
http://larouchepac.com/news/2007/09/08/theyre-all-bankrupt.html
At the International Ambrosetti Workshop in Cernobbio, Italy, international bankers and economists discussed how much the international financial system has already disintegrated, and which large bank will announce bankruptcy first, the Italian daily Corriere della Sera reports today.
According to Kenneth Rogoff, former chief economist at the IMF, at least 1.3 trillion dollars have evaporated. At least one large bank will go bust, Rogoff says, adding that Moody's could go bankrupt too: "They make 45% of their profits with ratings on high-risk assets." But nobody knows where the largest holes are. "Not even the banks know that," says Alessandro Mitrovich of the Royal Bank of Scotland. "Even if we sat around a table, we would not get a picture of the situation."
YOU CAN'T HAVE YOUR BANK, AND HEDGE FUNDS TOO
http://larouchepac.com/news/2007/09/07/larouche-issues-warning-you-cant-have-your-bank-and-hedge-fu.html
As the LaRouche Youth Movement drive to save the country's homeowners and banks sweeps across the country, pressuring Congress to enact LaRouche's "Homeowners and Bankers Protection Act of 2007" by the end of September, the international hedge fund cartel--which is run by the British Monarchy out of their Cayman Islands possession--has launched a desperate deployment designed to save...itself! "To hell with homeowners!" they say, "and to hell even with banks" that the hedge fund parasites have taken over and now control.
These locust funds this week brazenly flooded the U.S. Congress with their lobbyists--and their money--to push for their policy. And the evidence was in plain view at the hearings of Rep. Barney Frank's House Financial Services Committee on Sept. 5, and again on Sept. 6 at the House Ways and Means Committe.
Lyndon LaRouche, in discussions on Sept. 7, addressed this situation of the growing polarization in Washington and elsewhere in the country, over the LaRouche policy for resolving the crisis, versus that of the hedge funds.
"There's really one group, which is supporting what we're pushing, which wants to save the banks and the housing. The other group wants to sacrifice the banks and the housing, to save the hedge funds. So we have a fight: Who's on one side, and who's on the other side?
"The point is that, through the hedge funds operation, the banks aren't in control anymore. The banks are controlled by it. So you're trying to find out which banks are behind the hedge fund operations? You've got to find out which hedge fund operations are behind the banks, and controlling the banks. That's the problem.
"This is Rohatyn; this, of course, is also George Shultz, who are behind this. They are saying that you've got to save the hedge funds. Why are they saying you've got to save the hedge funds, and not the banks? Because the hedge funds are controlling the banks! And if you try to defend the banks, you're going to sink the hedge funds, and get the banks back in control of their own business.
"So this has to be made clear. Will you defend your bank, or the international hedge fund cartel? There is a conflict between the international hedge fund cartel, whose headquarters is the Cayman Islands, the British monarchy, as against the banks on the federal and state level in the United States, and in Europe. The banks don't control banking anymore: the international hedge fund cartel does.
"Our view is, the only way you're going to save civilization is sink the hedge funds, and keep the banks. You've got a choice: dump the banks in favor of the international hedge funds--it's called Globalization II--or save the banks and let the hedge funds sink all by themselves.
"We have to make the issue conscious. The reality is there, but the consciousness of the people and institutions is falling way behind the tempo of reality. We have to make it clear, definitive: Which do you choose? You can't have both. You can't have your bank and hedge funds too. You either save your bank at the expense of the hedge funds, or you give up your bank and everything in it, to an international London-centered authority, to a British-centered authority, most of which have offices in the Cayman Islands."
LaRouche went on to explain the urgency of getting Congress to pass his Homeowners and Bankers Protection Act of 2007 (HBPA): "My estimate is that by the end of September, you won't have the United States, unless something is done about this crisis. I know what we're dealing with here. We're dealing with something which is analogous to what happened in Germany in the middle to Fall of 1923. It takes a different form, because what they're doing today is they are monetizing worthless paper, and using that to create hyperinflation in the market. And this hyperinflation is hungrier and hungrier for more rent and things like that. And those inflationary effects are accelerating the breakdown of the housing sector. So that in about 30 days more of this stuff, you are going to have a blow-out of the U.S. economy, comparable to what happened in Germany, going in the direction of what happened in Germany in the Fall of 1923. We're that close."
LaRouche then discussed how to deploy to get the HBPA passed:
"We should not split our effort, between the housing bill and other initiatives. This is the issue. The question of this bill is the only issue. Any other issue is a waste of time. If this issue does not win, everything else will fail. If this issue wins, then we have a chance, the country has a chance. And if we split the effort, we're going to regret it, deeply, within 30 days. There should be only one concentration: on this bill. Period. Because the fate of the nation depends upon it. "The power that makes this legislation go through is not the Congress. The Congress has to pass the legislation, but the driver to convince the Congress to pass the legislation will come from the states, not from the Congress itself. The way this thing will work, is that you go to the people, and you go to the people in the states.
"You see, you don't have a `national housing crisis;' you have a state by state, national housing crisis. People don't live in an abstract congressional form; they live in actual states, and communities within states. Therefore, the pressure is on from the communities who are suffering mass evictions, which are rising at an accelerating rate. And our job is to keep them from being evicted. If they are evicted, then we lose the country.
"So the state legislators and people around them are the ones who will kick the Congress in the rear end, and in the head if necessary, to get the national legislation passed. That's the algebra of this thing. Any other interpretation is wrong, because it's not looking at reality. It's looking at things like objects, like "I want to buy this toy rather than that toy." People have not yet come out of childhood. They're arguing which toy to buy. "It's funny. You know people still have, as young adults and older, they still have this kind of thing they had when they were children, of which toy to buy. And often they look at things in life--they even have mating patterns among young people which are based on which toy do I like better. It's something to play with, you see. It's not serious, which goes especially with the post-industrial society mentality.
"The continued existence of the United States as a nation, over the months ahead, depends absolutely on getting this legislation through, now," LaRouche concluded.
WE HAVE THE GREATEST OPPORTUNITY FOR THE IMPROVEMENT OF THE CONDITION OF HUMANITY, WORLDWIDE
Lyndon LaRouche transmitted the following remarks to the 10th anniversary celebration of the Technological University of Peru, on Friday, Sept. 7, 2007. An audio file of LaRouche's remarks, dubbed in Spanish, was played to the gathering, and a written version of it was handed out to all participants.
Well, this is Lyndon LaRouche speaking, from Germany in fact, and I want to extend my greetings to the Technological University of Peru, and to our host Engineer Amuruz [Ing. Roger Amuruz Gallegos], on the occasion of the tenth anniversary of the Technological University.
This is an interesting time, because we're having a conference, here in Germany, this coming week, which will be an international conference attended by some hundreds of people from various parts of the world: on the subject of the present crash of the international monetary-financial system, and at the same time, on measures for economic recovery worldwide under these conditions. One of these conditions of course, which will be of interest to the faculty and students at the Technological University, is, we are involved in something I've been pushing for a long time--my wife and I--of developing a Land-Bridge across the Bering Strait, from Siberia to Alaska, with the idea of extending that rail connection, and I would propose magnetic levitation, down through Canada, through the United States, into Central America, through the Gap, into South America. This would, in effect, unite three continents: Eurasia, the Eurasian continent in particular; the Americas, North and South; and therefore, Europe. And it would mean, easily, we could extend the same type of line through Southwest Asia, and also directly from Europe itself, where there are plans to run lines, as from Spain, into North Africa and so forth.
This would mean a change, a geopolitical change in the planet. It would mean that no longer would we be depending on shipping, which is slow, nor would we have to use expensive, and inefficient economically, air transport; but we can move not only people, but freight, efficiently, by modern systems of up to the equivalent of 300 miles per hour, or about 500 kilometers an hour. We can move freight from part of these three continents, or mega-continents throughout the world.
This means that whole areas of the world which are less developed, but which contain potential natural resources of value, would now be accessible to humanity in an efficient way.
This would mean a revolution in the economy of the world. Now, as I said, this comes at a time when we face the biggest crisis, the biggest financial-monetary crisis in modern history, since at least the 1648 signing of the Treaty of Westphalia, the Peace of Westphalia. So therefore, we come at a collision point between the worst economic depression, potentially, the worst financial collapse of modern civilization since 1648, and at the same time, the greatest opportunity for physical development of the world economy and its continents, over the same period.
We now have a struggle inside the United States, to defeat what is a presently onrushing financial-monetary breakdown crisis, not only in the United States, but of Europe. Such a breakdown crisis, of Europe and the United States, would have chain-reaction effects on the world as a whole. For example: As a result of outsourcing policy, China depends greatly on sales to the United States of exports; India, more or less, a similar kind of situation, not quite the same. Of course, Africa is desperate. And the already bad conditions in the United States are terrible for Mexico, and for countries in South America.
So therefore, what we're doing now, is, we're now mobilizing an emergency measure, the first
of a series of proposed emergency measures, which I have launched with some favorable reception among leading circles inside the United States. As you probably know, the world financial-monetary crisis is reflected most conspicuously in the fact that the large-scale investments in real estate--that is, in mortgages, and the use of mortgages as security for large-scale financial speculation--is the breaking point causing this now-onrushing financial breakdown crisis of the world, which is what we have to think of. So I have proposed, and we've had much acceptance of this, we're pushing for the adoption of the relevant U.S. Federal regulations now, for the month of September--should happen now, could happen now, but we're going to have to fight to make it so. But my proposal, my proposed draft legislation, after its enactment by the U.S. Congress would guarantee that no householder would be thrown out of their home because of foreclosure on a mortgage. We would also protect the chartered banks of the United States, those that are registered as Federal banks, under Federal law, or those which are registered as state banks, under state law; they're private banks, but nonetheless, they are protected because of their status under Federal and state law.
Therefore, this would not solve the crisis, but it would prevent a breakdown crisis of the United States, and potentially Europe. And stopping that breakdown crisis, would give us the room to launch a recovery program, with the same spirit that President Franklin Delano Roosevelt organized the U.S. recovery from the Depression of 1929-1933. That's our perspective.
Obviously, the fate of the nations of South and Central America depend greatly on how we deal with this crisis. Now, there are many opportunities, and there's also something else: As you know, during a period, especially since 1968-1972, there has been a breakdown, coming out of the long U.S. war in Indo-China, a breakdown in U.S. policy, away from the Roosevelt fixed-exchange monetary system. As a result of that breakdown, we had a crisis in international finance and monetary systems over the course of the 1970s. We also had, after 1972, a series of changes in policy, which led to this present policy of globalization, and so forth. This has been a disaster, and has been the real cause of the present crisis.
If we're going to recover, from the onrushing Great Depression--we're going to stop it, and recover--we're going to have to create state credit, which will be emphasized at more than 60%, if we're sane, on reconstruction and improvement of the basic economic infrastructure of the United States and other nations. What we will do, is, use the engineering and production capabilities, which are stimulated by large-scale infrastructure projects, as a way of building up the economy for the production of goods and for agriculture. And thus, have a general recovery, which will remind us in some ways of what Franklin Roosevelt did to defeat the Depression which he faced, when he went into the Presidency in March of 1933.
