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THE GLOBAL FINANCIAL MELTDOWN
THE EUROPEAN STABILIZATION MECHANISM OR HOW GOLDMAN SACHS CAPTURED EUROPE
Ellen Brown
http://www.globalresearch.ca/index.php?context=va&aid=30403
Web of Debt

The Goldman Sachs coup that failed in America has nearly succeeded in Europe—a permanent, irrevocable, unchallengeable bailout for the banks underwritten by the taxpayers.

In September 2008, Henry Paulson, former CEO of Goldman Sachs, managed to extort a $700 billion bank bailout from Congress. But to pull it off, he had to fall on his knees and threaten the collapse of the entire global financial system and the imposition of martial law; and the bailout was a one-time affair. Paulson’s plea for a permanent bailout fund—the Troubled Asset Relief Program or TARP—was opposed by Congress and ultimately rejected.

By December 2011, European Central Bank president Mario Draghi, former vice president of Goldman Sachs Europe, was able to approve a 500 billion Euro bailout for European banks without asking anyone’s permission. And in January 2012, a permanent rescue funding program called the European Stability Mechanism (ESM) was passed in the dead of night with barely even a mention in the press. The ESM imposes an open-ended debt on EU member governments, putting taxpayers on the hook for whatever the ESM’s Eurocrat overseers demand.

The bankers’ coup has triumphed in Europe seemingly without a fight. The ESM is cheered by Eurozone governments, their creditors, and “the market” alike, because it means investors will keep buying sovereign debt. All is sacrificed to the demands of the creditors, because where else can the money be had to float the crippling debts of the Eurozone governments?

There is another alternative to debt slavery to the banks. But first, a closer look at the nefarious underbelly of the ESM and Goldman’s silent takeover of the ECB . . . .

The Dark Side of the ESM

The ESM is a permanent rescue facility slated to replace the temporary European Financial Stability Facility and European Financial Stabilization Mechanism as soon as Member States representing 90% of the capital commitments have ratified it, something that is expected to happen in July 2012. A December 2011 youtube video titled “The shocking truth of the pending EU collapse!”, originally posted in German, gives such a revealing look at the ESM that it is worth quoting here at length. It states:

The EU is planning a new treaty called the European Stability Mechanism, or ESM: a treaty of debt. . . . The authorized capital stock shall be 700 billion euros. Question: why 700 billion? [Probable answer: it simply mimicked the $700 billion the U.S. Congress bought into in 2008.] . . . .

[Article 9]: “. . . ESM Members hereby irrevocably and unconditionally undertake to pay on demand any capital call made on them . . . within seven days of receipt of such demand.” . . . If the ESM needs money, we have seven days to pay. . . . But what does “irrevocably and unconditionally” mean? What if we have a new parliament, one that does not want to transfer money to the ESM? . . . .

[Article 10]: “The Board of Governors may decide to change the authorized capital and amend Article 8 . . . accordingly.” Question: . . . 700 billion is just the beginning? The ESM can stock up the fund as much as it wants to, any time it wants to? And we would then be required under Article 9 to irrevocably and unconditionally pay up?

[Article 27, lines 2-3]: “The ESM, its property, funding, and assets . . . shall enjoy immunity from every form of judicial process . . . .” Question: So the ESM program can sue us, but we can’t challenge it in court?

[Article 27, line 4]: “The property, funding and assets of the ESM shall . . . be immune from search, requisition, confiscation, expropriation, or any other form of seizure, taking or foreclosure by executive, judicial, administrative or legislative action.” Question: . . . [T]his means that neither our governments, nor our legislatures, nor any of our democratic laws have any effect on the ESM organization? That’s a pretty powerful treaty!

[Article 30]: “Governors, alternate Governors, Directors, alternate Directors, the Managing Director and staff members shall be immune from legal process with respect to acts performed by them . . . and shall enjoy inviolability in respect of their official papers and documents.” Question: So anyone involved in the ESM is off the hook? They can’t be held accountable for anything? . . . The treaty establishes a new intergovernmental organization to which we are required to transfer unlimited assets within seven days if it so requests, an organization that can sue us but is immune from all forms of prosecution and whose managers enjoy the same immunity. There are no independent reviewers and no existing laws apply? Governments cannot take action against it? Europe’s national budgets in the hands of one single unelected intergovernmental organization? Is that the future of Europe? Is that the new EU – a Europe devoid of sovereign democracies?

The Goldman Squid Captures the ECB

Last November, without fanfare and barely noticed in the press, former Goldman exec Mario Draghi replaced Jean-Claude Trichet as head of the ECB. Draghi wasted no time doing for the banks what the ECB has refused to do for its member governments—lavish money on them at very cheap rates. French blogger Simon Thorpe reports:

On the 21st of December, the ECB “lent” 489 billion euros to European Banks at the extremely generous rate of just 1% over 3 years. I say “lent”, but in reality, they just ran the printing presses. The ECB doesn’t have the money to lend. It’s Quantitative Easing again.

The money was gobbled up virtually instantaneously by a total of 523 banks. It’s complete madness. The ECB hopes that the banks will do something useful with it – like lending the money to the Greeks, who are currently paying 18% to the bond markets to get money. But there are absolutely no strings attached. If the banks decide to pay bonuses with the money, that’s fine. Or they might just shift all the money to tax havens.

At 18% interest, debt doubles in just four years. It is this onerous interest burden, not the debt itself, that is crippling Greece and other debtor nations. Thorpe proposes the obvious solution:

Why not lend the money to the Greek government directly? Or to the Portuguese government, currently having to borrow money at 11.9%? Or the Hungarian government, currently paying 8.53%. Or the Irish government, currently paying 8.51%? Or the Italian government, who are having to pay 7.06%?

The stock objection to that alternative is that Article 123 of the Lisbon Treaty prevents the ECB from lending to governments. But Thorpe reasons:

My understanding is that Article 123 is there to prevent elected governments from abusing Central Banks by ordering them to print money to finance excessive spending. That, we are told, is why the ECB has to be independent from governments. OK. But what we have now is a million times worse. The ECB is now completely in the hands of the banking sector. “We want half a billion of really cheap money!!” they say. OK, no problem. Mario is here to fix that. And no need to consult anyone. By the time the ECB makes the announcement, the money has already disappeared.

At least if the ECB was working under the supervision of elected governments, we would have some influence when we elect those governments. But the bunch that now has their grubby hands on the instruments of power are now totally out of control.

Goldman Sachs and the financial technocrats have taken over the European ship. Democracy has gone out the window, all in the name of keeping the central bank independent from the “abuses” of government. Yet the government is the people—or it should be. A democratically elected government represents the people. Europeans are being hoodwinked into relinquishing their cherished democracy to a rogue band of financial pirates, and the rest of the world is not far behind.

Rather than ratifying the draconian ESM treaty, Europeans would be better advised to reverse article 123 of the Lisbon treaty. Then the ECB could issue credit directly to its member governments. Alternatively, Eurozone governments could re-establish their economic sovereignty by reviving their publicly-owned central banks and using them to issue the credit of the nation for the benefit of the nation, effectively interest-free. This is not a new idea but has been used historically to very good effect, e.g. in Australia through the Commonwealth Bank of Australia and in Canada through the Bank of Canada.

Today the issuance of money and credit has become the private right of vampire rentiers, who are using it to squeeze the lifeblood out of economies. This right needs to be returned to sovereign governments. Credit should be a public utility, dispensed and managed for the benefit of the people.

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DEMOCRACIES CAN STOP PREDATORY FINANCIERS -ARGENTINA AND BOLIVIA ARE SHOWING HOW

Richard Drayton - guardian.co.uk, Wednesday 2 May 2012

Kirchner's and Morales's renationalisation of energy companies has been seen as mere populist demagoguery. But it was a response to toxic speculation


While Europe forces yet more privatisation on Greece and Spain under the Orwellian name of "liberalisation", Latin America in 2012 is challenging the orthodox view that private always is better than public. On 1 May Bolivia seized the Spanish company that controlled its electricity grid, just after Argentina, on 14 April, effectively renationalised YPF, its main oil company, expropriating 51% owned by Spanish firm Repsol. Both critics and supporters have understood Cristina Fernández Kirchner's and Evo Morales's actions in terms of energy nationalism and populist demagoguery. But we should see both instead as responses to the failures of privatisation and its toxic connection to complex forms of financial speculation.

Bolivia and Argentina have both shown that private firms were investing less, not more, than their public predecessors were. Morales noted that only $81m had been invested in Bolivia's electricity grid since privatisation in 1997. YPF in the 1990s drilled three times as many exploratory wells in Argentina as it did in the 2000s under Repsol. Argentina's oil and gas output was falling, and new reserves were not being found to replace exploited deposits.


In both cases Spanish multinationals had prioritised the repatriation of dividends over investment. This indirect form of asset stripping was driven by the priorities of bankers in London and New York. Behind the Repsol-YPF affair, in particular, was something very close to the sick capitalism that caused the 2008 crisis: high-yield, high-risk assets, sliced and diced via complex derivatives.


Repsol, like all oil companies, has a double life. On one hand it makes money through producing, transporting, refining, and marketing oil and gas. On the other, it is a proxy for gambling on oil as a commodity and, through derivatives, for speculating on that speculation. Investment banks are similarly divided in their priorities. Sometimes they invest, though more usually they get rich by carrying money they borrow at low interest to places where they get higher yields.


While high yields almost always mean higher risks, there is a fiction of control over these risks through derivatives – in particular insurance contracts called "swaps".


In the murky world of derivatives, however, the same bank group may indirectly be guaranteeing its own risks, and the trade in risks becomes bigger than the real investment. The whole pyramid stands so long as there is some real-world thing that pays, in theory, a high and steady yield – whether it is subprime mortgages, or a high rent from an oil asset.


Spain privatised Repsol between 1989 and 1997, just at the time when "deregulation" in the US and Britain turned banks from investors into high-rolling gamblers. Repsol grew from a tiny Spanish refining and marketing "downstream" company into the world's 15th largest petroleum company, with operations on every continent. It specialised in deals where Anglo-American companies fear to tread, such as Iran, offshore gas in Venezuela under Chávez, and offshore oil in Cuba, enjoying bumps in its share price and valuation as it nominally acquired access to reserves.


In 1999, Repsol bought its most important international asset, YPF. Over the past decade the main value of YPF as far as Repsol was concerned was not the oil or gas it produced and sold, but its value as collateral on the basis of which debt could be contracted.


YPF, under Repsol, paid extraordinarily high dividends to its foreign owners – some 9% in 2011 – which it paid for by borrowing. So while YPF debts soared and Argentina's oil went undrilled, Repsol both banked profits and "invested" Argentinian capital elsewhere in its corporate structure. As the rating agency Standard & Poor's commented on 19 April: "Repsol does not guarantee any of the debt at YPF." Madrid got the juice, but the liabilities all fell on Buenos Aires.


High dividends allowed Repsol also to cash out of 25% of its YPF holding by selling it on to the Eshkenazi family, with the capital coming from Credit Suisse, Goldman Sachs, BNP Paribas, Standard Chartered and Citibank, with banks then making money buying and selling derivative contracts on Repsol and YPF debt.