That means, that for the students at the University, that there are challenging careers opening up, and great needs--not merely opportunities for great projects, but great needs for these projects--if we are to ensure the security of the sovereign states of the Americas, and of other parts of the world. In terms of the cooperation, there was a conference recently held in Russia, to which I was invited--I didn't attend directly, but I had a representative there; and I was in Russia for an event, immediately in the period following. What has been agreed upon, by Russians and others, is the launching of one of the greatest projects that mankind has ever undertaken, in terms of engineering: That, not only the Bering Strait Tunnel project, from the tip of Siberia to Alaska, but this means the greatest revolution in the large expanse of Northern Asia and the Americas so far. This has been agreed to, by Russia, by leading Russians--for example, the former head of the scientific research institute at Novosibirsk, Vladimir Lamin is the key sponsor of this, initiator of this, and head of one of the committees.
People in the Russian government otherwise have supported it. Other countries have indicated their interest. There are proposals from Denmark, for example, for magnetic levitation railway systems, to connect, implicitly out of Denmark, but implicitly aimed across Eurasia. Other countries want this.
So, we are on the verge of the greatest challenge in engineering the world has ever known: And it's coming on your doorstep, if we succeed, by the time you graduate from your studies at the University.
So, let us hope that we succeed. For, if we do, we shall make a better world, for all of us. And the aspirations of the Peruvians which have been there for a long time, could now begin to be realized. And patriotism would mean, not fighting wars--we hope we don't have to fight more wars; we think this would help--but it means that the sovereignty of nations in rebuilding their countries, or building them up, solving the problems of poverty, solving the problems of misery, the management of water, the supply of power, and the development of better health programs, all of things would flow.
So, again, this is our situation, this is your situation. We're at a point of a great divide: We have the greatest financial crisis, worldwide, in modern history, is coming on like an avalanche, now. But at the same time, if we all address this problem, we have the greatest opportunity in the history of humanity, for the improvement of the condition of humanity, worldwide.
REBUILDING THE BRITISH EMPIRE
http://larouchepac.com/news/2007/09/08/british-military-conference-rebuilding-british-empire.html
On September 10 a military conference entitled "Defence to 2020 and Beyond," has as it main theme, how the military must address the "breakdown of global order" in the next decade, according to Janes Defence Weekly. The conference is clearly aimed at the "day after" the financial collapse, and warfighting in the "new dark age" that Lyndon LaRouche has been warning of if a new financial system is not immediately implemented.
The conference main sessions have titles such as "Future of Warfare-What Should Be Anticipated- Policy issues; asymmetric conflict..." Another more telling session is entitled, "Protecting freedom of the seas, littorals and choke points if globalisation breaks down." And another, "After Iraq and Afghanistan - dealing with failed and failing states."
Almost all of the speakers are active duty military officers from Great Britain, the U.S., Germany and other NATO countries, as well as Australia., including Lt General David Richards, Commander of NATO's Allied Rapid Reaction Corp; Lt.General James Mattis, Commander U.S. Marine Forces Central Command, Lt.General David Hurley, Australian Dept of Defence, Vice Admiral Gerard Valin, head of plans and capabilities, French Navy. The only non-active duty military named is Dr. Anthony Cordesman of CSIS.
The spiritual father and keynote speaker at the conference is Rear Admiral Chris Parry of Her Majesty's Royal Navy and Director of General Development, Concepts and Doctrine Centre of the British Ministry of Defence.
After implementing a policy to destroy nation states, the British are now formulating a military doctrine to rebuild their empire on the East India company modal.
LaRouche - moeenyaseen - 09-08-2007
FINANCIAL MELTDOWN
http://www.hizb.org.uk/hizb/issues-explained/financial-meltdown.html
The dominant story in the press these past 2 weeks has been the turmoil in the financial markets. Billions of dollars have been written off of share values. There have been massive hedge fund losses, bank failures seen and threatened, a credit crunch, and the intervention of a central bank in markets to help liquidity and to re-establish confidence. Is the system tottering? And if so, why?
The current problems have been kicked off by problems in the US housing market. Specifically, the constantly growing US house price bubble has come to an end, and this has been reflected initially by problems in the sub-prime mortgage market. Sub-prime is a euphemism for those that wouldn’t normally be given mortgages because they are a poor credit risk! But in the desire to create financial products to meet all tastes, and most importantly to keep the demand for housing strong and consumer confidence high in the US economy, many banks have been only too keen to lend to these high credit risks. Furthermore, via the derivatives markets, the risk in these sub prime loans has been supposedly mitigated via the pooling of risk into vehicles like CDO’s (collateralised debt obligations) and other derivative products. The theory is that by pooling these toxic high risk loans into collective investment vehicles the risk from losses is spread. Spreading the risk across many investors theoretically lessens the risks of widespread collapse.
But what if the whole class of investment, in this case the high risk mortgages to the poorest in society, goes bad? The consequence has been a spread to the rest of the mortgage markets together with the whole “fixed income” credit world. They are now sucked into the rapidly declining value of US homes, with concern over the extent of losses and defaults on these loans and just which banks are over-extended in this market. Lenders are now proceeding with extreme caution, and investors are withdrawing rapidly, provided they can get a price on the funds/investments from which they are now fleeing.
Underlying the seriousness of the crisis, Central banks in Europe, Asia and the US have pumped more than $300 billion (£150bn) of emergency cash into the markets a week ago, and the US Federal Reserve this past week also cut by a full half percent its fund rate (loan rate) to financial institutions. This was aimed to prevent a full-blown financial collapse, effectively to stop a “run” on the financial institutions holding these and other financial assets of dubious quality. Interest rates shot up until the central banks intervened.
What has worsened the crisis has been the effect of ‘leveraging’. Not content with investing in high risk assets, banks and hedge funds make extensive use of lending or ‘leveraging’ to multiply earnings. If an asset can make a net return of say 7% this can be tripled to 21% via borrowing additional funds to invest. But of course the downside is equally dramatic when markets turn in the other direction. Bonds which were rated as high quality, double or triple A, at 99% of par value a month ago are now trading at 90%. If the investor was ‘leveraged’ 3 times they are sitting on losses of close to 30%. Little wonder investors and speculators are running for the exit door.
Compounding matters further is the nature of these pooled investments which are usually traded in secret (“over the counter” or OTC) which means that the market does not really know who is at risk of collapse. Bear Stearns, Banque Paribas and now high profile German Banks are tottering on the brink, and will require massive further support for survival.
Despite several market reforms and legislation over previous years to curb the worst excesses it seems that governments and their central banks still need to intervene periodically to restore order to financial markets. Has the invisible hand of the market been replaced by a great clunking fist of the central banks? In addition to the fact that further “creation” of money to support the excesses of the banking system is inflationary and works against all in society, it cannot be ignored that a system which is supposed to be self regulating to allow the free flow and use of capital still suffers major ripples of insecurity that require massive state intervention. And the full extent of this particular crisis has yet to surface.
Many do not understand the functioning of capital markets, its jargon, and purpose. It sometimes helps to picture 2 tables. At the first table people are trading real goods and services. They may buy or manufacture goods and sell them on, or provide services related to their area of work or expertise. This represents the bulk of “business” as it has been known for millennia. The second table is a more recent development it does not directly manufacture goods or services as commonly thought but provides a new kind of service. Rather than work in the real world, participants effectively gamble on what is happening – sometimes on how the first table, or some businesses in that sphere, is performing and sometimes merely providing capital or the money to either the real businesses or to those gambling on real business performance. Debt capital markets, foreign exchange markets, derivatives markets, the stock market and much of what investment banks trade in, now fall into the second speculative table rather than the real business world. This is evident by the weight of transactions occurring in the speculative world. The volume of foreign exchange, stock exchange, derivatives, stock market and related transactions far exceed by large multiples the requirement for capital or foreign exchange needed in the real business world. Additionally via easy credit a boom in the stock market has been seen through leveraged buyouts, the act of buying companies on credit. The derivatives market was once famously described as a 40 pound flea sitting on the back of a 5 pound dog!
The use of derivatives and highly leveraged transactions also means that massive gains and losses can eventuate with even relatively small movements in market prices. One might surmise that this has no real problems in the real world, as there will always be a winner and a loser in any transaction, and if parties want to take such risks then why not let them. But where the risks taken are so large and the counterparty or parties are not known, the risks to the whole system become obvious through the potential for domino effect collapses. Such a collapse can involve the whole banking system.
In 1998 the central banks also stepped in aggressively in light of the collapse of Long Term Capital Management, a hedge fund which had liabilities of $125 billion against its own capital of less than $5 billion. Additionally at the time of its collapse it had off balance sheet derivative positions of $1.25 trillion! With concern over a run on the banking system the Federal Reserve in the US arranged a $3.6 billion bail out in order that the financial markets didn’t collapse. The surrounding furore was capped by much ‘tut-tutting’ and promises of better regulation to ensure that it couldn’t happen again. Yet some now feel a major collapse is almost inevitable given the size these markets have grown to, the extent of high level risks now waged and the lack of transparency in many of the players and transactions. It is also very troubling that the government response to players in these markets over-extending is to pump (print) more money into the system, effectively encouraging further loans on top of the massive over-leveraging that is currently going on. This is both unfair to all those that see the value of their money dwindling via inflation and is counter to their claims to want to keep a lid on inflation.
It is also troubling that many Muslims fail to see the dangers of these markets and blindly step forth into them with little regard to what is actually going on and indeed whether Islam countenances investment within them. The prohibition of investment in interest based investment vehicles is well known across the Muslim world. However, it was not until the 1950’s or early 60’s that Sheikh Taqiuddin an-Nabhani, an Azhari scholar and the founder of Hizb ut-Tahrir set out a clear enunciation of the rules for capital markets including the modern stock and related markets following a process of ijtihad. Nabhani cited the rules of company structure set out by the Prophet (saw) for company set up, governance and ownership. These structures are not new to students of Shariah – Al-Mudharaba, Al-Mufawadha, Al-Abdan, Al-‘Inan, and Al-Wujooh – all including the requirement for investors to share directly in the risk of the real business which includes participation within the business with either direct work or capital participation. This precludes speculation on the performance of the company and also purchase of a company on the basis of borrowed money (debt based buyouts). In comparing to the two tables set out earlier the Islamic approach ensures that participants have a direct relationship with the real businesses, which ensures a full accounting and sharing of profits and losses and hence rewards and risks of failure. Without leveraged purchases and derivative speculation on the movement of markets or currencies, focus moves to the actual businesses and not forms of speculation or gambling on events. Providing a far more stable approach to business and capital markets. And that Islam forbids usury means that people seek a return on investment, not via interest rates managed by banks, but by direct participation in business with the attendant risks and rewards these hold.
The essential problems faced by Muslims, and indeed most of the world, is that this capitalist system not only gambles with billions and trillions of dollars. It gambles with people’s lives, investments and hopes. Muslims, who wish to establish the Islamic economic system in the Muslim world as part of the re-establishment of Islam as a complete way of life are looking to implement Allah’s laws. The fruits of such an implementation would not see such a volatile market, such financial instability and the consequent unseen human misery that inevitably accompanies it.