Spain has threatened Argentina with retaliation, quickly followed by the EU, Britain, and the US. The anger in Madrid and in Brussels is of an old-fashioned kind – Argentina is both refusing to hand over its present and future pocket money to Spain and reducing Europe's global assets.

But the fury on the pages of the Financial Times and the Wall Street Journal is not ultimately about oil or profits, nor even about the bad precedent it might set for future expropriations elsewhere. Rather, it is provoked by Argentina having interrupted a chain of securitisation anchored in the real world by its oil at one end, but with investment banks in London and New York, the holders of swap and other derivative liabilities on Repsol and YPF debt, at the other.


In nationalising, Argentina showed that a democratic government can stop predatory financiers. And it has not scared away new investors: already Talisman, ConocoPhillips, Chevron, and Chinese companies are seeking access to Argentina's shale oil reserves, the third largest in the world.
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PREDATORY CAPITALISM FAILED
Stephen Lendman
http://www.globalresearch.ca/index.php?context=va&aid=30763

Independent observers knew it long ago. Today's global economic crisis provides added confirmation. In 2008, a staunch champion of the system expressed second thoughts. More on him below.

An ideology based on inequality, injustice, exploitation, militarism, and imperial wars eventually self-destructs or gets pushed. Growing evidence in America and Europe show systemic unaddressed problems too grave to ignore. They remain so despite millions without jobs, savings, homes or futures.

Imagine nations governed by leaders letting crisis conditions fester. Imagine voters reelecting them despite demanding change. OWS aside, one day perhaps rage will replace apathy in America. The latest jobs report alone provides incentive enough to try and then some.

On May 4, the Labor Department reported 115,000 new jobs. It way overstated the true number. Official figures belie the dire state of things. At most, two-thirds the headline total were created. Even that's in doubt.

Most were low-pay, part-time, or temp positions with few or no benefits. Decades ago, workers would have avoided them. Today, there's no choice.

The report also showed economic decline. Expect much worse ahead. In 2008, Main Street Americans experienced Depression. It rages today. Poverty's at record levels. Real unemployment approaches 1930s numbers. Dire conditions are worsening.

Announced job cuts are increasing. Hiring plans are down. Compared to year ago levels, they're off 80%. Income is stagnant for those lucky to have work. The private diffusion index measuring growth fell sharply month-over-month.

The unemployment rate decline reflects discouraged workers dropping out. They want jobs but can't find them. The Labor Department considers them non-persons. They're not counted to make official figures look better.

Moreover, the broad based Household Survey showed employment dropping 169,000. It was the second consecutive monthly decline. The Labor Department uses a "population and payroll concept adjusted" calculation. Doing so tries to compare monthly payroll and household figures.

The measure plunged 495,000 in April after dropping 418,000 in March. The calculation represented the largest back-to-back decline since late 2009.

At 63.6%, America's labor force hit its lowest level since September 1981. Since then, population totals grew from 229 million to about 312 million today. The state of the nation today reflects lots of people facing few jobs, and no policy to create them.

The employment/population ratio stands at 58.4%. Alone, it represents a shocking testimony to failure. So do other data. Long-term unemployment remains near record levels. Credit deleveraging continues. Housing's in its worst ever depression. Prices keep falling. Inventories of unsold homes are huge. Foreclosures are at epidemic levels.

State and local downsizing continues. Personal income suffers. Conditions are bad and worsening.

On May 4, Pimco's Mohamed El-Erian headlined his Financial Times article "Confirmed: America's jobs crisis," saying:

"Friday’s US jobs data sound a warning that should be heard well beyond economists and market watchers."

Americans with jobs have poor ones. Wage growth is stagnant. Purchasing power can't keep up with inflation. For ordinary Americans, secular income headwinds blow at gale force strength.

Crisis conditions today make "a mockery of the published unemployment rate of 8.1 per cent....The economic implications are clear." At a time, Europe's recession deepens, America's declining.

Risks are increasing. A "potential (austerity caused) year-end 'fiscal cliff' (may) suck out some 4 per cent of GDP in purchasing power, and do so in a disorderly fashion."

Instead of addressing crisis conditions responsibly, political Washington campaigns for reelection, and plans huge domestic budget cuts when stimulus help is needed.

Main Street Americans are pushed to the edge. Potential "social consequences" suggest "the possibility....of a lost generation."

Unemployed teenagers "face the risk of going from being unemployed to becoming unemployable." Today's reality is bleak. It reflects "a multi-faceted unemployment crisis that politicians, both in America and Europe, are failing to comprehend, unite around, and respond to."

"I worry greatly that facts on the ground will unfortunately warrant future analyses to be even more disheartening."

Alan Greenspan's Too Late to Matter Mea Culpa

As Fed chairman for nearly two decades (1987 - 2006), he engineered today's crisis. Some call him the Maestro of Misery for good reason. Those benefitting most sing his praises. In 2008, he had second thoughts.

A longtime Ayn Rand disciple, he strayed noticeably in October 2008 House testimony. Her libertarian views influenced his. She championed regulatory free markets. So did Greenspan. He practiced what she preached.

Perhaps House Oversight and Government Reform Committee members couldn't believe their ears. He acknowledged his worldview failure, saying:

"You know, that's precisely the reason I was shocked, because I have been going for 40 yeas or more with very considerable evidence that it was working exceptionally well."

While trying to have it both ways, he admitted his faith in regulatory free markets was shaken, saying:

"I made a mistake in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms."

"The Federal Reserve had as good an economic organization as exists. If all those extraordinarily capable people were unable to foresee the development of this critical problem...we have to ask ourselves: Why is that? And the answer is that we're not smart enough as people. We just cannot see events that far in advance."

In his book "Secrets of the Temple: How the Federal Reserve Runs the Country" William Grieder called Greenspan one of "the most duplicitous figures to serve in modern American government."

He used "his exalted status as economic wizard (to) regularly corrupt the political dialogue by sowing outrageously false impressions among gullible members of Congress and adoring financial reporters."

His ideology was hokum. Somehow he managed a Columbia doctorate without its dissertation requirement. His economic consulting firm flopped. It faced liquidation. He closed shop to join the Fed after serving earlier in the Reagan, Nixon and Ford administrations.

His background in government got him his job. His inability to forecast made him a perfect Fed choice. So did his reliability to serve monied interests over populist ones.

Saying he got it wrong after the fact hardly matters. Where was he when it counted. In 2006, Bernanke replaced him. He made a bad situation worse. Since 2008, he more than tripled the Fed's balance sheet from about 6% of GDP to 20%.

His day of reckoning approaches. Perhaps in future congressional testimony, he'll address his own shortcomings. Doing it when it counts matters. After the fact turns memoirs into best-sellers.

His cross to bear and Greenspan's could fill volumes. Millions their policies harmed won't line up to buy them.

How can they? They're broke, on their own, out of luck, and unreceptive to hear defrocked Fed chairmen say they're sorry. If so, they'd have done it right in the first place.

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WHY US POLITICIANS ARE QUIET ABOUT EUROPE's MELTDOWN
Shamus Cooke

Global Research, May 14, 2012
http://www.globalresearch.ca/index.php?context=va&aid=30831


After the Greek elections struck fear into the hearts of the global banksters, the fallout remains uncertain. If the next Greek election produces an anti-austerity government, Greece will almost certainly make a speedy exit from the euro. If this happens — and it is looking increasingly inevitable — the consequences for the global economy are spectacularly gloomy. Yet U.S. media and U.S. politicians are largely silent on the issue, almost as if nothing were happening.

What will happen when Greece leaves the Euro? Foreign banks hold over $90 billion in Greek debt in the public and in the private sectors. These enormous losses could very well bring down banks in Europe and abroad.

Also, the struggling Euro countries such as Italy, Spain, Portugal and Ireland will see their borrowing costs skyrocket, since the wealthy will be more reluctant to waste anymore investment money on risky Euro countries, guaranteeing a further downward spiral of bailouts and bankruptcy.

How likely is a Greek euro exit? The conservative Economist magazine reports:

"If Greece rejects the second bail-out or falls drastically behind in its program [of debt payments and public sector cuts], its exit could become inevitable."

This scenario appears increasingly likely, as Greek voters have tired of supporting politicians that continue to attack the majority of voters’ living standards through massive austerity policies (cuts to jobs, social programs and the public sector in general).

How would the U.S. be affected by a European Union meltdown? The Bank for International Settlements claims that U.S. banks have loaned $96.8 billion to the weakest European nations in the public and private sector, with an additional $275.8 billion to German and French banks, who would suffer directly if the weak nations drowned.

Furthermore, the European Union is the U.S.' largest trading partner; U.S. exports to the EU would instantly plummet if the above scenario were played out.

Which brings us to the silence of the U.S. politicians on the issue. The giant austerity measures that are driving Europe to the edge of revolution have been delayed on the federal level in the U.S. until after the November elections. Then, the seldom discussed budget "sequesters" will go into effect — automatic cuts to federal spending of $100 billion, every year until 2021.

Also, after the election federally enhanced unemployment insurance expires, as does the federal payroll tax cut. Obama's stimulus plan that supported states and city governments petered out at the end of 2011, adding pain to the ongoing deficit crunch nationwide.

It's possible that the U.S. may already be re-entering an "official" recession, though the jobs recession never left; the April jobs report showed that only 63.6 percent of people in the U.S. are either employed or actively looking for work, the lowest in more than three decades.

U.S. politicians — both Democrats and Republicans — are united in a strategy to combat the weakening economy by resorting to the European strategy of austerity. Both parties have already worked together to cut 600,000 government jobs (mostly local) since 2009, destroying the services these workers deliver in the process (education has been most targeted).

These numbers will balloon when the effects of Europe's plight reaches America's shores. The political silence over this fact is a good strategy for U.S. corporate political representatives; the more unprepared working people are for austerity measures, the easier they are to implement (what Naomi Klein calls the Shock Doctrine).

Therefore, working people in the U.S. need to learn to speak Greek, and adopt an increasingly popular slogan that rejects austerity measures: Tax the Rich! In other words, make the rich pay for the crisis they created. In practice this means that, instead of massive job reductions, cuts to education and health care, taxes on the wealthy and corporations should be raised; the banks should be put under public control rather than being bailed out with public money; the public sector should be fully funded and expanded rather than privatized and slashed.

Austerity is when the wealthy attempt to push the effects of their recessions onto the backs of working people, who need only to collectively push back and force the 1% to pay instead.


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THE TRUTH ABOUT JP MORGAN’s $2 BILLION LOSS

Washington's Blog
http://www.globalresearch.ca/index.php?context=va&aid=30859


Before we can understand what’s really going on with JP Morgan’s loss (which will probably end up being a lot more than $2 billion), we need a little background.