RE: LaRouche - moeenyaseen - 09-16-2007
THIS NEW MILLENIUM OF OURS
http://www.larouchepac.com/news/2007/09/11/larouche-new-milllennium-ours.html
During two decades, twenty years, from the February 1763 Peace of Paris, when the British empire was, in fact, born, until that British East India Company's empire-in-fact conceded the establishment of the United States of America's independence, in 1783, a certain world order of what became a see-saw conflict between those two English-speaking systems, has dominated the decisive strategic elements of the history of this entire planet. This conflict was pivoted, throughout the 1783-2007 interval to date, on the conflict between the system of usury represented by the imperial, London-centered Anglo-Dutch Liberal monetarism, on the one side, and, on the other, the American republican system of sovereign national credit associated with the name of the first U.S. Treasury Secretary, Alexander Hamilton, of the new U.S. constitutional Federal republic.
Now, during the recent weeks, the Anglo-Dutch Liberal monetarist system has been engaged with a process of the self-disintegration of its present world monetarist system of global practice of a rampant, and also virtually rabid form of usury. Thus, we are presently pivoting on the anticipated new world system. The question is, will it be the affirmation of the American System of political-economy, or a global form of Hellish chaos, a global new dark age?
During most of the decades of those centuries, the British empire, with its predatory gold standard, dominated the world, until the 1931 formation of the Basel, Switzerland Bank for International Settlements.
So, from the time the associate, Andrew Jackson, of the London-owned traitor to the U.S., Aaron Burr, entered the U.S. Presidency, until the election of President Abraham Lincoln, the Presidency itself was usually ruined by London's assets, such as Jackson, Martin van Buren, Polk, Pierce, and Buchanan. However, after the victory over London's Confederacy assets under President Lincoln, we emerged as a continental power within our own borders, a power which could not be conquered by outside military force.
However, even then, when the fame of the success led by President Lincoln spread the influence of Lincoln's victory into Japan and the Eurasian continent, assassinations of elected Presidents and other subversive activity, repeatedly weakened our political system. Two elected Presidents representing the instincts of the defeated British asset which had been the Confederacy, Theodore Roosevelt and Woodrow Wilson, ruined us, until the election of President Franklin Roosevelt. Immediately on the news of the death of President Franklin Roosevelt, the Anglo-American Liberal party grabbed increasing control over our republic's foreign and domestic policies, despite the grave warning which outgoing President Dwight Eisenhower delivered against those forces of Caesarian reforms in military affairs which he labeled the same "military-industrial complex" which engaged the U.S. in two sets of ruinously long wars (1964-1972 and 2003- 2007), echoes of the ancient Peloponnesian war which ruined Classical Greece's civilization, each, like the ancient Peloponnesian War, engaged on fraudulent pretext of lies uttered from the highest offices of the relevant republic.
Now, we have the presently soaring, global monetary-financial breakdown-crisis of the aggregated, present world monetarist systems. The world is presently seized by what is in fact a global systemic crisis, which has certain internal similarities to the breakdown-crisis which struck Weimar Germany with full force during the second half of 1923, but which is global in scope, rather than one whose effects were susceptible of being confined, at least temporarily, to one nation.
A dollar-crisis, with marked similarities to the Wall Street "crash" of 1929, had already struck, in early October 1987. Unfortunately, for the world at large, a decision made by the U.S.A. and others, then, postponed the reckoning with the foolishness which had brought on that October 1987 stock-market crisis, until a time approximately two decades later. This time, a process called by such names as "'globalization," "post-industrialism," and the anti-scientific, "neo-malthusian" manias called "global warming," have created a degree of John Law-style, hyperinflation in credit markets, such that the actual financial debt outstanding vastly exceeds the means by which any orderly bankruptcy proceeding could resist a general economic-breakdown-crisis of the global system as a whole.
We have already entered a situation, this time on a global scale, which must be seen in terms of its likeness to the so-called "New Dark Age" which struck medieval European civilization during the middle of the Fourteenth Century.
In face of this presently onrushing, global crisis, only a certain, definite kind of reform could succeed.
- The Essential Systemic Reform -
The present world monetary system, with its component monetary systems, must be put into protective custody for general reform in bankruptcy proceedings, over a period of some years or more to come. Therefore, all so-called independent monetary and related central banking systems must be taken into protective custody, and the authority which they had enjoyed given over, entirely, to a concert of treaty-agreements among perfectly sovereign nation-states' authorities.
We must credit a network of sovereign credit- systems, created by sovereign governments, which must employ a nested set of treaty-agreements among sovereign nations, agreements which will, in effect, reestablish a global, fixed-exchange-rate system of treaty-organizations. The immediate intention of adoption of such agreements, must be: a.) To replace the world's present monetary systems with statist credit-systems, as Treasury Secretary Alexander Hamilton defined national banking. b.) To unleash long-term, massive expansion of essential physical-economic infrastructure, to shift employment back toward emphasis on capital-intensive modes of technological progress in manufacturing, independent farming, high-technology mass-transport featuring emphasis on magnetic levitation, global development of fresh-water supplies, and high-energy-flux-density of production and distribution of power and synthetic generation of hydrogen-based fuels produced by nuclear-fission technology, and science-driver programs for economy, and health-care and sanitation.
The visible economic horizon for such a reform spans the two generations of expected economically-active life of young people entering adult life today. Since the great mass of required infrastructure-building and related tasks will be within the range of twenty-five to fifty years maturation, we are presently situated at the point at which long-term treaty agreements among sovereign governments must recognize that what we do, or fail to do on those accounts will necessarily encumber our populations for fifty years and more to come.
Rather than floating currencies, we must allow prices to float within a fixed-exchange-system based on long-term considerations, especially the important of protection of long-term physical capital expressed in forms such as productive capacities and progressive improvements in skill-levels of populations.
If we can muster the resolution to make such emergency agreements among sovereign nations now, we will probably have defined the hopeful future for all mankind for at least a millennium to come.
- In The Meantime -
No effort should be wasted in trying to adjust values of what are essential fictitious monetary claims. At this immediate time, and for some years to come, we must protect what is currently essential, such as occupation of housing by families, the functioning of locally chartered banks by the national or regional governments, and other things. Presently, we do not now have the basis on which to determine what the valuation of a claim to property should be. What that should be will become more or less clear only during the course of a lapse of time of several or more years. In the meantime, life must go on; all essential functions of physical economy and well-being of households, must be protected; real growth in employment in productive, rather than financial-speculative and questionable "services," must have priority. The function of governments, and among governments, must be to ensure that what is essential happens, and that the physical growth of useful output, as physical capital and essentials of the population as a whole, are met.
This could not be accomplished, presently, under ordinary proceedings-in-bankruptcy.
The mere attempt to take that route would be a disaster for all concerned. Instead, we must
use emergency "fire walls" of government reform to ensure that physically essential measures of support for normal life and improved physical productivity are taken with what is otherwise a minimal stress and strain upon a population attempting to resume both a stable, understandable, and progressive manner of living in households and running local businesses in their respective communities. We must foster creative initiatives, and, therefore, we must foster, rather than tend to discourage useful private initiatives.
RE: LaRouche - moeenyaseen - 09-16-2007
IN GOLDMAN SACHS WE TRUST
ATCA
John Kenneth Galbraith titled a chapter in his book, The Great Crash: 192 9 , "In Goldman Sachs We Trust."
. US Treasury Secretary Henry Paulson, former Chairman and CEO of Goldman Sachs Group, and his counterparts in Japan, Germany, UK, France, Italy and Canada -- The Group of Seven -- Governments are to ask the Financial Stability Forum (FSF) , housed at the Bank for International Settlements (BIS) in Basel, Switzerland, to give a detailed report on the root causes of the credit crunch to the G7 October meeting of finance ministers . FSF is Chaired by Prof Mario Draghi, Governor of the Banca d'Italia, former Vice-Chairman at Goldman Sachs International.
. Secretary Paulson has conceded the crisis in the credit markets will last longer than any of the financial shocks of the last two decades. He said the US economy would be hurt by the upheaval but the overall outlook remained benign.
. Crude oil rose to a record USD 80+ per barrel in New York intraday trading after supplies dropped the most this year. The inflation-adjusted record is coming close to t he previous record in real terms set post the Iranian revolution in 1979. C ost of oil used by US refiners averaged USD 37.5 a barrel in March 1981 -- that's USD 84.7 in today's dollars. The euro reached its highest point against the dollar since its introduction in 1999. Th is is partially because the US Federal Reserve is expected to cuts its fed funds rate by as much as 50 basis point next week to help relieve economic pressures. A global credit crisis has increased the threat to growth according to the European Central Bank.
. Wall Street investment banks Lehman Brothers, Morgan Stanley, Goldman Sachs and Bear Stearns all report their third-quarter results next week.
. The Financial Stability Forum ( FSF) is a worldwide group of finance ministers, central bankers and regulators from G7 national authorities as well as those of Australia, Hong Kong, Netherlands, Singapore and Switzerland. FSF is . The FSF is going to examine financial institutions' liquidity, credit risk practices, accounting and valuation procedures for complex derivatives, supervisory principles and the role of credit rating agencies in a clear sign that the credit crunch is becoming a trans-national issue with political implications. FSF comprises 42 representatives (Numbers in brackets):
National Authorities (26)
Australia
Reserve Bank of Australia
Canada
Department of Finance
Bank of Canada
Office of the Superintendant of Financial Institutions
France
Ministry of the Economy
Autorité des Marchés Financiers (AMF)
Banque de France
Germany
Ministry of Finance
Bundesanstalt für Finanzdienstleistungsaufsicht
Deutsche Bundesbank
Hong Kong SAR
Hong Kong Monetary Authority
Italy
Ministry of the Economy and Finance
Banca d'Italia
CONSOB
Japan
Ministry of Finance
Financial Services Agency
Bank of Japan
Netherlands
De Nederlandsche Bank
Singapore
Monetary Authority of Singapore
Switzerland
Swiss National Bank
United Kingdom
Bank of England
Financial Services Authority
H M Treasury
United States
Department of the Treasury
Securities & Exchange Commission
Board of Governors of the Federal Reserve System
International Financial Institutions (6)
International Monetary Fund (IMF) (2)
World Bank (2)
Bank for International Settlements (BIS)
Organisation for Economic Co-operation and Development (OECD)
International Standard Setting, Regulatory and Supervisory Groupings (7)
Basel Committee on Banking Supervision (BCBS) (2)
International Accounting Standards Board (IASB)
International Association of Insurance Supervisors (IAIS)(2)
International Organisation of Securities Commissions (IOSCO) (2)
Committees of Central Bank Experts (2)
Committee on Payment and Settlement System (CPSS)
Committee on the Global Financial System (CGFS)
European Central Bank (1)
RE: LaRouche - moeenyaseen - 09-16-2007
PREDICTING THE FUTURE: HOW DOES THE "WISDOM BASED SUPER-SENSITIVE A PRIORI KNOWLEDGE ATCA ENGINE WORK?
ATCA
As the global credit crunch has unfolded, a number of you have enquired how the ATCA engine works so accurately and why is it so reliable in terms of predicting the next steps in the unfolding crisis? For this, many thanks are reciprocated to you and with deep humility we are in a position to share with you the underlying ATCA engine's "wisdom based super-sensitive a priori knowledge" built on the experience garnered by working on supercomputer modelling of complex problems and human interaction.
Imagine a 24/7 knowledge network which is constantly alive. Imagine a n etwork which deep mines the internet and "domain-specific" expertise looking for unique information on uncertainties, risks, opportunities and developing global news themes. Then imagine a human fine tuning system which polls hundreds of members out of a carefully selected set of 5,000 executive decision makers in over 120 countries, representing different sectors of the global economy, to find the one submission which will add something extra to the existing pool of knowledge to help make highly informed decisions at a corporate, government and voluntary organisation level. Imagine ATCA working step-by-step since its conception in October 2001!
It is no accident that ATCA engine models the present and unfolding future to predict the precise direction of future trends based on "wisdom based super sensitive a priori knowledge." It is no accident that it can inform how markets work or what type of government policy should evolve to counter climate chaos, to address search engine dilemmas and to safeguard democracy.
How often have you read an ATCA Socratic dialogue and then a month, a quarter or indeed a year later seen the news on television or in mainstream newspapers that predicted events have actually transpired? This is not accidental, this is part of the design of the ATCA engine.
At the intersection of ATCA members engaged in Socratic dialogue -- 1,000 Parliamentarians; 1,500 Chairmen and CEOs of leading corporations; 1,000 Heads of NGOs; 750 Directors at Academic Centres of Excellence; 500 Inventors and Original thinkers; as well as 250 Editors-in-Chief of major media -- both off-line and online, in published and mostly unpublished formats, lies "wisdom based super sensitive a priori knowledge" and where does it come from?
"Wisdom based super sensitive a priori knowledge" is gained through deduction and feedback loops from current events and expert wisdom input, super-sensitively screened, and not through empirical evidence of future major events or market movements that are yet to happen.
"A priori knowledge" is gained through deduction, and not through empirical evidence. For instance, if we have two Picasso paintings now, and we plan to add three Picasso paintings, we will have five Picasso paintings in the future. This is future knowledge gained deductively. We did not actually need to get the three other Picasso paintings and place them with the first two to see that we have five in the future. To this extent, the term "A priori" is valid for the ATCA engine.
"A priori knowledge" also exists without reference to reality. One example is inborn knowledge. Another example, often used, is mathematics and deductive logic to predict the future. To understand why this second definition -- which is how the term is really used by ATCA -- might manifest itself, we have to look at exactly what is being said and meant.
Let us look at mathematics. It is easy to see, in the Picasso painting example, that mathematics and deductive logic fit under the first, valid meaning of the term. If this were all that was meant by saying that mathematics is a priori, there would be no problem. However, this is not so. Socratic philosophers then go on to say that mathematics is true without reference to reality. The knowledge of mathematics -- as opposed to the knowledge created by mathematics -- is "a priori." It is known without reference to reality. It is claimed that mathematics is a higher form of knowledge. That even if the world around us does not exist, mathematics is still true. That it is a form of knowledge that we can be certain of, even if we deny reality.
How do we make such a statement? First, we see that mathematics is the science of units, and any units are acceptable. We could have said Rodin sculptures instead of Picasso paintings in the example presented. The validity would be the same. It is true without reference to any unit.
This sounds reasonable at first. The problem stems from the method of deriving the mathematical abstractions. If we teach a child to do simple arithmetic, we will recognize that to gain the knowledge of mathematics, one must use some units. Maybe Picasso paintings. Maybe Rodin sculptures. It doesn't matter which units. It does matter, though, that some unit is picked. To grasp mathematics, one needs a foundation. Particulars from which an abstraction can be made.
Calling mathematics "a priori," or knowledge independent of reality, is to undercut its base. This is the essence of the second meaning of a "priori." The meaning that is actually used by ATCA to predict the future and market behaviour. An abstraction is made from particulars. Once the abstraction is made, the process from which it was derived is then ignored. The base on which it was built is denied. The abstract knowledge is then said to exist without reference to reality, since the reference can be ignored.
In this way, certain kinds of "wisdom based super sensitive a priori knowledge" or "ATCA knowledge" sets are said to exist without being dependent on "yet-to-be" future reality. Various explanations for how we are aware of the knowledge are put forward. Some say it is inborn, and we were always aware of it. Others say that although it was inborn, it takes a while for us to recognize the knowledge via expert deduction. Others decide that it is revelation from some higher power, that higher power being the network of 5,000 members of ATCA engaged in Socratic dialogue with super-sensitive filtering along the way of "noise" arguments.
The consequences to accepting the claim that knowledge can be "a priori" is that it leads to faith in the ATCA engine. When it is supposed that some knowledge exists and is valid without our need of deriving it from reality and the events actually happening in the future, it opens the door to accepting most "yet-to-be" knowledge can be extrapolated like this, given enough inputs as in the case of the "Wisdom based super sensitive a priori knowledge" of the ATCA engine.
What are your precise thoughts? Have you been tracking the ATCA engine's capability to predict the future via Socratic dialogue and internet deep mining ?
[ENDS]
The ATCA submissions can be accessed from here . We are grateful to:
* The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK , for " In Goldman Sachs We Trust ;"
. Dr Harald Malmgren , CEO, Malmgren Global, based in Washington, DC, USA , and The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK , for " Currencies Turmoil Ahead: Euro and Sterling Weakness around Point of Inflexion?; "
. Eric Best , Founder and President , Best Partners SC , New York City , NY , USA, for " Captains' Priorities and Requisite Virtues in Deep Financial Storm ;"
. Andrew Hunt, Founder and Consultant Economist, Andrew Hunt Economics, City of London, UK, for " The UK's Non-Bank Banks and High LIBOR;"
. The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK, for "
Worst Financial Crisis in 20 Years and the 10 Day Debt Bomb ;"
+ DK Matai, Executive Chairman, mi2g , ATCA, The Philanthropia , based in Canary Wharf, London, UK, for " Breach-of-Trust in Computing Platforms: Systemic Risk & Black Swans ;"
+ The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK, for " ATCA QUERY: The Question of Trust ;"
. Dr Harald Malmgren , CEO, Malmgren Global, based in Washington, DC, USA , and The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK for " Central Banks' Intervention and Europa ; "
. Hamid Hakimzadeh, Hedge Fund Specialist, based in Buckinghamshire, England, UK, for "The Physics of Humpty Dumpt y;"
. Nigel Reed, Senior Analyst, Financial Markets, based in Cornwall , England , UK, for " China, Japan & US T- Bond s ;"
* The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK , for " Credit Card Debt Default - The Domino Crisis post Sub-Prime Overflow;"
* Dr George Feiger, President & CEO, Contango Capital Advisors, based in Berkeley, California, USA for " Responsibility for Credit, Securitisation and Moral Hazard ;"
. Anthony Whitehouse , Founder , Bittiner Whitehouse (now Maitland), Geneva, Switzerland, for "Blame and Sanctions in the Credit Crunch ; "
. Prof Prabhu Guptara, Executive Director, Organisational Development, Wolfsberg (UBS), Switzerland, for " Unique Problems with 1990s Japan ; "
. The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK, and Dr Harald Malmgren, CEO, Malmgren Global, based in Washington, DC, USA, for " Central Bankers, Monetary Policy and Moral Hazard ; "
* William Sturge, Partner, Reinsurance, Lawrence Graham (LG) based in Central London, UK, for "Litigation Exposure and Insurances that may Respond ;"
. Peter Tasker, Founding Partner, Arcus Investment, based in T okyo, Japan, for " Invaluable Lessons from 1990s Japan - Risks of Schadenfreude ; "
. Andrew Leung, CEO, AL International, London, UK, and frequent visitor to China for "The China Dimension of The Global Credit Crunch ;"
* The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK, and Dr Harald Malmgren, CEO, Malmgren Global, based in Washington, DC, USA for " Off-B alance S heet Conduits & SIVs R aise W ider C oncerns ;"
* Prof C harles Calomiris , Columbia Business School, New York & Prof Joseph Mason , LeBow College of Business, Drexel University, Philadelphia, USA for " The Conflict of Rating Agencies and Regulation - We need a Better Way to Judge Risk ;"
. Dr George Feiger, President & CEO, Contango Capital Advisors, based in Berkeley, California, USA for, " Questioning the Views of a Nobel Laureate;"
. Prof Joseph Stiglitz, Nobel Laureate in Economics (2001), Columbia University, New York, USA , for " Day of Reckoning for Americans who lived Beyond their Means ; "
. Dr George Feiger, President & CEO, Contango Capital Advisors, based in Berkeley, California, USA for "Suggestions for Resolving Sub-Prime Dilemma Step by Step ;"
* Dr Harald Malmgren , CEO, Malmgren Global, based in Washington, DC , USA for " Understanding Rating Agencies beyond the Sub-Prime Meltdown ;"
* The ATCA Research & Analysis Wing (RAW), based in Canary Wharf, London, UK, for " Asymmetric Knowledge Risk -- Insurance Lessons for Sub-Prime Contagion ;"
* Anthony Whitehouse, Founder , Bittiner Whitehouse (now Maitland), Geneva, Switzerland, for " High Credit Ratings and Breakdown of Trust ; "
* John Pickering, Vice-Chairman, Labour Finance and Industry Group, based in London and Tunbridge Wells, UK, for " Role of Auditors ;"
* The ATCA Research and Analysis Wing (RAW), based in Canary Wharf, London, UK, for "ATCA QUERY: Role of Credit Rating Agencies ;"
. Peter Tasker, Founding Partner, Arcus Investment, based in T okyo, Japan, for " Resilience of Corporate Profits & Sub-Prime Fiasco -- Global View from Japan ; "
. Daniel Morler , Head of Middle East, LGT Private Bank, based in Vaduz, Liechtenstein, for " Human Factor, Information Lag, Geo-Politics and Central Banks ; "
. Justin Urquhart Stewart, Director, Seven Investment Management, London, UK, for " Pride Before the Fall -- Those Who Don't Know that they Don't Know;"
. Martin Wolf, Associate Editor & Chief Economics Commentator, Financial Times, London, UK, for "To Cut or Not to Cut: Federal Reserve must Prolong the Party ;"
. The Hon Al McDonald, Chairman and CEO, Avenir Group, from Michigan, USA, for " Balancing The Role of Management in Extreme Financial Turbulence ; "
. The ATCA Editorial Team based in Canary Wharf, London, UK, for " Subprime Crisis Spreads Across Regions and Financial Sectors;"
* Hervé de Carmoy, European Vice-Chairman, Trilateral Commission, based in Paris, France, for "Role of Large Financial Institutions in Fuelling Crisis ;"
* Dr Jim Walker , Chief Economist, CLSA, based in Hong Kong , China, for " China Chaos and Subprime Butterfly;"
. Ashutosh Sheshabalaya, CEO, India-Advisory, based in Brussels, EU, and Bassilly, Belgium, for "India turns History Upside Down ;"
. John Elkington, Chief Entrepreneur, SustainAbility, based in London, UK, and returning from India, for " Mother Convulsion - India's Third Liberation;"
. Stephen Lendman, based in Chicago, Illinois, USA, for " Slow Motion Train Wreck" via Dr Ashok Khosla, Chairman, Development Alternatives, New Delhi, India;