JP Morgan:

Is the world’s largest publicly-traded company
Is the largest bank in the U.S. … the biggest of the too big to fail banks which are killing the American economy
Is the largest derivatives dealer in the world (and see this), and derivatives are inherently destabilizing for the economy
Essentially wrote the faux “reform” legislation for derivatives, which did nothing to decrease risk, and killed any chance of real reform
Is the creator of credit default swaps – which caused the 2008 financial crisis, and is the asset class which blew up and caused the loss
Has had large potential exposures to credit default swap losses for years
Has replaced the chief investment officer who made the risky bets with a trader who worked at Long Term Capital Management … which committed suicide by making risky bets
Went completely insolvent in the 1980s
… and again in 2007 ( and was saved both times by the government at taxpayer expense)
Heads – with Goldman Sachs – the Treasury Borrowing Advisory Committee, which helps set government financial policy
Has a reputation of being the most risk-averse of the big Wall Street players
Was kept alive by a huge government bailout … but used the money to invest in India and other projects which won’t really help Americans
Has made a killing by kicking companies (and see this) and governments (and here) when they are down, engaging in various types of fraud (update), allegedly manipulating the silver market, and profiting on misery by acting as the largest processor of food stamps in America
In addition, JPM’s CEO Jamie Dimon:

Is a Class A Director of the Federal Reserve Bank of New York, which is the chief bank regulator for Wall Street (including JPM). Indeed, Dimon served on the board of the Federal Reserve Bank of New York at the same time that his bank received emergency loans from the Fed and was used by the Fed as a clearing bank for the Fed’s emergency lending programs. In 2008, the Fed provided JP Morgan Chase with $29 billion in financing to acquire Bear Stearns. At the time, Dimon persuaded the Fed to provide JP Morgan Chase with an 18-month exemption from risk-based leverage and capital requirements. He also convinced the Fed to take risky mortgage-related assets off of Bear Stearns balance sheet before JP Morgan Chase acquired this troubled investment bank
Has a reputation of being the “golden boy” and smartest guy on Wall Street
Has been the chief spokesman and advocate for deregulation of banks, and has lectured, scolded and cajoled everyone who has questioned his banking practices
Jokes about a new financial crisis happening “every five to seven years”
What Does It Mean?
Pundits and consumers alike are reacting to JP Morgan’s loss like a startled herd of sheep.

They somehow believed that the “best of the breed” bank and CEO – the biggest boy on the block – was immune from losses. Especially since JPM has been so favored by the Feds, and Dimon was so favored that he was being groomed for Secretary of Treasury.

And the fact that the head cheerleader for letting banks police themselves has egg on his face is making a lot of people nervous.

And that the biggest of the too big to fails could conceivably fail.

The government says its launching a criminal probe into JPM’s trades.

Ratings services have downgraded JPM’s credit, and many commentators have noted that other banks may be downgraded as well.

Elizabeth Warren is calling for Dimon to resign from the New York Fed:


Even CNBC is now calling for Glass-Steagall to be put back in place.
Banking expert Chris Whalen writes:

Someone at the Fed should have at least secondary accountability for the JPM losses if the VaR model/process was faulty. Is there any accountability for incompetent, badly managed federal bank regulators? As our colleague Janet Tavakoli wrote in the Huffington Post: “The U.S. can count on JPMorgan to continue both long and short market manipulation and take its winnings and losses from blind gambles. Shareholders, taxpayers, and consumers will foot the bill for any unpleasant global consequences.”

We think that the loss by JPM is ultimately yet another legacy of the era of “laissez-faire” regulation and even overt Fed advocacy for the use of OTC derivatives by US banks. Fed officials such as Pat Parkinson, who retired as head of the Fed’s division of supervision and regulation in January, were effectively lobbyists for the large banks and their derivatives activities. It seems a little ridiculous for the same Fed officials who caused the problem over the years to now be tasked with investigating JPM, much less regulation of large bank dealings in OTC instruments.

And Reuters correctly notes:

JP Morgan Chase’s loss is the perhaps inevitable result of the interaction of two policies: too big to fail and zero interest rates.

Too big to fail, the de facto insurance provided by the U.S. to financial institutions so big their failure would be disastrous, provides JP Morgan and its peers with a material advantage in funding and as counterparties. Depositors see it as an advantage, as do bondholders and other lenders. That leaves TBTF banks flush with cash.

At the same time, ultra-low interest rates make the traditional business of banks less attractive, naturally leading to a push to make money elsewhere. [See this.] With interest rates virtually nothing at the short end but not terribly higher three, five or even 10 years out, net interest margins, once the lifeblood of large money center banks, are disappointingly thin. Given that investors are rightly dubious about the quality of bank earnings, and thus unwilling to attach large equity market multiples to them, this puts even more pressure on managers to look elsewhere for profits.

Investors believe, rightly, that the largest banks won’t be allowed to fail; what they also appear to believe is that they very well may not be able to prosper and that to the extent they do shareholders won’t fairly participate.

What would you do if you had a built-in funding advantage but little demand for your services as a traditional lender, i.e., one which borrows short and lends long? If you are anything like JP Morgan Chase appears to be you will put some of that lovely liquidity to work in financial markets, hoping to turn a built-in advantage into revenue.

JP Morgan stoutly maintains that the purpose of the trades was to hedge exposure elsewhere, as opposed to being proprietary trading intended to generate profits. That’s contradicted by a report from Bloomberg citing current and former employees of the chief executive office, including its former head of credit trading. http://www.bloomberg.com/news/2012-05-14...ws-up.html

The Volcker Rule, now being shaped, is intended to stop such speculative trades, though in practice debating what is a hedge and what isn’t is a sort of angels-dancing-on-the-heads-of-pins argument which makes effective regulation almost impossible.

The keys are motive, opportunity and ability. Profits – and the investment office is reported to have made considerable ones in the past – provide a more believable motive than simple hedging. Opportunity is afforded by the combination of a privileged funding cost combined with poor alternative places to put money to work elsewhere in the banking business. While there may be some active borrowers, and TBTF banks enjoy an unfair advantage in serving their needs, the trans-Atlantic balance-sheet recession means households and businesses are showing a preference for paying back loans rather than taking them out.

Bruce Lee, chief credit officer of Fifth Third Bancorp, which isn’t TBTF, was frank about this recently, saying that the value of deposit funding was now at its lowest in his career.

Finally there is ability, and like common sense all bankers believe they have the ability to trade successfully despite the wealth of historical evidence to the contrary.

While events show clearly that JP Morgan wasn’t able to adequately manage its own business, an attack on it engaging in speculation doesn’t actually hinge on that.

There is clearly a public policy outrage here because should JP Morgan find itself in difficulties due to speculation the taxpayer will end up paying the freight. That’s probably not even the worst of it. All of the profits that TBTF banks make through speculation have been subsidized and enabled by the taxpayer. It is obvious that managers and employees have an incentive to take risks because, after all, TBTF may not be forever but they will capture 35 or 40 percent of the inflated takings so long as it lasts. Even if JP Morgan never blew up speculative trades, we should still oppose them so long as they are made possible and profitable by government policy.

Raising interest rates in order to remove an incentive to speculation probably wouldn’t work; low rates are the result of too much debt as well as a palliative for that disease.

The Volcker Rule won’t be effective; it is impossible to distinguish hedges from speculation and either can blow up banks.

The better alternative is to end the policy of too big to fail, preferably while at the same time forcing all banks out of the business of market speculation through a revival of the kind of Glass-Steagall-like policy which encouraged a small and useful financial sector for decades, forcing those that want government insurance to act like utilities, taking deposits, processing payments and making simple loans.

Let the investment banks take their risks, take their chances and suffer their losses – as separate entities.


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CRASH ALERT
Mike Whitney


As you might have noticed, the stock market is falling like a stone. As of 9 AM PST, the Dow Jones has dropped 172 points while all the other indices are down sharply. German 2-year debt (bund) has dipped below 0% this morning at auction, signalling an acceleration in the bank run taking place in southern Europe. Depositors in Spain, Greece, Italy, Portugal, etc would rather take a loss on their investment, then risk not their money back at all. The European Central Bank (ECB) does not guarantee deposits, so people are withdrawing their money en masse and getting out of Dodge pronto. What we're seeing is a real-time panic.

The ostensible trigger for the panic is known, but you won't read about it in the financial media where the news is dumbed down to the point of incoherence. What's really going on is that the German central bank (The Bundesbank) has indicated that it's ready to pull the plug on Greece which means that future bailouts will probably not be forthcoming. That's bad. It means that Greece will run out of money some time in June; their banking system will implode, and the "birthplace of democracy" will be reduced to 3rd world status overnight. Here's a blurb from the Bundesbank's communique:

"Current developments in Greece are extremely worrying. Greece is threatening not to implement the reform and consolidation measures that were agreed in return for the large-scale aid programmes.

This jeopardises the continued provision of assistance. Greece would have to bear the consequences of such a scenario. The challenges this would create for the euro area and Germany would be considerable, but manageable given prudent crisis management. By contrast, a significant dilution of existing agreements would damage confidence in all euro-area agreements and treaties and strongly weaken incentives for national reform and consolidation measures. In such circumstances the institutional status quo comprising liability, control and individual responsibility of member states would be fundamentally called into question.

When the Eurosystem provided Greece with large amounts of liquidity, it trusted that the programs would be implemented and thereby ultimately assumed considerable risks. In the light of the current situation, it should not significantly increase these risks. Instead, the parliaments and governments of the member states should decide on the manner in which any further financial assistance is provided and therefore whether the associated risks should be assumed."

Okay. So German central bankers don't want to wait until the June elections in Greece to decide whether to provide more money or not. They're throwing in the towel now. No more money. No more bailouts. No more Mr. Niceguy. End of story. But what does that mean? Does it mean that the whole global financial system is headed back into the shitter again like after Lehman Brothers?

No one knows for sure, but there's bound to be a few bumps in the road, don't you think? Take a look at this from Bloomberg today (Wed):

“Europe’s banks, are sitting on $1.19 trillion of debt to Spain, Portugal, Italy and Ireland, are facing a wave of losses if Greece abandons the euro. While lenders have increased capital buffers, written down Greek bonds and used central-bank loans to help refinance units in southern Europe, they remain vulnerable to the contagion that might follow a withdrawal, investors say. Even with more than two years of preparation, banks still are at risk of deposit flight and rising defaults in other indebted euro nations.” (Bloomberg)

Can you really slash a trillion bucks out of the rotting corpse of the EU banking system and still keep things running smoothly?

Don't bet on it. Here's more from Bloomberg:

"The ECB’s unprecedented provision of 1.02 trillion euros in three-year cash in December and February helped calm financial markets in the first quarter by removing concern that banks unwilling to lend to one another would run out of cash. Lenders in Spain and Italy also used the funds to buy sovereign debt, reducing government borrowing costs....

Lenders probably would need another 800 billion-euro liquidity lifeline from the ECB to help stem contagion from a Greek exit, Citigroup analysts estimated in a May 17 note...." (Bloomberg)

That's right, the EU banks were gifted over 1 trillion euros 3 months ago, and they're still too undercapitalized to weather the storm of a Greek default. Nice, eh? So, the whole system is just an empty gourd, right? They're broke, so the ECB will have to print up another 800 bil just to keep the house of cards from collapsing in a heap.

Getting worried yet?

US Treasuries are also rallying big today. In fact, the yield on the 10-year --which hit a record low last week--is on its way back down indicating that investors are freaking scared-out-of-their-minds. In real terms, investors are now socking money into 10-year Treasuries knowing that (inflation adjusted) they'll get LESS money back then they put in.

How do you like them apples? That's what I call a full-blown panic! And yet, you ain't hearing a blasted thing about it on the news, right? Why would that be?

Here's a little icing on the cake from Bloomberg:

"Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening ....