. The ATCA Editorial Team based in Canary Wharf, London, UK, for " Market Convulsions;"
. Dr Harald Malmgren , CEO, Malmgren Global, based in Washington, DC , USA for " Federal Reserve's Changed Focus ; "
. Bill Emmott , Director, UK-Japan 21st Century Group, based in London and Somerset, UK, for " Japan's Strong Yen ;"
* Dr Harald Malmgren, CEO, Malmgren Global, based in Washington, DC, USA for " The Asymmetric Loss of Trust and Chain Reaction ;"
. The ATCA Editorial Team, based in Canary Wharf, London, UK, for " Public Inquisition of Credit Rating Agencies may Accelerate Downturn ;"
. Dr George Feiger, President and CEO, Contango Capital Advisors, based in Berkeley, California, USA, for " Watch out for Dramatic Winners ;"
* The ATCA Editorial Team, based in Canary Wharf, London, UK, for " Systemic Risk & Sectoral Meltdown: Heightened Correlation and Deleveraging;"
. Rudi Bogni, Chairman, Medinvest, and Director, Old Mutual, from Basel, Switzerland, for, "Non-Stop Central Banks' Intervention ;"
. Dr Ravi Batra, Professor of Economics, Southern Methodist University, Dallas, Texas, USA, for "Towards a Global Economic Crisis? ;"
. Aurora Carlson, Founder, Open One Center, based on the West Coast, Sweden, for " The Coming Storm of Change;"
. The ATCA Editorial Team, based in Canary Wharf, London, UK, for " Large Quake hits Quants as Computer-Driven Quantitative Hedge Funds Short-Circuit;"
* Dr Harald Malmgren, CEO, Malmgren Global, based in Washington, DC, USA for " Prolonged Credit Market Correction Ahead;"
. Prof Dr Norbert Walter, Chief Economist, Deutsche Bank Group, based in Frankfurt, Germany, for "Economic Consequences of The Sub -Prime Crisis ;"
. Anthony Whitehouse, Founder , Bittiner Whitehouse (now Maitland), Geneva, Switzerland, for " Regulators, Hedge Fund Lending and Cro s s-Selling ;"
. The ATCA Editorial Team, based in Canary Wharf, London, UK, for " Perfect Storm: Credit Freeze and Distress Selling by Hedge Funds;"
. Dr George Feiger, President and CEO , Contango Capital Advisors , based in Berkeley, California, USA, for "Two Faces of the Same Coin ;"
* The ATCA Editorial Team, based in Canary Wharf, London, UK, for " Contagion and Systemic Risk? ECB Injects Record Euro 95bn post Major Disturbance;"
. The ATCA Editorial Team, based in Canary Wharf, London, UK, for " Flight to Quality as Markets finally A ppreciate R isk ;"
. Robert McNally, Chairman, London Chamber of Commerce Property and Construction Group, UK, for " Erosion of Commercial Real Estate as a Solid Asset Class;"
. Alexander Hoare, CEO, C Hoare and Co, Private Bankers, based in the City of London, UK, for "Destructive Creativity, Leverage and The Derivatives Market ;" and
. Dr Harald Malmgren , CEO, Malmgren Global, based in Washington, DC , USA for "The Fear of Central Bankers -- Flight from Illiquidity , Derivatives and Heightened Risk of Contagio n ; "
RE: LaRouche - moeenyaseen - 09-16-2007
MARGIN OF SAFETY AND THE BUBBLE PHENOMENON :
DIFFERENTIATING BETWEEN VALUE INVESTMENT AND SPECULATION
ATCA
What do Benjamin Graham, Warren Buffett, Irving Kahn, Walter Schloss, Mario Gabelli, Glenn Greenberg, Robert Heilbrum, Seth Klarman, Michael Price, Paul Sonkin, Charles Brandes et al have in common. They are investment icons whose thoughts, ideas and investment philosophies are described as those of "Value Investors."
After the great crash of 1929 during the depression era, Benjamin Graham, a veteran American investor in the early 1930s said, "Common stocks have one important investment characteristic and one important speculative characteristic. Their investment value and average market price tend to increase irregularly but persistently over the decades, as their net worth builds up through the reinvestment of undistributed earnings. However, most of the time common stocks are subject to irrational and excessive price fluctuations in both directions, as the consequence of the ingrained tendency of most people to speculate or gamble."
Over the last six years ATCA has researched the modus operandi of business leaders and investors in regard to Value Investing. Nigel Gibson in "Essential Finance" describes Value Investing as follows, "An approach to investing best summed up by Benjamin Graham, who urged others to seek a 'margin of safety'; the opposite of growth investing. Value investors ferret out the stocks of companies (that is value stocks) which have solid businesses and balance sheets but which, for one reason or another, are out of favour with the market. Such investors aim to buy low and sell high. Their techniques vary. Warren Buffett, one of the most successful investors of all time, values companies on the basis of the present value of their future cash flows. Others look for companies whose price/earnings ratios are below the average for the market as a whole. Most take a long-term view of investment."
If we survey the financial and property markets today in a number of countries, we can see that safety margins are inadequate amid a speculative bubble where the yields or annual earnings on investments have gone from bad to worse. What does this mean? Investors around the world are not being paid enough for the inherent risk in owning stocks, bonds and real estate. They are, even now, earning little additional yield on higher-risk corporate and developing nation debt than on AAA rated government bonds in highly developed nations. What happens if there is a "hundred year storm?" Although investors are displaying a lot of excitement, however, as in market bubbles of the past, there is "not enough margin of safety." In order to understand the speculative bubble phenomenon and its aftermath, the graphs of the extreme stock market losses from 1929 to 1932 and from 1972 to 1974 are worth examining as indeed is the plunge of oil stocks in 1981 and tech stocks from 1999 to 2001.
When examining a hundred year graph of the market value of US company shares compared with the annual output of the US economy, the present bubble is different from the previous sections of graph showing historical investment bubbles and "irrational exuberance." The graph shows the typical steep upward slope as the value of US stocks went from about 60 per cent of annual economic output in 1990 to nearly 170 per cent in 2000. Then came a steep dotcom decline which was short-lived as interest rates were drastically cut by the US Federal Reserve. As a result, stocks as a percentage of Gross Domestic Product (GDP) did not return to 60 per cent, the average share value ratio dating back to the 1920s. More surprisingly, the percentage never even fell to the level of the highs of 1929 and the early 1970s, and it has recovered in the past four years to more than double the historic average. It is possible, although not certain, that a return to the historic average, or a lower percentage, could yet occur. A further decline in US house prices could set off a chain reaction as witnessed in Japan in the 1990s.
Access to cheap debt has fuelled a boom among the private equity funds that use a high proportion of debt to take over public companies, as in Leveraged Buy Outs (LBOs). The support such deals provide for stock prices could completely evaporate if there is a sudden arrival of another Black Swan -- outlier event -- which sends a shock to the world economy alongside the presently unfolding global credit crunch. A further decline in US real estate prices could trigger a rise in the number of borrowers defaulting on debt that supports some USD 2 trillion worth of securities held by financial institutions. In the event of mass exit from highly speculative property and equity investments, the only recourse may lie in quality government bonds and Treasury bills, ultra-safe haven currencies, or gold.
LaRouche - moeenyaseen - 09-16-2007
CAPTAINS' PRIORITIES AND REQUISITE VIRTUES IN DEEP FINANCIAL STORM
ATCA
In following the ATCA Socratic dialogue, I was struck by Hamid Hakimzadeh's "The Physics of Humpty Dumpty," considering the parallels between thermodynamics, entropy and market conditions, and also the question of "Where are the clients' yachts?" in thinking about the winners and losers in the current credit crunch.
It is true that more people, whose risks could not otherwise have been spread widely enough, have been enabled by securitization and related financial product innovation to have mortgages -- and therefore houses and boats and higher levels of consumption in general. That is arguably a good thing, even if some people have gone too far.
It would not appear that too many have gone too far though , certainly not as much as proclaimed in the US. US household balance sheets are stronger and more liquid than at any time in recent history, according to data going back to 1945. Households have USD 6.47 trillion in Money Market Funds (MMF) and savings deposited in the first quarter, 50% higher than the USD 4 trillion at the peak of the 1990s boom.
That being said, the average income of financial market "experts" -- read investment bankers and hedge fund managers -- is 10+ times average income in the US. If these financial market functionaries are not delivering extraordinary value, then something may well be awry in the system of finance capitalism, as Mr Hakimzadeh's ATCA submission suggests, and we should debate how to redress this. It's fair to question whether, if financial engineering sold at a very high price brings enormous misunderstood risk to the system, and adjustments are catastrophic, the risk-adjusted compensation of the purveyors is out of alignment.
We should acknowledge that no one really knows for certain what is going on in the markets at present, or what will happen next, though we may understand markets in the way we understand thermodynamics or the development of wind conditions. Yes, distributed risk through CDOs has rendered many values opaque. Some credit markets are freezing, or refusing to thaw. Some spreads are harder to explain than others. Central bankers are obfuscating with the implication of some clarity hidden behind the curtain -- it's difficult for me to believe that they really know what to do, or that they are not being misled by history.
Investors of all types are trying to figure out what to buy, to sell, or to hold. If they are facing obligations they know they will not be able to meet, their reactions are going to remain quite private until they become public, with uncertain consequence. If anyone should be bailed out of inopportune positions, who are they? Why, exactly? Mounting volumes of cash are pouring into distressed credit funds, so the markets are going to clear, eventually.
This is the stuff of which profound market uncertainty -- which by definition can't be priced -- is made, while the risks -- which some say by definition can be priced -- must necessarily be high. If we were all sailing in the same yacht, we might acknowledge that the weather is ugly and may remain so. Can the ship stand it? Night is coming, the barometer is still falling. Or is it?
New dangers will be harder to see and perhaps impossible to discern until it's too late. The crew grows more fearful, restive, questioning, with perhaps the least experienced -- or those with the most booty in their chests -- among the most frightened. The captain(s) are being asked questions to which they do not have answers. But the leaders, above decks and below, are expected to provide reassurance amid ignorance of what may happen next.
One is invited to consider the challenges faced by Magellan in searching for a way around the Horn, when no accurate maps existed. The conditions of the ocean and weather kept deteriorating as Magellan sailed south, into currents not previously known. No one knew "if there was a there there (sic)," and the crew became mutinous before Magellan found the way. He quelled the mutiny with some violence -- to good end, as it turned out.
If we are all in the same boat -- and one may also think of global markets as a casino where the only de facto rule is that one cannot leave -- then it is misguided to try to jump ship in the midst of a storm. In any crisis, we are all served by efforts to reduce fears that promote ill-considered actions and reactions. Better to acknowledge the unknowable unknowns and return to fundamentals that have been proven over time. Being quiet is often a good tactic when all about you are losing their heads and trying to blame someone or something else, as Kipling noted long ago. "Do nothing" can be good advice when not enough information is present, and "say nothing" might be preferable to speculating too openly or loudly on the depth of imminent crisis.