“I am completely convinced they could not orchestrate an orderly exit,” said Erik Nielsen, chief economist at UniCredit SpA in London. “This is a country that can’t implement laws, so how in the world are they going to secretly agree to print money, control the banks, control capital flows and think this is going to be orderly? It’s completely impossible.” ...

“There is no reason to think there won’t be riots and violence,” said Lefteris Farmakis, a strategist at Nomura International Plc in London. “It would be a pretty disastrous situation. People have no understanding of the consequences of a euro exit.” ("War-Gaming Greek Euro Exit Shows Hazards in 46-Hour Weekend", Bloomberg)

Riots, street violence, skyrocketing unemployment, grinding poverty...the whole schmeer. And what's the most likely scenario for Greece after all that?

Well, probably another military coup backed by President Hopium and his band of CIA merry pranksters, right?

Okay, my bad. I don't want to polarize all the Obama fans, but, Geez Louise, things are looking mighty grim for the poor Greeks, don't you think?

Of course, it all could go smoothly "without a hitch"; no credit crunch, no bank runs, no flight to safety, no crashing stock markets, no decades of struggle and social unrest, no splitting up of the eurozone, no ethnic animosities, no uber-nationalism, no right wing fanaticism, no border skirmishes or armed hostilities, no revolutions, no depression, no rise of fascism...just a smooth transition to a new, slimmed-down version of the EZ. After all, that's what Germany is expecting. And they could be right.

But, probably not.



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THE POLITICS OF LANGUAGE AND THE LANGUAGE OF POLITICAL REGRESSION
Prof. James Petras
http://www.globalresearch.ca/index.php?context=va&aid=31018

Capitalism and its defenders maintain dominance through the ‘material resources’ at their command, especially the state apparatus, and their productive, financial and commercial enterprises, as well as through the manipulation of popular consciousness via ideologues, journalists, academics and publicists who fabricate the arguments and the language to frame the issues of the day.

Today material conditions for the vast majority of working people have sharply deteriorated as the capitalist class shifts the entire burden of the crisis and the recovery of their profits onto the backs of wage and salaried classes. One of the striking aspects of this sustained and on-going roll-back of living standards is the absence of a major social upheaval so far. Greece and Spain, with over 50% unemployment among its 16-24 year olds and nearly 25% general unemployment, have experienced a dozen general strikes and numerous multi-million person national protests; but these have failed to produce any real change in regime or policies. The mass firings and painful salary, wage, pension and social services cuts continue. In other countries, like Italy, France and England, protests and discontent find expression in the electoral arena, with incumbents voted out and replaced by the traditional opposition. Yet throughout the social turmoil and profound socio-economic erosion of living and working conditions, the dominant ideology informing the movements, trade unions and political opposition is reformist: Issuing calls to defend existing social benefits, increase public spending and investments and expand the role of the state where private sector activity has failed to invest or employ. In other words, the left proposes to conserve a past when capitalism was harnessed to the welfare state.

The problem is that this ‘capitalism of the past’ is gone and a new more virulent and intransigent capitalism has emerged forging a new worldwide framework and a powerful entrenched state apparatus immune to all calls for ‘reform’ and reorientation. The confusion, frustration and misdirection of mass popular opposition is, in part, due to the adoption by leftist writers, journalists and academics of the concepts and language espoused by its capitalist adversaries: language designed to obfuscate the true social relations of brutal exploitation, the central role of the ruling classes in reversing social gains and the profound links between the capitalist class and the state. Capitalist publicists, academics and journalists have elaborated a whole litany of concepts and terms which perpetuate capitalist rule and distract its critics and victims from the perpetrators of their steep slide toward mass impoverishment.

Even as they formulate their critiques and denunciations, the critics of capitalism use the language and concepts of its apologists. Insofar as the language of capitalism has entered the general parlance of the left, the capitalist class has established hegemony or dominance over its erstwhile adversaries. Worse, the left, by combining some of the basic concepts of capitalism with sharp criticism, creates illusions about the possibility of reforming ‘the market’ to serve popular ends. This fails to identify the principle social forces that must be ousted from the commanding heights of the economy and the imperative to dismantle the class-dominated state. While the left denounces the capitalist crisis and state bailouts, its own poverty of thought undermines the development of mass political action. In this context the ‘language’ of obfuscation becomes a ‘material force’ – a vehicle of capitalist power, whose primary use is to disorient and disarm its anti-capitalist and working class adversaries. It does so by co-opting its intellectual critics through the use of terms, conceptual framework and language which dominate the discussion of the capitalist crisis.

Key Euphemisms at the Service of the Capitalist Offensive

Euphemisms have a double meaning: What terms connote and what they really mean. Euphemistic conceptions under capitalism connote a favorable reality or acceptable behavior and activity totally dissociated from the aggrandizement of elite wealth and concentration of power and privilege. Euphemisms disguise the drive of power elites to impose class-specific measures and to repress without being properly identified, held responsible and opposed by mass popular action.

The most common euphemism is the term ‘market’, which is endowed with human characteristics and powers. As such, we are told ‘the market demands wage cuts’ disassociated from the capitalist class. Markets, the exchange of commodities or the buying and selling of goods, have existed for thousands of years in different social systems in highly differentiated contexts. These have been global, national, regional and local. They involve different socio-economic actors, and comprise very different economic units, which range from giant state-promoted trading-houses to semi-subsistence peasant villages and town squares. ‘Markets’ existed in all complex societies: slave, feudal, mercantile and early and late competitive, monopoly industrial and finance capitalist societies.

When discussing and analyzing ‘markets’ and to make sense of the transactions (who benefits and who loses), one must clearly identify the principle social classes dominating economic transactions. To write in general about ‘markets’ is deceptive because markets do not exist independent of the social relations defining what is produced and sold, how it is produced and what class configurations shape the behavior of producers, sellers and labor. Today’s market reality is defined by giant multi-national banks and corporations, which dominate the labor and commodity markets. To write of ‘markets’ as if they operated in a sphere above and beyond brutal class inequalities is to hide the essence of contemporary class relations.

Fundamental to any understanding, but left out of contemporary discussion, is the unchallenged power of the capitalist owners of the means of production and distribution, the capitalist ownership of advertising, the capitalist bankers who provide or deny credit and the capitalist-appointed state officials who ‘regulate’ or deregulate exchange relations. The outcomes of their policies are attributed to euphemistic ‘market’ demands which seem to be divorced from the brutal reality. Therefore, as the propagandists imply, to go against ‘the market’ is to oppose the exchange of goods: This is clearly nonsense. In contrast, to identify capitalist demands on labor, including reductions in wages, welfare and safety, is to confront a specific exploitative form of market behavior where capitalists seek to earn higher profits against the interests and welfare majority of wage and salaried workers.

By conflating exploitative market relations under capitalism with markets in general, the ideologues achieve several results: They disguise the principle role of capitalists while evoking an institution with positive connotations, that is, a ‘market’ where people purchase consumer goods and ‘socialize’ with friends and acquaintances. In other words, when ‘the market’, which is portrayed as a friend and benefactor of society, imposes painful policies presumably it is for the welfare of the community. At least that is what the business propagandists want the public to believe by marketing their virtuous image of the ‘market’; they mask private capital’s predatory behavior as it chases greater profits.

One of the most common euphemisms thrown about in the midst of this economic crisis is ‘austerity’, a term used to cover-up the harsh realities of draconian cutbacks in wages, salaries, pensions and public welfare and the sharp increase in regressive taxes (VAT). ‘Austerity’ measures mean policies to protect and even increase state subsidies to businesses, and create higher profits for capital and greater inequalities between the top 10% and the bottom 90%. ‘Austerity’ implies self-discipline, simplicity, thrift, saving, responsibility, limits on luxuries and spending, avoidance of immediate gratification for future security – a kind of collective Calvinism. It connotes shared sacrifice today for the future welfare of all.

However, in practice ‘austerity’ describes policies that are designed by the financial elite to implement class-specific reductions in the standard of living and social services (such as health and education) available for workers and salaried employees. It means public funds can be diverted to an even greater extent to pay high interest rates to wealthy bondholders while subjecting public policy to the dictates of the overlords of finance capital.

Rather than talking of ‘austerity’, with its connotation of stern self-discipline, leftist critics should clearly describe ruling class policies against the working and salaried classes, which increase inequalities and concentrate even more wealth and power at the top. ‘Austerity’ policies are therefore an expression of how the ruling classes use the state to shift the burden of the cost of their economic crisis onto labor.

The ideologues of the ruling classes co-opted concepts and terms, which the left originally used to advance improvements in living standards and turned them on their heads. Two of these euphemisms, co-opted from the left, are ‘reform’ and ‘structural adjustment’. ‘Reform’, for many centuries, referred to changes, which lessened inequalities and increased popular representation. ‘Reforms’ were positive changes enhancing public welfare and constraining the abuse of power by oligarchic or plutocratic regimes. Over the past three decades, however, leading academic economists, journalists and international banking officials have subverted the meaning of ‘reform’ into its opposite: it now refers to the elimination of labor rights, the end of public regulation of capital and the curtailment of public subsidies making food and fuel affordable to the poor. In today’s capitalist vocabulary ‘reform’ means reversing progressive changes and restoring the privileges of private monopolies. ‘Reform’ means ending job security and facilitating massive layoffs of workers by lowering or eliminating mandatory severance pay. ‘Reform’ no longer means positive social changes; it now means reversing those hard fought changes and restoring the unrestrained power of capital. It means a return to capital’s earlier and most brutal phase, before labor organizations existed and when class struggle was suppressed. Hence ‘reform’ now means restoring privileges, power and profit for the rich.

In a similar fashion, the linguistic courtesans of the economic profession have co-opted the term ‘structural’ as in ‘structural adjustment’ to service the unbridled power of capital. As late as the 1970’s ‘structural’ change referred to the redistribution of land from the big landlords to the landless; a shift in power from plutocrats to popular classes. ‘Structures’ referred to the organization of concentrated private power in the state and economy. Today, however, ‘structure’ refers to the public institutions and public policies, which grew out of labor and citizen struggles to provide social security, for protecting the welfare, health and retirement of workers. ‘Structural changes’ now are the euphemism for smashing those public institutions, ending the constraints on capital’s predatory behavior and destroying labor’s capacity to negotiate, struggle or preserve its social advances.

The term ‘adjustment’, as in ‘structural adjustment’ (SA), is itself a bland euphemism implying fine-tuning , the careful modulation of public institutions and policies back to health and balance. But, in reality, ‘structural adjustment’ represents a frontal attack on the public sector and a wholesale dismantling of protective legislation and public agencies organized to protect labor, the environment and consumers. ‘Structural adjustment’ masks a systematic assault on the people’s living standards for the benefit of the capitalist class.

The capitalist class has cultivated a crop of economists and journalists who peddle brutal policies in bland, evasive and deceptive language in order to neutralize popular opposition. Unfortunately, many of their ‘leftist’ critics tend to rely on the same terminology.

Given the widespread corruption of language so pervasive in contemporary discussions about the crisis of capitalism the left should stop relying on this deceptive set of euphemisms co-opted by the ruling class. It is frustrating to see how easily the following terms enter our discourse:

Market discipline – The euphemism ‘discipline’ connotes serious, conscientious strength of character in the face of challenges as opposed to irresponsible, escapist behavior. In reality, when paired with ‘market’, it refers to capitalists taking advantage of unemployed workers and using their political influence and power lay-off masses workers and intimidate those remaining employees into greater exploitation and overwork, thereby producing more profit for less pay. It also covers the capacity of capitalist overlords to raise their rate of profit by slashing the social costs of production, such as worker and environmental protection, health coverage and pensions.