In a system so devoted to widespread home ownership, the "captains" should focus first on saving the houses that deserved to be saved, and seek to reassure the crew that the ship itself is sound, however beleaguered and even leaky at the moment. Humility and patience may be what we most need for now in a system where such wealth has been created in the last decade, and liquidity abounds even in the current state of tightening. Entropy is most to be feared where it is made of fear itself.
GEO-POLITICAL RISK AND INFLATION BASED BLACK SWANS
Dr Philippa Malmgren
ATCA
People now believe that geopolitical risk is something from the past and inflation is dead. ATCA has pointed out that it might become very difficult, "if there is a sudden arrival of another Black Swan -- outlier event -- which sends a shock to the world economy alongside the presently unfolding global credit crunch."
While it is nearly impossible to accurately predict the timing, in our view, the landscape is changing in ways that will give rise to more Black Swans in the foreseeable future. As Nassim Taleb points out, "Black Swans" are unpredictable events. Yet, such events are always preceded by some signals however faint. There are many faint signals at the moment. But all eyes are now focused on the complex day-by-day unfolding of the financial crisis. So, it is perhaps not surprising that few are watching broader forces that are changing the investment landscape.
In contrast, I think the peace dividend is nearly over and inflation is back from the dead. In addition, the shock absorber of freely available and cheap money, which protected the financial markets and businesses from these issues, is now gone.
The fall of the Berlin Wall brought about both the Peace Dividend and the Great Moderation of Inflation, as central bankers refer to it. Millions of people entered the global workforce and thereby pushed down wages and prices while, simultaneously, governments were able to devote fewer resources to the preparation for or prevention of conflict. The markets and the business community have become accustomed to operating in a world where there is little or no inflation or conflict premium. Geopolitical risks cannot hurt the markets and inflation is dead. This has been the common wisdom. This view helped contribute to a period when growth was strong and risk premia fell to record lows.
All this changed earlier this summer when the cost of capital suddenly went up, as presented and discussed by the distinguished ATCA network. This event hit the retail market (subprime mortgages) and then the wholesale market (commercial paper). One fears that even now there is insufficient recognition of the fact that every deal, every trading strategy, every business and every economy is rather more vulnerable to unexpected developments than was the case when capital was cheap and freely available to cushion us from shocks.
US-China
The US-China relationship has been deteriorating for some time. It is not only the potential protectionism rising in the US Congress that underlies this. There have also been a series of specific security incidents over the last twelve months that have given rise to increasing distrust on both sides.
On the fourth of July 2006, North Korea launched seven missiles, one of which was an ICBM. In response, the US sent spy satellites over North Korea, which, of course gave the US greater access to intelligence images of China as well, thus raising distrust in China. The Chinese authorities responded in turn by using lasers to blind the US satellites as they passed by, thus rendering them useless. North Korea then undertook a nuclear test in October, which further reinforced views on the US side that China was not making best efforts to restrain North Korea's nuclear ambitions. Then, on January 11th, China used a kinetic kill vehicle to destroy its own ageing weather satellite in space. This technical feat demonstrated clearly to the US that American satellites are now potentially vulnerable to China. The US and its allies effectively control the shipping lanes across Asia and into the Middle East, a fact that makes China feel vulnerable. The US is now concerned that China's sense of vulnerability is causing China's leaders to turn to new technology to counter the US threat. China now has the capacity to render the US Navy in the Pacific quite useless given the US Navy's dependence on satellites for all navigation and missile guidance systems. Meanwhile the Pentagon claims that China's military is proving ever more capable in their efforts to hack into US defence networks. It is fairly clear from the Pentagon's most recent reports and from comments from the Chinese leadership that both sides intend to spend more money perfecting their relative capabilities and protecting their relative vulnerabilities.
Meanwhile, new power blocs are forming that reflect this distrust. The US has tried to pull India closer to it by offering full access to nuclear technology, high technology and military cooperation. Meanwhile, the US continues to ban high tech sales to China and to reduce military cooperation. China, in return, has brought Russia and central Asian states into the Shanghai Cooperation Organization, which just held its first joint military exercises. India has been invited to join as an observer but, so far, the US is not welcome.
China and Russia have, of course been facing off against the US over Iran for some time. For China, Iran represents the only major oil-producing nation in the Middle East that is not aligned with the US. For the US, Iran represents a serious nuclear and strategic threat to the US and its oil-producing allies in the region.
Iran and the Nuclearization of the Middle East
The rhetoric between Iran and the US is becoming ever more strident. On September 16th, the French Foreign Minister said, "We have to prepare for the worst, and the worst is war" with regard to Iran. Germany recently killed any hope of a diplomatic resolution when they said no to any more sanctions, thus opening the door to other avenues. Obviously everyone believes that a military confrontation with Iran would be an unmitigated disaster, as would be a nuclear Iran.
The US and Iran already believe they are in the midst of such a confrontation. The US maintains two aircraft carrier battle groups just off Iran's shore. From these carriers the US and its allies are constantly pushing up against Iran's borders and testing Iran's reaction function (which is how the incident involving British marines happened back in March). Iran accuses the US of fomenting domestic instability through its support of opposition groups while the US accuses Iran of waging proxy war against American troops inside of Iraq. The threat of an accident or an incident arising from the ever more tense relations between the US and Iran carries an ever present potential black swan. As diplomacy increasingly fails to resolve the issue, one must assume that other, more potentially disruptive solutions are being considered on both sides.
Meanwhile, Saudi, Egypt and Turkey all view Iran as a mortal threat and each are seeking to defend themselves by becoming a nuclear power. A few years ago, international observers were shocked to find out how close India and Pakistan had advanced to the brink of a nuclear exchange. Considering that there is no history of stable cooperation among these Middle Eastern nations and, that most of them are a mere one heart attack or one coup away from a change in leadership, it is hard to imagine that the rise of nuclear capabilities in the Middle East is anything other than a series of black swans in the making.
Russia
Russia's potential to spawn a black swan at any time is significant. Consider recent events. After the US announced its intention to place anti-missile defences in the Czech Republic and Poland (in response to Iran's long range missile advances), Russia announced that the US had broken the terms of the Anti-Ballistic Missile Treaty. Russia is no longer, therefore, sharing nuclear information with the US. Last month, Russia's President formally announced (at the recent joint SCO military exercises they conducted with China) that it intends to resume long-range strategic bomber missions across the Atlantic, Pacific and elsewhere. On the day that the British decided to expel Russian diplomats over the Litvinenko affair, Russian bombers buzzed both Scavenger in Norway and Aberdeen in the UK (both symbolic for the role they play in the production of North Sea oil). Such air incursions have occurred repeatedly since last May. In the last few days, the British RAF scrambled to intercept eight Russian bombers before they entered British airspace. The Pentagon has made it public that these incursions have been occurring over Alaska for many months. A Russian plane recently flew over Georgia and either deliberately or inadvertently dropped a missile which failed to explode. This incident has given rise to a serious investigation within the UN Security Council.
Russia has also been increasingly willing to use state power, including control over energy and commodity assets as means of compelling neighbouring states to behave, as Russia would like. Russia's claim to resources in the Arctic seabed has triggered an ownership race among Canada, Norway and Denmark.
Perhaps the most interesting example of a black swan type of event occurred in May. Estonia's government announced it would move a statue from a major town square in Tallinn to a nearby cemetery. The statue depicts the unknown Russian soldier rescuing Estonia from the Germans in WWII, and its removal gave rise to substantial protests from Russia and by the Russian community in Estonia. Suddenly, the Estonian government found themselves victims of a massive cyber attack that shut down all government websites, most media websites and many banking and finance websites. Estonia's economy is especially web-based and the attack was therefore quite crippling to the economy. Estonia accused Russia of launching the attack and brought NATO's cyber warfare experts in to examine the problem. NATO did not name Russia as the culprit but made it clear that only a state could muster these kinds of cyber resources. NATO actively considered actions under Article V of the NATO Treaty (military defence of Estonia) but concluded that legally, NATO could not define a cyber-attack as a military action. In other words, a broader confrontation between NATO and Russia was averted mainly on a technicality.
Inflation
Not all black swan events arise from geopolitical developments. Traditional economics can foster black swans as well. In his new book, Alan Greenspan warns that the Fed needs to be very careful about cutting interest rates, in spite of the financial crisis. If they cut too much, he says the inflation rate will probably rise to unsustainably high levels. We have a strange inflation picture at the moment. In most major economies official measures of core inflation are either stable or falling. But, the price of virtually everything a person needs to buy to live is going up substantially: energy, food, education, all services, and now some manufactured goods. Some say that the CPI models that predate the exclusion of food and energy show that the core inflation rate is already running at nearly 10%. Within the Fed there is a substantial debate about whether more attention ought to be paid to headline inflation. Many traders think we already have negative real interest rates.
The oil price keeps breaking all time record high (keep in mind that people care more about nominal than real prices). Consider the recent headlines that help keep the oil price high: Israel has bombed a suspected nuclear facility in Syria, the US is considering a tougher policy toward Iran or that Saudi has just increased their oil field defence force from 5,000 men to 35,000 men. Oil has been high and non-inflationary for a while now. But that was when demand pulled the price higher. It may be different when demand wanes in a slowdown and supply or geopolitics keeps the price high.
The price of many foods is rising apace. The United Nations is warning that rising food prices are already causing civil unrest in a number of emerging market countries. Recent headlines show that the price of wheat and corn keep hitting new highs and that these costs are changing consumption patterns. The Italians are holding a one day strike against the rising price of pasta. New York steak houses are issuing press releases that say that so much corn has been diverted to ethanol production that they have insufficient supply to feed their customers. The CEO of Nestle has said that rising food prices are not cyclical but structural and will remain a pressure on the world economy for years to come.
Wages and prices are rising in China and India. Indian firms are starting to outsource to Mexico because wages are cheaper there. If the financial crisis causes capacity in India or China to contract, then we should expect higher prices for goods and services as pricing power is restored.
Inflation is not only an economic phenomenon. It is a political phenomenon as well. China is clearly concerned about rising inflation and is quite determined to take the necessary steps to defeat it. Usually, defeating inflation involves slowing and weakening economic growth. This is worrying given the widely held assumption that Asia can withstand the financial market and real economy turbulence that is so violently affecting the West right now.
Conclusion
No doubt, many will argue that I am exaggerating things that are of little real consequence. Diplomats will say that all these issues can all be resolved with time and negotiation, others will argue that these issues will subside when President Bush leaves office, some believe that there is bound to be a shift of power in a more multilateral direction and these issues arise from and will be resolved by that fact. On the economic side most will be preoccupied with the threat of deflation rather than the risk of inflation. However, whatever one may think of these individual issues, the current vulnerability of the financial markets only increases the risk that one or several of these developments will give rise to a black swan at the worst possible time.
RE: LaRouche - moeenyaseen - 09-22-2007
BANK RUN OR STEALTH BAILOUT :
GLOBAL CREDIT CRISIS HITS MAIN STREET
Dr. Ellen Brown
http://globalresearch.ca/index.php?context=va&aid=6844
In July 2007, the global credit crisis hit Wall Street. In September 2007, it hit Main Street, in what has been called the worst bank run since the 1970s.
Northern Rock, Britain's fifth-largest mortgage lender, was besieged at branches across the country, as thousands of worried customers queued for hours in hopes of getting their money out before the doors closed. Bank officials feared that as much as half the bank's deposit base could be withdrawn before the run was over. By September 14, 2007, Northern Rock's share price had dropped 30 percent, and on September 17 it dropped another 35 percent. According to one official, "If the run on deposits looks out of control, Northern Rock would effectively be nationalised and put into administration so it could be wound down."1i The bloodletting slowed after the government issued an emergency pledge to Northern Rock's worried savers that their money was safe, but analysts said the credit crisis was here to stay.
As BBC News explained the problem: "Northern Rock has struggled since money markets seized up over the summer. The bank is not short of assets, but they are tied up in loans to home owners. Because of the global credit crunch it has found it difficult to borrow the cash to run its day-to-day operations."2 The problem reflects a fundamental flaw in the modern banking system: it is built on a confidence trick. The same money that is supposedly being "saved" by depositors is also being "lent" many times over in the form of long-term mortgage commitments. As the late Murray Rothbard observed:
[Depositors] think of their checking account as equivalent to a warehouse receipt. If they put a chair in a warehouse before going on a trip, they expect to get the chair back whenever they present the receipt. Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain't there.
An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently . . . Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term "fractional-reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem.3
While Northern Rock was being stampeded by angry depositors, Countrywide Financial, the largest U.S. mortgage lender, managed to fend off bankruptcy, at least for the time being, with $12 billion in new-found financing. Financing found where? It is an interesting question. Peter Ralter observed in LeMetropoleCafe.com on September 16, 2007:
[W]hy is it that the $2 billion investment by Bank of America in Countrywide was front page news in August while the company's new $12 billion financing is buried on the business pages? Isn't it funny, too, that Countrywide didn't specify who is providing all that money, saying only that it comes from "new or existing credit lines." There was no comment, either, on the credit or interest terms—this for $12 billion! It makes me suspect that Countrywide's new angel isn't the B of A, but rather the B of B; the Bank of Bernanke.4
John Hoefle, writing in EIR in 2002, observed, "Major financial crises are never announced in the newspapers but are instead treated as a form of national security secret, so that various bailouts and market-manipulation activities can be performed behind the scenes." At least that is true in the United States, where bailouts are primarily conducted by the Federal Reserve, a private corporation answerable to the private banks that are its real owners. In England, by contrast, the Bank of England is actually owned by the British government. Hoefle argues that Congress delegated the money-creating power to the private Federal Reserve in violation of its Constitutional mandate, making the Fed's activities illegal.5
Murray Rothbard would no doubt have agreed. Before 1913, he observed, whenever a bank's depositors demanded more cash than the bank had on hand, the bank would have had to close its doors. The Federal Reserve Act of 1913 shored up the system by allowing troubled banks to "borrow" from the Federal Reserve, which created the money essentially by counterfeiting it on its books. By rights, said Rothbard, the banks should be put into bankruptcy and the bankers should be jailed as embezzlers, just as they would have been before they succeeded in getting laws passed that protected their swindling. But instead, banks considered "too big to fail" are routinely bailed out from their folly, in a form of social welfare reserved only for the rich. The result is "moral hazard": profligate risk-takers are rewarded and encouraged to take even more risks.
At one time, bank bailouts were done openly by the Federal Deposit Insurance Corporation (FDIC) under the auspices of Congress, with the burden falling on more solvent banks or the taxpayers; but that solution cost votes and was politically unpopular. The failure of President George Bush Sr. to win a second term in office was blamed in part on the Long Term Capital Management bailout that was engineered during his first term. In a 2005 statement arguing against the imposition of new "insurance premiums" on the banks, Congressman Ron Paul said:
These "premiums," which are actually taxes, are the primary source of funds for the Deposit Insurance Fund. This fund is used to bail out banks that experience difficulties meeting commitments to their depositors. Thus, the deposit insurance system transfers liability for poor management decisions from those who made the decisions to their competitors. This system punishes those financial institutions that follow sound practices, as they are forced to absorb the losses of their competitors. This also compounds the moral hazard problem created whenever government socializes business losses. In the event of a severe banking crisis, Congress likely will transfer funds from general revenues into the Deposit Insurance Fund, which would make all taxpayers liable for the mistakes of a few.6
The Federal Reserve's new approach to rescuing failed banks is evidently to avoid political objection by doing it behind the scenes, using fiat money created for the purpose. Rather than taxing other banks or the taxpayers at large, the Federal Reserve imposes an indirect tax in the form of inflation. Like other central banks, the Federal Reserve is a "lender of last resort," which means it can create money out of nothing with accounting entries.7 Adding new money to the economy without adding new goods or services, however, is not without cost. It shifts the cost to the public, driving prices up, taxing us at the grocery store and the pump. Meanwhile, errant bank managers are rewarded by being allowed to keep their winnings and continue in their risky ventures.
The system is clearly flawed, but what is the alternative - thousands of people queuing to get their money back as in England? That was the nineteenth century solution. In an article titled "Anatomy of a Bank Run", Murray Rothbard wrote:
[I]t was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation. But now bank runs - at least for the overwhelming majority of banks under federal deposit insurance - are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation. Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.8
The obvious problem with that solution is that it would penalize the prudent savers who wound up losing their savings, and the banks' shareholders who invested under different rules. There is really no good solution under the current debt-based banking system, because it is basically a pyramid scheme. Collapse is built into the system, because there is never enough money to meet the cumulative debt burden. Virtually the entire money supply originates as a debt to private banks; and since banks create the principal but not the interest necessary to pay back their loans, new loans must continually be taken out to come up with this interest. When no more borrowers can be found, the pyramid must and will collapse. It will collapse either in those painful increments called the recessions and depressions of the "business cycle," or all at once.
(See E. Brown, "Market Meltdown: The End of a 300 Year Ponzi Scheme,"
September 3, 2007, http://www.webofdebt.com/articles.)
The only way to get off this endless wheel of inflation and depression is to change the way money is created. Rather than coming into existence as an interest-bearing debt to private banks, our national currency needs to be issued as "legal tender" by the people themselves, following the innovative system of debt-free money devised by the American colonists before the private central banking scheme was imposed on the world.
(For more on this, see E. Brown,"Captured by the Debt Spider,"
http://www.webofdebt.com/excerpts/introduction.php.)
NOTES
1 Iain Dey, et al., "Angry Savers Force Northern Rock to Be Sold," Telegraph.Co.Uk (September 16, 2007).
2 "Fears Over Rock’s Online Accounts," BBC News, http://newsvote.bbc.co.uk (September 16, 2007).
3 Murray Rothbard, "Fractional Reserve Banking," The Freeman (October 1995), reprinted on www.LewRockwell.com.
4 Peter Ralter, "News of the Day," LeMetropoleCafe.com (September 16, 2007).
5 John Hoefle, "The Federal Reserve Vs. The United States," Executive Intelligence Review, April 12, 2002.
6 Ron Paul, "Reject Taxpayer Bank Bailouts," LewRockwell.com (May 4, 2005).
7 James Barth, et al., "Financial Crises and the Role of the Lender of Last Resort," Federal Reserve of Atlanta Economic Review (January 1984), pages 58-67. See E. Brown, "Financial Meltdown," September 3, 2007, http://www.webofdebt/articles.com .
8 Murray Rothbard, "Anatomy of the Bank Run," Free Market (September 1985), reprinted on www.LewRockwell.com.
LaRouche - moeenyaseen - 09-23-2007
FAILING BANKS,TOXIC BONDS AND MORTGAGE LAUNDERING
Mike Whitney
http://www.informationclearinghouse.info/article18410.htm
“The entire global financial structure is becoming uncontrollable in crucial ways that its nominal leaders never expected, and instability is its hallmark. The scope and operation of international financial markets, their “architecture”, as establishment experts describe it, has evolved haphazardly and its regulation is inefficient — indeed, almost nonexistent. Banks do not understand the chain of exposure and who owns what: senior financial regulators and bankers now admit this.” Gabriel Kolko “An Economy of Buccaneers and Fantacists”
“Ben Bernanke, the Federal Reserve chairman, is like a man who, after spending a lifetime playing with train sets, finally gets to drive the real thing - only to find it hurtling towards the edge of a cliff.” U.K. Observer
By now, you’ve probably seen the photos of the angry customers queued up outside of Northern Rock Bank waiting to withdraw their money. http://news.bbc.co.uk/2/hi/uk_news/6998507.stm The pictures are headline news in the UK but have been stuck on the back pages of US newspapers. The reason for this is obvious---the same Force 5 economic-hurricane that just touched ground in Great Britain is headed for America and gaining strength on the way.
This is what a good old fashioned bank run looks like---the likes of which we haven’t seen since the Great Depression. And, just like 1929, the bank owners are frantically trying to calm down their customers by reassuring them that their money is safe. But—human nature being what it is---people are not so easily pacified when they think their hard-earned savings are at risk. The bottom line is this: The people want their money---not excuses.
But Northern Rock doesn’t have their money and, surprisingly, it is not because the bank was dabbling in risky subprime loans. Rather, NR had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the US. In other words, they depended on wholesale financing of their mortgages from eager investors in the market, instead of the traditional method of maintaining sufficient capital to back up the loans on their books.
It seemed like a nifty idea at the time and most of the big banks in the US were doing the same thing. It was a great way to avoid bothersome reserve requirements and the loan origination fees were profitable as well. Northern Rock’s business soared. Now they carry a mortgage book totaling $200 billion dollars.
$200 billion! So why can’t they pay out a paltry $4 or $5 billion to their customers without a government bailout?
It’s because they don’t have the reserves---and, because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”---which means they have no discernible market value. They might as well have been “marked to fantasy”---it amounts to the same thing. Investors don’t want them. So Northern Rock is stuck with a $200 billion albatross that’s dragging them under.
A more powerful fiscal-tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business-model as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the UK right now. The only difference is that the US economy is already listing from the downturn in housing and an increasingly-jittery stock market.
That’s why Treasury Secretary Henry Paulson rushed off to England yesterday to see if he could figure out a way to keep the contagion from spreading.
Good luck, Hank.
It would interesting to know if Paulson still believes that “This is far and away the strongest global economy I’ve seen in my business lifetime”, or if he has adjusted his thinking as troubles in subprime, commercial paper, private equity, and credit continue to mount?
SECURITIZATION: Is it really just Mortgage laundering?
For weeks we’ve been saying that the banks are in trouble and do not have the reserves to cover their losses. This notion was originally pooh-poohed by nearly everyone. But it’s becoming more and more apparent that it is true. We expect to see many bank failures in the months to come. Prepare yourself. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.