‘Market shock’ – This refers to capitalists engaging in brutal massive, abrupt firings, cuts in wages and slashing of health plans and pensions in order to improve stock quotations, augment profits and secure bigger bonuses for the bosses. By linking the bland, neutral term, ‘market’ to ‘shock’, the apologists of capital disguise the identity of those responsible for these measures, their brutal consequences and the immense benefits enjoyed by the elite.

‘Market Demands’ – This euphemistic phrase is designed to anthropomorphize an economic category, to diffuse criticism away from real flesh and blood power-holders, their class interests and their despotic strangle-hold over labor. Instead of ‘market demands’, the phrase should read: ‘the capitalist class commands the workers to sacrifice their own wages and health to secure more profit for the multi-national corporations’ – a clear concept more likely to arouse the ire of those adversely affected.

‘Free Enterprise’ – An euphemism spliced together from two real concepts: private enterprise for private profit and free competition. By eliminating the underlying image of private gain for the few against the interests of the many, the apologists of capital have invented a concept that emphasizes individual virtues of ‘enterprise’ and ‘freedom’ as opposed to the real economic vices of greed and exploitation.

‘Free Market’ – A euphemism implying free, fair and equal competition in unregulated markets glossing over the reality of market domination by monopolies and oligopolies dependent on massive state bailouts in times of capitalist crisis. ‘Free’ refers specifically to the absence of public regulations and state intervention to defend workers safety as well as consumer and environmental protection. In other words, ‘freedom’ masks the wanton destruction of the civic order by private capitalists through their unbridled exercise of economic and political power. ‘Free market’ is the euphemism for the absolute rule of capitalists over the rights and livelihood of millions of citizens, in essence, a true denial of freedom.

‘Economic Recovery’ – This euphemistic phrase means the recovery of profits by the major corporations. It disguises the total absence of recovery of living standards for the working and middle classes, the reversal of social benefits and the economic losses of mortgage holders, debtors, the long-term unemployed and bankrupted small business owners. What is glossed over in the term ‘economic recovery’ is how mass immiseration became a key condition for the recovery of corporate profits.

‘Privatization’ – This describes the transfer of public enterprises, usually the profitable ones, to well-connected, large scale private capitalists at prices well below their real value, leading to the loss of public services, stable public employment and higher costs to consumers as the new private owners jack up prices and lay-off workers - all in the name of another euphemism, ‘efficiency’.

‘Efficiency’ – Efficiency here refers only to the balance sheets of an enterprise; it does not reflect the heavy costs of ‘privatization’ borne by related sectors of the economy. For example, ‘privatization’ of transport adds costs to upstream and downstream businesses by making them less competitive compared with competitors in other countries; ‘privatization’ eliminates services in regions that are less profitable, leading to local economic collapse and isolation from national markets. Frequently, public officials, who are aligned with private capitalists, will deliberately disinvest in public enterprises and appoint incompetent political cronies as part of patronage politics, in order to degrade services and foment public discontent. This creates a public opinion favorable to ‘privatizing’ the enterprise. In other words ‘privatization’ is not a result of the inherent inefficiencies of public enterprises, as the capitalist ideologues like to argue, but a deliberate political act designed to enhance private capital gain at the cost of public welfare.

Conclusion

Language, concepts and euphemisms are important weapons in the class struggle ‘from above’ designed by capitalist journalists and economists to maximize the wealth and power of capital. To the degree that progressive and leftist critics adopt these euphemisms and their frame of reference, their own critiques and the alternatives they propose are limited by the rhetoric of capital. Putting ‘quotation marks’ around the euphemisms may be a mark of disapproval but this does nothing to advance a different analytical framework necessary for successful class struggle ‘from below’. Equally important, it side-steps the need for a fundamental break with the capitalist system including its corrupted language and deceptive concepts. Capitalists have overturned the most fundamental gains of the working class and we are falling back toward the absolute rule of capital. This must raise anew the issue of a socialist transformation of the state, economy and class structure. An integral part of that process must be the complete rejection of the euphemisms used by capitalist ideologues and their systematic replacement by terms and concepts that truly reflect the harsh reality, that clearly identify the perpetrators of this decline and that define the social agencies for political transformation.


Reply
UNRAVELLING THE WELFARE SAFETY NET. EUROPE MOVES CLOSER TO BANKTATORSHIP
Mike Whitney
http://www.counterpunch.org/2012/06/01/e...tatorship/

Yields on 10-year Treasuries plunged to a record-low 1.56 percent on Thursday morning as panicky investors stormed out of European financial assets into German and U.S. government bonds. Deteriorating credit conditions, a flurry of ratings downgrades, and bank runs in Spain and Greece have triggered a flight-to-safety which has pushed the benchmark 10-year below its previous all-time low of 1.67 percent. Falling yields indicate that investors have lost confidence in the ability of EU policymakers to resolve the ongoing debt crisis, particularly as it relates to growing troubles in Greece and Spain.

The present crisis, which is largely the result of excessive credit expansion and poor risk management by EU banks, is being used by the European Commission and the ECB to establish a euro-wide ”banking union” and to impose savage cuts to social programs, health care, and pensions. The response by EU policymakers is a social counterrevolution designed to transform the 17-member monetary union into a permanent ”austerity zone” ruled by corporate elites and big finance. Here’s more from Reuters:

“The eurozone must boost growth and cut debt to regain investor confidence but it should also move towards a banking union, consider eurobonds and the direct recapitalisation of banks from its permanent bailout fund, the European Commission said on Wednesday as it laid out year-long recommendations.”

“A closer integration among the euro area countries in supervisory structures and practices, in cross-border crisis management and burden sharing, towards a “banking union”, would be an important complement to the current structure” of Europe’s economic and monetary union, the Commission said.

“In the same vein, to sever the link between banks and the sovereigns, direct recapitalisation by the European Stability Mechanism (ESM) might be envisaged,” the document said.” (“EU calls for eurozone banking union, direct bank recapitalisations”, IFR, Reuters)

The eurozone’s permanent bailout fund, the ESM, has not yet been ratified by all 17 members and already the European Commission wants to change its mandate to include direct bailouts to banks. The direct funding of underwater banks is a blatant power-grab, an attempt to establish the primacy of banks in the same way that the TARP was used to create Too Big To Fail in the US. TBTF means that the banks have merged with the state and that taxpayers provide blanket guarantees for their survival. Europe is moving fast towards this same model.

German chancellor Angela Merkel is opposed to allowing the ESM to recapitalise Spanish banks, but she’s likely to capitulate if the crisis worsens. If she does give in, then the mismanaged banks will not be required to restructure their debt, wipe out bondholders and shareholders, remove bad assets, and replace management. All of the costs for such a bailout would fall on taxpayers, which is exactly what leaders of the European Commission and the ECB want. At the same time, the deepening crisis will be used to impose more fiscal reforms, which have already pushed unemployment to 20 year highs while submerging most of the south in a severe recession. Here’s more from Reuters:


”….ministers in private are clear about their wish to see European-wide bank deposit guarantee measures put in place quickly to avoid the risk of what could be a catastrophic event. There are signs the European Central Bank favors deposit guarantees.



Problems are mounting on other fronts. With the cost of borrowing heading rapidly towards 7 percent and most foreign investors already shunning Spanish debt, the government will find it increasingly difficult to refinance 98 billion euros of debt and find another 52 billion euros to fund its deficit this year.


Local banks are barely lending, or offering loans at prohibitively high rates, squeezing companies and increasing the risk of a chain of bankruptcies which could send the economy into a nosedive. The banking system’s total loans to the business sector were 44.6 billion euros at the end of March half of what they were at the end of the boom in 2007, and the contraction continues almost every month, according to Bank of Spain data.


Consumers are postponing big purchases and cutting back spending. Spain’s soaring borrowing costs have become a national obsession since the crisis….The government acknowledges that the situation is critical.” (“Spain cries for help: is Berlin listening ?”, Reuters)

The EU Commission and ECB are allowing the crisis to grow to achieve their goal, which is the creation of a fiscal union controlled by banks that has unlimited access to funding and the power to impose policy (“austerity”) through coercion. Here’s a clip from economist Mark Weisbrot who sees the political motive behind the debt crisis:


”I have argued for some time now that the recurring crisis in the eurozone is not driven by financial markets’ demands for austerity in a time of recession, as is commonly asserted. Rather, the primary cause of the crisis and its prolongation is the political agenda of the European authorities – led by the European Central Bank (ECB) and European commission. These authorities (which, if we included the IMF constitute, the “troika” that runs economic policy in the eurozone) want to force political changes, particularly in the weaker economies, that people in these countries would never vote for.” (“Europeans’ economic future has been hijacked by dangerous ideologues”, The Guardian)

It’s all politics. Right wing politics. 100 percent of the reputable economists that have commented on the debt crisis have criticized the way it has been handled, particularly in regards to austerity measures. Do you really think that Merkel or Draghi think that they’re smarter than Stiglitz, Krugman, Reich, Eichengreen, Thoma, Weisbrot, Galbraith, Baker, Roubini, etc.?
 
No. Merkel has no background in economics at all, and Draghi was formally an investment banker for Goldman Sachs.

These people are not interested in fixing the EZ economy. They are engaged in a stealth campaign to radically restructure EU society, to unravel to welfare safety net, to roll back the progressive gains of the last century, and to reduce much of the continent to 3rd world poverty. A banking union will further solidify the power of big finance over the individual states, and that is the main objective.

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THE REAL BANKING CRISIS
Eric Sprott & David Baker

Although the adjacent questionnaire is facetious, it does ask the right questions. If you're a wealthy European depositor today, whatdoyou do with your money? Do you really continue to keep cash in a Greek or Italian bank account?

European bank depositors all face a tough decision today - to withdraw their deposits, or not withdraw and take their chances. Their response to that decision may determine the financial future of the Eurozone. Since 2008, EU Government bailouts have transformed a traditional banking crisis into a full-blown sovereign crisis. The European Central Bank (ECB) has managed to keep the Eurozone banking system going for now, but the constant threat of depositor bank runs makes its future extremely uncertain. A bank run on deposits forces banks to liquidate assets to raise cash. Governments and central banks will go to extreme lengths to avert such a scenario, because a liquidation reveals what an asset is really worth - and they are likely worth far less than what the banks are claiming they're worth on their balance sheets today.
  

Bank runs have wreaked havoc in Europe over the past three years. In Iceland, it was a UK-led bank run on its second largest bank, Landsbanki, in early October 2008 that led Landsbanki to block over 300,000 UK depositors from accessing their accounts in its online bank called Icesave. Fear of widespread deposit losses compelled the British government to promptly freeze the assets of Landsbanki in retaliation, inciting an effective lock-down of foreign capital in and out of the country.1 You certainly didn't want to have an Icelandic chequing account when that happened - especially considering that the Icelandic Krona proceeded to lose 58% of its value by the end of November 2008.2

In Ireland, it was the withdrawal of almost €4 billion in deposits in less than three weeks that compelled the Irish government to nationalize Anglo Irish Bank in January 2009.3 Large depositors lost faith in the Irish government's bank account guarantee and began to pull their cash out of Irish banks in droves. As a Trinity College Dublin professor was quoted at the time, "This is a nightmare scenario for the [Irish] government… they can't stop further withdrawals from the bank unless we close the borders and turn into Cuba."4

Ireland experienced a secondbank run in late 2010, when more than €67 billion was withdrawn from Ireland-based institutions in October alone.5 Ireland's top six domestic banks, two of which are currently in the process of being shut down, have now lost more than €90 billion in corporate deposits since the crisis began in 2008.6 And the withdrawals continue - in May 2011 it was reported that Irish resident private-sector deposits had declined by 8.7% over the past 12 months.7 Private sector deposits from non-Irish Eurozone residents declined by 9.7% over the same period, while deposits from non-Eurozone residents were reportedly down 28.2%.8 Ireland's experience makes it fairly clear: when depositors sense danger,and they are free to move their money elsewhere - they typically do.

The Irish deposit withdrawals have left Ireland's banks in the hands of the ECB, which graciously bailed the country out back in November 2010, and has now lent Irish banks more than €103 billion as of the end of June 2011.9 This, in addition to the €55.7 billion the Irish banks have received from their own central bank, is amazingly still not enough to recapitalize the Irish banking system, which at the time of writing still requires an additional €24 billion of capital to remain solvent.10

In Greece, bank withdrawals have proven equally as damaging. Greek banks have seen deposit outflows of around 8% thus far in 2011, with an acceleration of outflows in May and June. Moody's recently warned that such flows could cause a "severe cash shortage if they rapidly increased beyond 35% of deposits".11 Last week's €109 billion bail-out suggests that may have already happened.

Just as with Ireland, the ECB has kept the Greek banks afloat, funding them almost €100 billion in 2010 and an additional €103 billion thus far in 2011.12,13 The recent bail-out will buy Greece time, but deposit outflows could still derail the ECB's efforts to save the Greek banking system if they continue unchecked.

Although we don't have the data for Spain or Italy, it does not escape us that those countries' governments are likely highly aware of the effect a bank run could potentially have on their fiscal stability. Italy is a much bigger fish than Ireland or Greece. Its €1.8 trillion of borrowing in nominal terms is more than the debt of Greece, Spain, Portugal and Ireland, combined.14 Italy and Spain are too big to fail and too big to bail-out, so the future of the Eurozone will be seriously compromised if Italian and Spanish depositors take flight with their euros. To that effect, we found it very instructive to read about new provisions that the Eurozone's rescue fund, the EFSF, recently incorporated into the latest Greek bail-out. Included among them is the ability for the EFSF to buy sovereign bonds in the secondary market, give EU states "precautionary credit lines" before they are shut out of credit market, and "lend governments money to recapitalize their banks".15 The sovereign crisis, at its root, is still a banking crisis. The banks hold loads of Eurozone sovereign debt. If depositors withdraw capital, those banks must sell some of those sovereign bonds to stay solvent. The EFSF provisions are there to provide the banks with the liquidity they need to survive deposit withdrawals. The question now is what will happen if the EFSF runs out of the funds to do so.

In our view, the depositors that chose to transfer their money out of their local Eurozone banks deserve some recognition, because they 'get it'. The EU banks are still the root of this problem, and depositors are right to question the security of their deposits held with them. We have always postulated that the real problem in our financial system is too much leverage in the banking system. We are continually reminded of this fact every Friday when US bank failures are released. When you compare the failed banks' assets to the cost the FDIC pays to make their depositors whole, it reveals how many times the banks have lost their equity capital. The key to remember here is that banks lend out our money and keep very little in reserve. If we assume they keep 5 cents of capital for every 95 cents they loan out - a 25% 'implied write-down' in Chart A would mean that the bank has effectively lost its capital six times over.

The banking situation in Europe is no different from that above - EU banks are also highly levered, but their situation is further complicated by the fact that what was once the most liquid and secure loan on European banks' balance sheets - sovereign debt - is no longer liquid and secure. This makes EU banks extremely vulnerable to deposit withdrawals as it forces them to approach the ECB for help to maintain liquidity. There is only so much the ECB can do - if a true 'liquidity event' takes place, we can all rest assured that there will be no buyers of distressed assets in the sizes that European banks hold today, sovereign bonds, or not.

We discuss the EU banking crisis this month to remind everyone that we have very recently lived through two instances where the entire financial system almost collapsed. The first took place during the height of the 2008 crash. The second transpired in May 2010 when the ECB stepped in with its $1 trillion bailout package to avert disaster. All financial bailouts up to this point have been instigated with a desire to avert the first domino from falling. They have been instituted to avert contagion - a total financial meltdown that would effectively turn the global banking system into an Icelandic money trap - where no money can get in, or out.

We still don't know if a financial collapse can be averted in Europe because investors and depositors are not all naïve to reality. The financial malfunction is ongoing and will not be prevented through these continual perverse financial machinations. If Eurozone depositors move their capital - more bailouts will be required, thereby increasing the sovereign debt levels and exacerbating the seemingly hopeless situation that much more.

As the questionnaire above suggests, we believe a growing number of European depositors are transferring their money out of EU banks, and many of them are reinvesting their capital into gold and silver for safety. It does not surprise us to see gold hitting all-time highs in euros and dollars. It's worthwhile to acknowledge that those investors in Iceland and Ireland who had the foresight to convert their cash to gold before their countries' respective bank runs have all fared extremely well in both nominal and real terms. We believe that gold and silver are the ultimate alternative for a chequing account in a vulnerable banking jurisdiction, and whether the ECB prints more euros or eventually defaults, both outcomes will continue to support a robust demand for precious metals as an alternative currency.


THE REAL BANKING CRISIS
http://www.zerohedge.com/news/eric-sprot...is-part-ii

Here we go again. Back in July 2011 we wrote an article entitled "The Real Banking Crisis" where we discussed the increasing instability of the Eurozone banks suffering from depositor bank runs. Since that time (and two LTRO infusions and numerous bailouts later), Eurozone banks, as represented by the Euro Stoxx Banks Index, have fallen more than 50% from their July 2011 levels and are now in the midst of yet another breakdown led by the abysmal situation currently unfolding in Greece and Spain.

On Wednesday, May 16th, it was reported that Greek depositors withdrew as much as €1.2 billion from their local Greek banks on the preceding Monday and Tuesday alone, representing 0.75% of total deposits.1 Reports suggest that as much as €700 million was withdrawn the week before. Greek depositors have now withdrawn €3 billion from their banking system since the country's elections on May 6th, seemingly emptying what was left of the liquidity remaining within the Greek banking system.2 According to Reuters, the Greek banks had already collectively borrowed €73.4 billion from the ECB and €54 billion from the Bank of Greece as of the end of January 2012 - which is equivalent to approximately 77% of the Greek banking system's €165 billion in household and business deposits held at the end of March.3 The recent escalation in withdrawals has forced the Greek banks to draw on an €18 billion emergency fund (released on May 28th), which if depleted, will leave the country with a cushion of a mere €3 billion.4 It's now down to the wire. Greece is essentially €21 billion away from a complete banking collapse, or alternatively, another large-scale bailout from the European Central Bank (ECB).

The way this is unfolding probably doesn't surprise anyone, but the time it has taken for the remaining Greek depositors to withdraw their money is certainly perplexing to us. Official records suggest that the Greek banks only lost a third of their deposits between January 2010 and March 2012, which begs the question of why the Greek banks have had to borrow so much capital from the ECB in the meantime.5 Nonetheless, we are finally past the tipping point where Greek depositors have had enough, and the past two weeks have perfectly illustrated how quickly a determined bank run can propel a country back into crisis mode. The numbers above suggest there really isn't much of a banking system left in Greece at all, and at this point no sane person or corporation would willingly continue to hold deposits within a Greek bank unless they had no other choice.

The fact remains that here we are, in May 2012, and Greece is right back in the exact same predicament it was in before its March 2012 bailout. Before the bailout, Greece had approximately €368 billion of debt outstanding, and its government bond yields were trading above 35%.6 On March 9th, the authorities arranged for private investors to forgive more than €100 billion of that debt, and launched a €130 billion rescue package that prompted Nicolas Sarkozy to exclaim that the Greek debt crisis had finally been solved.7 Today, a mere two months later, Greece is back up to almost €400 billion in total debt outstanding (more than it had pre-bailout), and its sovereign bond yields are back above 29%. It's as if the March bailout never happened… and if you remember, that lauded Greek bailout back in March represented the largest sovereign restructuring in history. It is now safe to assume that that record will be surpassed in short order. It's either that, or Greece is out of the Eurozone and back on the drachma - hence the renewed bank run among Greek depositors.

Meanwhile, in Spain, bank depositors have been pulling money out of the recently nationalized Bankia bank, which is the fourth largest bank in the country. Depositors reportedly withdrew €1 billion during the week of May 7th alone, prompting shares of Bankia to fall 29% in one day.8 The Bankia run coincided with Moody's issuance of a sweeping downgrade of 16 Spanish banks, a move that was prompted over concerns related to the Spanish banks' €300+ billion exposure to domestic real estate loans, half of which are believed to be delinquent.9 The Spanish authorities were quick to deny the Bankia run, with Fernando Jiménez Latorre, secretary of state for the economy stating, "It is not true that there has been an exit of deposits at this time from Bankia… there is no concern about a possible flight of deposits, as there is no reason for it."10 Funny then that the Spanish government had to promptly launch a €9 billion bailout for Bankia the following Wednesday, May 24th, an amount which has since increased to a total of €19 billion to fund the ailing bank.11 Deny, deny some more… panic, inject capital - this is the typical government approach to bank runs, but the bailouts are happening faster now, and the numbers are getting larger.

The recent bank runs in Greece and Spain are part of a broader trend that has been building for months now. Foreign depositors in the peripheral EU countries are understandably nervous and have been steadily lowering their exposure to Eurozone sovereign debt. According to JPMorgan analysts, approximately €200 billion of Italian government bonds and €80 billion of Spanish bonds have been sold by foreign investors over the past nine months, representing more than 10% of each market.12 The same can be said for foreign deposits in those countries. Citi's credit strategist Matt King recently reported that, "in Greece, Ireland, and Portugal, foreign deposits have fallen by an average of 52%, and foreign government bond holdings by an average of 33%, from their peaks."13 Spain and Italy are not immune either, with Spain having suffered €100 billion in outflows since the middle of last year (certainly more now), and Italy having lost €230 billion, representing roughly 15% of its GDP.14

As we've stated before, no matter what happens in the Eurozone, the absolute worst case scenario for the authorities is a bank run. It terrifies all involved, because they can spiral out of control faster than governments can react to stop them, save for the most Draconian measures. They also prompt banks to liquidate whatever assets they can, revealing the truth about what their "assets" are actually worth. In this environment, no one wants to find out what the market will really pay for them. We're seeing this now in Spain, where according to Bloomberg, "Many Spanish banks are avoiding property sales so they don't have to "mark to market" valuations. Instead, they're giving developers new loans to pay debt coming due to prevent defaults."15 Sound familiar? We're now at the point where a bank run in one Eurozone country could quickly seize up the entire system - not just in Greece or Spain, but throughout the entire Eurozone and beyond. Greek and Spanish banks are just like all the others; they operate with leverage ratios averaging 25x their equity capital. They are all so overleveraged that it takes very little in deposit withdrawals to cause instantaneous liquidity issues. This is why we'll likely see another ECB-induced printing program announced (with a new abbreviation, hopefully) before a broader bank run can take root. The Eurozone authorities simply cannot risk the consequences of bank runs in countries like Spain, Portugal or Italy, which are far too big to bailout for the over-stretched ECB. It's not about Greece staying or leaving the European Union anymore, it's about the bailout ability of European banking system to survive the impact of massive money transfers.