“Structured finance” is touted as the “new architecture of financial markets”. It is designed to distribute capital more efficiently by allowing other market participants to fill a role which used to be left exclusively to the banks. In practice, however, structured finance is a hoax; and undoubtedly the most expensive hoax of all time. The transformation of liabilities (dodgy mortgage loans) into assets (securities) through the magic of securitization is the biggest boondoggle of all time. It is the moral equivalent of mortgage laundering. The system relies on the variable support of investors to provide the funding for pools of mortgage loans that are chopped-up into tranches and duct-taped together as CDOs (collateralized debt obligations). Its madness; but no one seemed to realize how crazy it was until Bear Stearns blew up and they couldn’t find bidders for their remaining CDOs. It’s been downhill ever since.
Structured Finance: The new market plumbing springs a leak
The problems with structured finance are not simply the result of shabby lending and low interest rates. The model itself is defective.
John R. Ing provides a great synopsis of structured finance in his article, “Gold: The Collapse of the Vanities”:
“The origin of the debt crisis lies with the evolution of America's financial markets using financial engineering and leverage to finance the credit expansion…. Financial institutions created a Frankenstein with the change from simply lending money and taking fees to securitizing and selling trillions of loans in every market from Iowa to Germany. Credit risk was replaced by the "slicing and dicing" of risk, enabling the banks to act as principals, spreading that risk among various financial institutions….. Securitization allowed a vast array of long term liabilities once parked away with collateral to be resold along side more traditional forms of short term assets. Wall Street created an illusion that risk was somehow disseminated among the masses. Private equity too used piles of this debt to launch ever bigger buyouts. And, awash in liquidity and very sophisticated algorithms, investment bankers found willing hedge funds around the world seeking higher yielding assets. Risk was piled upon risk. We believe that the subprime crisis is not a "one off" event but the beginning of a significant sea change in the modern-day financial markets.” (John R. Ing “Gold: The Collapse of the Vanities”)
The investment sharks who conjured up “structured finance” knew exactly what they were doing. They were hyping dog-pelts as fine mink and selling off them to anyone foolish enough to buy them. They were in bed with the ratings agencies----off-loading trillions of dollars of garbage-bonds to pension funds, hedge funds, insurance companies and foreign financial giants. It’s a swindle of epic proportions and it never would have taken place in a sufficiently regulated market.
MAKING THE CASE FOR ECONOMIC PREEMPTION
The Bush administration needs to come to grips with the “systemic” problems of the current market-model and act fast. When crowds of angry people are huddled outside the banks to get their money; the system is in real peril. Credibility must be restored quickly. This is no time for Bush’s “free market” nostrums or Paulson’s soothing bromides (We think the problem is “contained”) or Bernanke’s feeble rate cuts. This requires real leadership.
The first thing to do is take charge----alert the public to what is going on and get Congress to work on substantive changes to the system. Concrete steps must be taken to build public confidence in the markets. And there must be a presidential announcement that all bank deposits will be fully covered by government insurance.
The lights should be blinking red at all the related government agencies including the Fed, the SEC, and the Treasury Dept. They need to get ahead of the curve and stop thinking they can minimize a potential catastrophe with their usual public relations mumbo jumbo.
U.S. BANKS: Waiting for the storm-surge
Last week, an article appeared in the Wall Street Journal, “Banks Flock to Discount Window”. (9-14-07) The article chronicled the sudden up-tick in borrowing by the struggling banks via the Fed’s emergency bailout program, the “Discount Window”.
WSJ:
“Discount borrowing under the Fed’s primary credit program for banks surged to more than $7.1 billion outstanding as of Wednesday, up from $1 billion a week before.”
Again we see the same pattern developing; the banks borrowing money from the Fed because they cannot meet their minimum reserve requirements.
WSJ: “The Fed in its weekly release said average daily borrowing through Wednesday rose to $2.93 billion.”
$3 billion.
Traditionally, the “Discount Window” has only been used by banks in distress, but the Fed is trying to convince people that it’s really not a sign of distress at all. It’s “a sign of strength”.
Baloney. Banks don’t borrow $3 billion unless they need it. They don’t have the reserves. Period.
The real condition of the banks will be revealed sometime in the next few weeks when they report earnings and account for their massive losses in “down-graded” CDOs and MBSs.
Market analyst, Jon Markman offered these words of advice to the financial giants:
“Before they (the financial industry) take down the entire market this fall by shocking Wall Street with unexpected losses, I suggest that they brush aside their attorneys and media handlers and come clean. They need to tell the world about the reality of their home lending and loan securitization teams' failures of the past four years -- and the truth about the toxic paper that they've flushed into the world economic system, or stuffed into Enron-like off-balance sheet entities -- before the markets make them walk the plank.”….” Since government regulators and Congress have flinched from their responsibility to administer "tough love" with rules forcing financial institutions to detail the creation, securitization and disposition of every ill-conceived subprime loan, off-balance sheet "structured investment vehicle," secretive money-market "conduit" and commercial-paper-financing vehicle, the market will do it with a vengeance” (Jon Markman, “What the big banks aren't telling you – yet”)
Good advice. We’ll have to wait and see if anyone is listening. The investment banks may be waiting until Tuesday hoping that Fed-chief Ken Bernanke announces a cut to the Fed’s fund rate that could send the stock market roaring back into positive territory.
But interest rate cuts do not address the underlying problems of insolvency among homeowners, mortgage lenders, hedge funds and (potentially) banks. As market-analyst John R. Ing said, “A cut in rates will not solve the problem. This crisis was caused by excess liquidity and a deterioration of credit standards….A cut in the Fed Fund rate is simply heroin for credit junkies.”
Well put.
The cuts merely add more cheap credit to a market that that is already over-inflated from the ocean of liquidity produced by former-Fed chief Alan Greenspan. The housing bubble and the massive credit bubble are largely the result of Greenspan’s misguided monetary policies. (For which he now blames Bush!)The Fed’s job is to ensure price stability and the smooth operation of the markets—not to reflate equity bubbles and reward over-exposed market participants.
It’s better to let cash-strapped borrowers default than slash interest rates and trigger a global run on the dollar. Financial analyst Richard Bove says that lower interest rates will do nothing to bring money back into the markets. Instead, lower interest rates will send the dollar into a tailspin and wreak havoc on the job market.
“There is no liquidity problem, but a serious crisis of confidence," Bove said. "In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation."
"It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value," he said. "By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets." CNN Money)
Bove is right. The people and businesses that cannot repay their debts should be allowed to fail. Further weakening the dollar only adds to our collective risk by feeding inflation and increasing the likelihood of capital flight from American markets. If that happens; we’re toast.
SPIRALLING INFLATION
Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.
Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6% in the most recent quarter.” (WSJ)
That’s 18.4% per year---and yet, Bernanke is still considering cutting interest rates and further fueling inflation?!?
It’s crazy!
What about the American worker whose wages have stagnated for the last 6 years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing. Inflation is just a hidden tax progressively eroding his standard of living. .
Bernanke’s rate cut may be boon to the “cheap credit” addicts on Wall Street, but it’s the death-knell for the average worker who is already struggling just to make ends meet.
No bailouts. No rate cuts. Let the banks and hedge funds sink or swim like everyone else. The message to Bernanke is simple: “It’s time to take away the punch bowl”.
The inflation in the stock market is just as evident as it is in the price of gold, oil or real estate. Economist and author Henry Liu demonstrates this in his article “Liquidity Boom and the Looming Crisis”:
“The conventional value paradigm is unable to explain why the market capitalization of all US stocks grew from $5.3 trillion at the end of 1994 to $17.7 trillion at the end of 1999 to $35 trillion at the end of 2006, generating a geometric increase in price earnings ratios and the like. Liquidity analysis provides a ready answer.” (Asia Times)
“Market capitalization zoomed from $5.3 trillion to $35 trillion in 12 years?!?
Why?
Was it due to growth in market-share, business expansion or productivity?
No. It was because there were more dollars chasing the same number of securities; hence, inflation.
If that is the case, then we can expect the stock market to fall sharply before it reaches a sustainable level. As Liu says, “It is not possible to preserve the abnormal market prices of assets driven up by a liquidity boom if normal liquidity is to be restored.” Eventually, stock prices will return to a normal range.
Bernanke should not even be contemplating a rate cut. The market needs more discipline not less. And workers need a stable dollar so they can live within their means. Besides, another rate cut would further jeopardize the greenback’s position as the world’s “reserve currency”. That could destabilize the global economy by rapidly unwinding the US massive current account deficit.
The International Herald Tribune summed up the dollar’s problems in a recent article,” Dollar's Retreat Raises Fear of Collapse”:
“Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result.
The latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy.
This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar.”
Other experts and currency traders have expressed similar sentiments. The dollar is at historic lows in relation to the basket of currencies against which it is weighted. Bernanke can’t take a chance that his effort to rescue the markets will cause a sudden sell-off of the dollar.
The Fed chief’s hands are tied. Bernanke simply doesn’t have the tools to fix the problems before him. Insolvency cannot be fixed with liquidity injections nor can the deeply-rooted “systemic” problems in “structured finance” be corrected by slashing interest rates. These require fiscal solutions, congressional involvement, and fundamental economic policy changes.
Rate cuts won’t help to rekindle the spending spree in the housing market either. That charade is over. The banks have already tightened lending standards and inventory is larger than anytime since they began keeping records. The slowdown in housing is irreversible as is the steady decline in real estate prices. Trillions in market capitalization will be wiped out. (thanks to Greenspan) Home equity is already shrinking as is consumer spending connected to home-equity withdrawals.
The bubble has popped regardless of what Bernanke does. The same is true in the clogged Commercial Paper market where hundreds of billions of dollars in short-term debt is due to expire in the next few weeks. The banks and corporate borrowers are expected to struggle to refinance their debts but, of course, much of the debt will not roll over. There will be substantial losses and, very likely, more defaults.
Bernanke can either be a statesman---and tell the country the truth about our dysfunctional financial system which is breaking down from years of corruption, deregulation and manipulation---or he can take the cowards-route and “buy some time” by flooding the system with liquidity, stimulating more destructive consumerism, and condemning the nation to an avoidable cycle of double-digit inflation.
We’ll know his decision on Tuesday.
RE: LaRouche - moeenyaseen - 09-23-2007
FIRST RUN ON A BRITISH BANK SINCE 1866
http://larouchepac.com/news/2007/09/19/first-run-british-bank-1866.html
"These are historic times," says Martin Wolf in an oped in today's Financial Times, amidst general debate in that paper as to whether the Bank of England should not have been more liberal in its refinancing of mortgage-backed debt, supposedly to avoid such bankruptcies. "Financial panic has hit both the public and the politicians of the U.K. over the past week, to deliver two remarkable results," says Wolf - "the first run on a British bank since the collapse of Overend and Gurney in 1866; and the transformation of bank deposits into public debt at the stroke of a pen."
Wolf claims it was necessary for the Bank of England to guarantee the deposits of Northern Rock, citing the danger of "contagion" as a main reason. "On Monday [Sept. 17], the shares of institutions dedicated to lending for house purchases collapsed. Northern Rock may not have been a systemically important institution. But its implosion became a systemically important event." The conclusion however is worse insanity, i.e. that in the future, "normal insolvency procedures should not apply to banks."