Nothing is really being solved here, and everyone knows it. We're essentially in the same place we were when the crisis erupted back in 2010, only now there's more total debt outstanding. Bank of Canada Governor Mark Carney remarked in a December 2011 speech that "the global Minsky moment has arrived", and it's now plain for all to see.16 The "Minsky moment" refers to the work of Hyman Minsky, a deceased American economist who developed theories on how debt accumulation eventually leads to financial crises. You don't have to be an economist to understand the crux of Minsky's theories. As an economy grows it takes on increasing amounts of debt. The point eventually comes when the cost of servicing that debt can no longer be met by that economy's productive capacity - that's the Minsky Moment, and we're watching it play out all over the world today. When Greek bond yields spiked back in February 2012, bond investors looking at the country's €368 billion of debt outstanding, its population of 11 million people, and its nominal GDP of $312 billion realized that it couldn't possibly work. There was no way Greece could pay the interest on its debt load. There was no way the bond market could keep pretending everything was ok, like it currently does with the UK, US and Japan… for now.

Greece clearly needs another large-scale bailout, and we think they'll get one. Greece's exit from the Eurozone represents a Lehman-like scenario to the global banking system - why wait to see what carnage it will unleash? It's always easier to print money, and printing another couple €100 billion is nothing compared to the trillions that have been printed since last November. Where this will get tense, however, is when the market acknowledges the Minsky moment in a larger EU economy, like Spain or Italy. As we go to print, Spanish bond yields are now trading back above 6.5%, signaling the market's non-confidence in the country's ability to back-stop its own banking system. Spain has a population of 47 million, a GDP of roughly $1.3 trillion, national debt of roughly $1.1 trillion, debt owed to the ECB and various bailout funds totaling €643 billion, and now, a banking system that also appears close to collapsing.17 Their Minsky Moment has already arrived, and it's simply a matter now of how the market will react to it, and how long it takes the ECB to come to Spain's rescue.

Without a doubt, the most counterintuitive aspect of the Greece/Eurozone debacle has been its impact on the price of gold. Gold is now back below $1600 for the third time since August 2011; each time has coincided with severe banking stress within Greece and the broader Eurozone. Some pundits have suggested that various European banks are selling gold to raise liquidity, and this would make sense if the Eurozone banks had gold to sell, but we cannot find any evidence of large physical sellers out of Europe. Also, ever since the unlimited US-dollar SWAP agreement was launched in November 2011, USD liquidity has not been the key issue in Europe - rising sovereign bond yields and deposit withdrawals have. On the contrary, the selling pressure in gold once again appears to be expressed primarily through the futures markets, which are highly levered and rarely involve any physical transactions involving actual bullion. The futures market sell-off also appears to be waning now, since the European banking crisis has provided central banks with a politically-palatable excuse to take action if it deteriorates any further.

The recent gold price has been particularly frustrating given the continuation of bullish demand trends out of China. China posted another record Hong Kong gold import number in March of 62.9 tonnes. Gold imports into China have now totaled 135.5 metric tonnes between January and March 2012, representing a 600% increase over the same period last year.18 We don't have to connect the dots here - China is stockpiling the precious metal while investors in the West scratch their heads wondering why the spot price is so low.

Non-G6 central banks have also continued to accumulate physical gold, with the latest reports revealing another 70 tonnes of gold purchases completed in March and April by the central banks of Philippines, Turkey, Mexico, Kazakhstan, Ukraine and Sri Lanka.19 We won't bore you with the exercise of annualizing those numbers and comparing them to the annual global mine supply, but suffice it to say that the fundamentals still remain firmly intact. It's now simply a matter of improving sentiment towards gold in the West, and if the current banking crisis in Europe gets any worse, or if we see another large-scale policy response, it will likely happen on its own accord.

Although the last eight months have not played out the way we would have expected for gold, they have played out the way we envisioned for the banks. The question now is how long this can go on for, and how long gold can remain under pressure in a banking crisis that has the potential to spread beyond Greece and Spain? So much now rests on the policy responses fashioned by the US Fed and ECB, and just as much also rests on what's left of European citizens' confidence in their local banking institutions. Neither of these things can be precisely measured or predicted, but we continue to firmly believe that depositors in Greece and Spain will choose gold over drachmas or pesetas if they have the foresight and are given the freedom to act accordingly. The number one reason we have always believed gold should be owned, and why we believe it will go higher, is people's growing distrust of the banking system - and we are now there. We will wait and see how the summer develops, and keep our attention firmly focused of the second phase of the bank run now spreading across southern Europe.
Reply
FINANCIAL COLLAPSE AT HAND: WHEN IS "SOONER OR LATER "?
Dr. Paul Craig Roberts
http://www.globalresearch.ca/index.php?context=va&aid=31272


Ever since the beginning of the financial crisis and Quantitative Easing, the question has been before us: How can the Federal Reserve maintain zero interest rates for banks and negative real interest rates for savers and bond holders when the US government is adding $1.5 trillion to the national debt every year via its budget deficits? Not long ago the Fed announced that it was going to continue this policy for another 2 or 3 years. Indeed, the Fed is locked into the policy. Without the artificially low interest rates, the debt service on the national debt would be so large that it would raise questions about the US Treasury’s credit rating and the viability of the dollar, and the trillions of dollars in Interest Rate Swaps and other derivatives would come unglued.

In other words, financial deregulation leading to Wall Street’s gambles, the US government’s decision to bail out the banks and to keep them afloat, and the Federal Reserve’s zero interest rate policy have put the economic future of the US and its currency in an untenable and dangerous position. It will not be possible to continue to flood the bond markets with $1.5 trillion in new issues each year when the interest rate on the bonds is less than the rate of inflation. Everyone who purchases a Treasury bond is purchasing a depreciating asset. Moreover, the capital risk of investing in Treasuries is very high. The low interest rate means that the price paid for the bond is very high. A rise in interest rates, which must come sooner or later, will collapse the price of the bonds and inflict capital losses on bond holders, both domestic and foreign.

The question is: when is sooner or later? The purpose of this article is to examine that question.

Let us begin by answering the question: how has such an untenable policy managed to last this long?

A number of factors are contributing to the stability of the dollar and the bond market. A very important factor is the situation in Europe. There are real problems there as well, and the financial press keeps our focus on Greece, Europe, and the euro. Will Greece exit the European Union or be kicked out? Will the sovereign debt problem spread to Spain, Italy, and essentially everywhere except for Germany and the Netherlands?

Will it be the end of the EU and the euro? These are all very dramatic questions that keep focus off the American situation, which is probably even worse.

The Treasury bond market is also helped by the fear individual investors have of the equity market, which has been turned into a gambling casino by high-frequency trading.

High-frequency trading is electronic trading based on mathematical models that make the decisions. Investment firms compete on the basis of speed, capturing gains on a fraction of a penny, and perhaps holding positions for only a few seconds. These are not long-term investors. Content with their daily earnings, they close out all positions at the end of each day.

High-frequency trades now account for 70-80% of all equity trades. The result is major heartburn for traditional investors, who are leaving the equity market. They end up in Treasuries, because they are unsure of the solvency of banks who pay next to nothing for deposits, whereas 10-year Treasuries will pay about 2% nominal, which means, using the official Consumer Price Index, that they are losing 1% of their capital each year. Using John Williams’ (shadowstats.com) correct measure of inflation, they are losing far more. Still, the loss is about 2 percentage points less than being in a bank, and unlike banks, the Treasury can have the Federal Reserve print the money to pay off its bonds. Therefore, bond investment at least returns the nominal amount of the investment, even if its real value is much lower. ( For a description of High-frequency trading, see: http://en.wikipedia.org/wiki/High_frequency_trading )

The presstitute financial media tells us that flight from European sovereign debt, from the doomed euro, and from the continuing real estate disaster into US Treasuries provides funding for Washington’s $1.5 trillion annual deficits. Investors influenced by the financial press might be responding in this way. Another explanation for the stability of the Fed’s untenable policy is collusion between Washington, the Fed, and Wall Street. We will be looking at this as we progress.

Unlike Japan, whose national debt is the largest of all, Americans do not own their own public debt. Much of US debt is owned abroad, especially by China, Japan, and OPEC, the oil exporting countries. This places the US economy in foreign hands. If China, for example, were to find itself unduly provoked by Washington, China could dump up to $2 trillion in US dollar-dominated assets on world markets. All sorts of prices would collapse, and the Fed would have to rapidly create the money to buy up the Chinese dumping of dollar-denominated financial instruments.

The dollars printed to purchase the dumped Chinese holdings of US dollar assets would expand the supply of dollars in currency markets and drive down the dollar exchange rate. The Fed, lacking foreign currencies with which to buy up the dollars would have to appeal for currency swaps to sovereign debt troubled Europe for euros, to Russia, surrounded by the US missile system, for rubles, to Japan, a country over its head in American commitment, for yen, in order to buy up the dollars with euros, rubles, and yen.

These currency swaps would be on the books, unredeemable and making additional use of such swaps problematical. In other words, even if the US government can pressure its allies and puppets to swap their harder currencies for a depreciating US currency, it would not be a repeatable process. The components of the American Empire don’t want to be in dollars any more than do the BRICS.

However, for China, for example, to dump its dollar holdings all at once would be costly as the value of the dollar-denominated assets would decline as they dumped them. Unless China is faced with US military attack and needs to defang the aggressor, China as a rational economic actor would prefer to slowly exit the US dollar. Neither do Japan, Europe, nor OPEC wish to destroy their own accumulated wealth from America’s trade deficits by dumping dollars, but the indications are that they all wish to exit their dollar holdings.

Unlike the US financial press, the foreigners who hold dollar assets look at the annual US budget and trade deficits, look at the sinking US economy, look at Wall Street’s uncovered gambling bets, look at the war plans of the delusional hegemon and conclude: “I’ve got to carefully get out of this.”

US banks also have a strong interest in preserving the status quo. They are holders of US Treasuries and potentially even larger holders. They can borrow from the Federal Reserve at zero interest rates and purchase 10-year Treasuries at 2%, thus earning a nominal profit of 2% to offset derivative losses. The banks can borrow dollars from the Fed for free and leverage them in derivative transactions. As Nomi Prins puts it, the US banks don’t want to trade against themselves and their free source of funding by selling their bond holdings. Moreover, in the event of foreign flight from dollars, the Fed could boost the foreign demand for dollars by requiring foreign banks that want to operate in the US to increase their reserve amounts, which are dollar based.

I could go on, but I believe this is enough to show that even actors in the process who could terminate it have themselves a big stake in not rocking the boat and prefer to quietly and slowly sneak out of dollars before the crisis hits. This is not possible indefinitely as the process of gradual withdrawal from the dollar would result in continuous small declines in dollar values that would end in a rush to exit, but Americans are not the only delusional people.

The very process of slowly getting out can bring the American house down. The BRICS--Brazil, the largest economy in South America, Russia, the nuclear armed and energy independent economy on which Western Europe ( Washington’s NATO puppets) are dependent for energy, India, nuclear armed and one of Asia’s two rising giants, China, nuclear armed, Washington’s largest creditor (except for the Fed), supplier of America’s manufactured and advanced technology products, and the new bogyman for the military-security complex’s next profitable cold war, and South Africa, the largest economy in Africa--are in the process of forming a new bank. The new bank will permit the five large economies to conduct their trade without use of the US dollar.

In addition, Japan, an American puppet state since WW II, is on the verge of entering into an agreement with China in which the Japanese yen and the Chinese yuan will be directly exchanged. The trade between the two Asian countries would be conducted in their own currencies without the use of the US dollar. This reduces the cost of foreign trade between the two countries, because it eliminates payments for foreign exchange commissions to convert from yen and yuan into dollars and back into yen and yuan.

Moreover, this official explanation for the new direct relationship avoiding the US dollar is simply diplomacy speaking. The Japanese are hoping, like the Chinese, to get out of the practice of accumulating ever more dollars by having to park their trade surpluses in US Treasuries. The Japanese US puppet government hopes that the Washington hegemon does not require the Japanese government to nix the deal with China.

Now we have arrived at the nitty and gritty. The small percentage of Americans who are aware and informed are puzzled why the banksters have escaped with their financial crimes without prosecution. The answer might be that the banks “too big to fail” are adjuncts of Washington and the Federal Reserve in maintaining the stability of the dollar and Treasury bond markets in the face of an untenable Fed policy.

Let us first look at how the big banks can keep the interest rates on Treasuries low, below the rate of inflation, despite the constant increase in US debt as a percent of GDP--thus preserving the Treasury’s ability to service the debt.

The imperiled banks too big to fail have a huge stake in low interest rates and the success of the Fed’s policy. The big banks are positioned to make the Fed’s policy a success. JPMorganChase and other giant-sized banks can drive down Treasury interest rates and, thereby, drive up the prices of bonds, producing a rally, by selling Interest Rate Swaps (IRSwaps).

A financial company that sells IRSwaps is selling an agreement to pay floating interest rates for fixed interest rates. The buyer is purchasing an agreement that requires him to pay a fixed rate of interest in exchange for receiving a floating rate.

The reason for a seller to take the short side of the IRSwap, that is, to pay a floating rate for a fixed rate, is his belief that rates are going to fall. Short-selling can make the rates fall, and thus drive up the prices of Treasuries. When this happens, as the charts at http://www.marketoracle.co.uk/Article34819.html illustrate, there is a rally in the Treasury bond market that the presstitute financial media attributes to “flight to the safe haven of the US dollar and Treasury bonds.” In fact, the circumstantial evidence (see the charts in the link above) is that the swaps are sold by Wall Street whenever the Federal Reserve needs to prevent a rise in interest rates in order to protect its otherwise untenable policy. The swap sales create the impression of a flight to the dollar, but no actual flight occurs. As the IRSwaps require no exchange of any principal or real asset, and are only a bet on interest rate movements, there is no limit to the volume of IRSwaps.

This apparent collusion suggests to some observers that the reason the Wall Street banksters have not been prosecuted for their crimes is that they are an essential part of the Federal Reserve’s policy to preserve the US dollar as world currency. Possibly the collusion between the Federal Reserve and the banks is organized, but it doesn’t have to be. The banks are beneficiaries of the Fed’s zero interest rate policy. It is in the banks’ interest to support it. Organized collusion is not required.

Let us now turn to gold and silver bullion. Based on sound analysis, Gerald Celente and other gifted seers predicted that the price of gold would be $2000 per ounce by the end of last year. Gold and silver bullion continued during 2011 their ten-year rise, but in 2012 the price of gold and silver have been knocked down, with gold being $350 per ounce off its $1900 high.

In view of the analysis that I have presented, what is the explanation for the reversal in bullion prices? The answer again is shorting. Some knowledgeable people within the financial sector believe that the Federal Reserve (and perhaps also the European Central Bank) places short sales of bullion through the investment banks, guaranteeing any losses by pushing a key on the computer keyboard, as central banks can create money out of thin air.

Insiders inform me that as a tiny percent of those on the buy side of short sells actually want to take delivery on the gold or silver bullion, and are content with the financial money settlement, there is no limit to short selling of gold and silver. Short selling can actually exceed the known quantity of gold and silver.

Some who have been watching the process for years believe that government-directed short-selling has been going on for a long time. Even without government participation, banks can control the volume of paper trading in gold and profit on the swings that they create. Recently short selling is so aggressive that it not merely slows the rise in bullion prices but drives the price down. Is this aggressiveness a sign that the rigged system is on the verge of becoming unglued?

In other words, “our government,” which allegedly represents us, rather than the powerful private interests who elect “our government” with their multi-million dollar campaign contributions, now legitimized by the Republican Supreme Court, is doing its best to deprive us mere citizens, slaves, indentured servants, and “domestic extremists” from protecting ourselves and our remaining wealth from the currency debauchery policy of the Federal Reserve. Naked short selling prevents the rising demand for physical bullion from raising bullion’s price.

Jeff Nielson explains another way that banks can sell bullion shorts when they own no bullion. http://www.gold-eagle.com/editorials_08/...02411.html Nielson says that JP Morgan is the custodian for the largest long silver fund while being the largest short-seller of silver. Whenever the silver fund adds to its bullion holdings, JP Morgan shorts an equal amount. The short selling offsets the rise in price that would result from the increase in demand for physical silver. Nielson also reports that bullion prices can be suppressed by raising margin requirements on those who purchase bullion with leverage. The conclusion is that bullion markets can be manipulated just as can the Treasury bond market and interest rates.

How long can the manipulations continue? When will the proverbial hit the fan?

If we knew precisely the date, we would be the next mega-billionaires.

Here are some of the catalysts waiting to ignite the conflagration that burns up the Treasury bond market and the US dollar:

A war, demanded by the Israeli government, with Iran, beginning with Syria, that disrupts the oil flow and thereby the stability of the Western economies or brings the US and its weak NATO puppets into armed conflict with Russia and China. The oil spikes would degrade further the US and EU economies, but Wall Street would make money on the trades.

An unfavorable economic statistic that wakes up investors as to the true state of the US economy, a statistic that the presstitute media cannot deflect.

An affront to China, whose government decides that knocking the US down a few pegs into third world status is worth a trillion dollars.

More derivate mistakes, such as JPMorganChase’s recent one, that send the US financial system again reeling and reminds us that nothing has changed.

The list is long. There is a limit to how many stupid mistakes and corrupt financial policies the rest of the world is willing to accept from the US. When that limit is reached, it is all over for “the world’s sole superpower” and for holders of dollar-denominated instruments.

Financial deregulation converted the financial system, which formerly served businesses and consumers, into a gambling casino where bets are not covered. These uncovered bets, together with the Fed’s zero interest rate policy, have exposed Americans’ living standard and wealth to large declines. Retired people living on their savings and investments, IRAs and 401(k)s can earn nothing on their money and are forced to consume their capital, thereby depriving heirs of inheritance. Accumulated wealth is consumed.

As a result of jobs offshoring, the US has become an import-dependent country, dependent on foreign made manufactured goods, clothing, and shoes. When the dollar exchange rate falls, domestic US prices will rise, and US real consumption will take a big hit. Americans will consume less, and their standard of living will fall dramatically.

The serious consequences of the enormous mistakes made in Washington, on Wall Street, and in corporate offices are being held at bay by an untenable policy of low interest rates and a corrupt financial press, while debt rapidly builds. The Fed has been through this experience once before. During WW II the Federal Reserve kept interest rates low in order to aid the Treasury’s war finance by minimizing the interest burden of the war debt. The Fed kept the interest rates low by buying the debt issues. The postwar inflation that resulted led to the Federal Reserve-Treasury Accord in 1951, in which agreement was reached that the Federal Reserve would cease monetizing the debt and permit interest rates to rise.

Fed chairman Bernanke has spoken of an “exit strategy” and said that when inflation threatens, he can prevent the inflation by taking the money back out of the banking system. However, he can do that only by selling Treasury bonds, which means interest rates would rise. A rise in interest rates would threaten the derivative structure, cause bond losses, and raise the cost of both private and public debt service. In other words, to prevent inflation from debt monetization would bring on more immediate problems than inflation. Rather than collapse the system, wouldn’t the Fed be more likely to inflate away the massive debts?

Eventually, inflation would erode the dollar’s purchasing power and use as the reserve currency, and the US government’s credit worthiness would waste away. However, the Fed, the politicians, and the financial gangsters would prefer a crisis later rather than sooner. Passing the sinking ship on to the next watch is preferable to going down with the ship oneself. As long as interest rate swaps can be used to boost Treasury bond prices, and as long as naked shorts of bullion can be used to keep silver and gold from rising in price, the false image of the US as a safe haven for investors can be perpetuated.

However, the $230,000,000,000,000 in derivative bets by US banks might bring its own surprises. JPMorganChase has had to admit that its recently announced derivative loss of $2 billion is more than that. How much more remains to be seen. According to the Comptroller of the Currency the five largest banks hold 95.7% of all derivatives. The five banks holding $226 trillion in derivative bets are highly leveraged gamblers. For example, JPMorganChase has total assets of $1.8 trillion but holds $70 trillion in derivative bets, a ratio of $39 in derivative bets for every dollar of assets. Such a bank doesn’t have to lose very many bets before it is busted.

Assets, of course, are not risk-based capital. According to the Comptroller of the Currency report, as of December 31, 2011, JPMorganChase held $70.2 trillion in derivatives and only $136 billion in risk-based capital. In other words, the bank’s derivative bets are 516 times larger than the capital that covers the bets.

It is difficult to imagine a more reckless and unstable position for a bank to place itself in, but Goldman Sachs takes the cake. That bank’s $44 trillion in derivative bets is covered by only $19 billion in risk-based capital, resulting in bets 2,295 times larger than the capital that covers them.

Bets on interest rates comprise 81% of all derivatives. These are the derivatives that support high US Treasury bond prices despite massive increases in US debt and its monetization.

US banks’ derivative bets of $230 trillion, concentrated in five banks, are 15.3 times larger than the US GDP. A failed political system that allows unregulated banks to place uncovered bets 15 times larger than the US economy is a system that is headed for catastrophic failure. As the word spreads of the fantastic lack of judgment in the American political and financial systems, the catastrophe in waiting will become a reality.

Everyone wants a solution, so I will provide one. The US government should simply cancel the $230 trillion in derivative bets, declaring them null and void. As no real assets are involved, merely gambling on notional values, the only major effect of closing out or netting all the swaps (mostly over-the-counter contracts between counter-parties) would be to take $230 trillion of leveraged risk out of the financial system. The financial gangsters who want to continue enjoying betting gains while the public underwrites their losses would scream and yell about the sanctity of contracts. However, a government that can murder its own citizens or throw them into dungeons without due process can abolish all the contracts it wants in the name of national security. And most certainly, unlike the war on terror, purging the financial system of the gambling derivatives would vastly improve national security.


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