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THE GLOBAL FINANCIAL MELTDOWN
#41
A DEBT CULTURE GONE AWRY
Hamid Varzi

The U.S. economy, once the envy of the world, is now viewed across the globe with suspicion. America has become shackled by an immovable mountain of debt that endangers its prosperity and threatens to bring the rest of the world economy crashing down with it.

The ongoing sub-prime mortgage crisis, a result of irresponsible lending policies designed to generate commissions for unscrupulous brokers, presages far deeper problems in a U.S. economy that is beginning to resemble a giant smoke-and-mirrors Ponzi scheme. And this has not been lost on the rest of the world.

This new reality has had unfortunate side effects that go beyond economics. As a banker working in the heart of the Muslim world, I have been amazed by the depth and breadth of anti-Americanism, even among U.S. allies, manifested in reactions ranging from fierce anger to stoic fatalism. Muslims outside the United States interpret America's policies in the Middle East not as an effort to spread democracy but as a blatant neocolonialist attempt to solve its economic problems by force. Arabs and Persians alike argue that America's fiscal irresponsibility has forced the nation to seek solutions through military aggression.

Many believe that America's misguided adventure in Iraq was a desperate attempt to capture both a reliable source of cheap oil and a major export market for the United States.

The United States borrows a whopping $2.5 billion daily from abroad to service its burgeoning debt. In order to continue borrowing at reasonable interest rates America needs to retain credibility with its overseas creditors, especially Far Eastern nations running huge trade surpluses. A cessation of foreign lending would force the Fed to raise interest rates to attract money, precipitating a collapse of the already weak housing market and pushing the economy into recession.

This is why the Chinese, in particular, have threatened to retaliate against proposed U.S. trade sanctions by reducing their $1.3 trillion in dollar holdings.

The U.S. debt situation is so grave that the Chinese would not even need to "dump dollars" to precipitate a meltdown but could simply refuse to extend further credit: They could cease purchasing additional Treasury Bonds and Treasury Bills, without selling any excess inventory. China has the far stronger hand, because a run on the dollar would merely reduce China's gigantic cash surplus while increasing America's debt burden to astronomical levels.

U.S. debt affects all nations, but in surprisingly different ways: Third world farmers suffer from the effects of gigantic U.S. farm subsidies aimed at reducing the trade deficit, while Russia has actually profited from America's lack of discipline.

Flush with funds generated from a decade of trade and account surpluses, Russia views U.S. sensitivity to its expansionist energy policy as a response to America's own failure to reduce energy waste and exploit alternative energy sources when it had the opportunity to do so. In sum, American economic decadence has become a source of Russian strength.

America's supply-side economists argue that there is nothing wrong with going into debt, but this is valid only as long as a nation and its consumers are gaining something in return.

What have Americans gained from their nation's mountain of debt? A crumbling infrastructure, a manufacturing base that has declined 60 percent since World War II, a rise in the wealth gap, the lowest consumer-savings rate since the depths of the Great Depression, 50 million Americans without health insurance, an educational system in decline and a shrinking dollar that makes foreign travel a luxury.

The best cars, the best bridges and highways, the fastest trains and the tallest buildings are all to be found outside America's borders. Supply-siders ignore the crucial distinction between, on the one hand, debt employed as an investment vehicle to enhance competitiveness and, on the other, debt used to pay off current expenses and to create even more debt.

The bottom line is that America is awash in red ink and seeks the wrong solutions to its debt problems. A return to fiscal responsibility would make America far stronger, both domestically and internationally, than would a continuation of current policies that falsely project strength through idle protectionist threats and failed military aggression.

Current tensions between the United States and the rest of the world will continue as long as America's military bark is louder than its economic bite.

A solution to the U.S. debt problem requires radical measures, including: the elimination of corporate tax loopholes, a reversal of tax breaks for the ultra-rich, a bipartisan campaign to eliminate budget "pork," imposition of stringent limits on corporate debt and speculative lending, a vast reduction in military expenditure and, finally, an additional 50 cent per gallon gasoline tax that would slash the federal deficit, curtail energy waste and spur technological breakthroughs.

Let us hope America heeds the warnings, dispenses with junk-food economics and embraces a crucial diet of fiscal discipline. It remains to be seen, however, whether America's political leaders have the courage to instigate such reforms, and whether Congress is finally willing to do something for the future of ordinary, hard-working Americans.

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#42
ACTION MUST BEGIN IMMEDIATELY DURING SEPTEMBER, OCTOBER


Lyndon LaRouche replied as follows today, to a question e-mailed earlier by Giorgio Vitangeli, economist, author, and director of the monthly "Finanza Italiana," Rome:

"The needed action of reform must begin immediately during the rapidly unfolding weeks of September and October. The possibility of launching the first of a series of phased reforms has been created by the rate of accelerating ferocity of the breakdown now already in progress. We are already witnessing the rapidly rising storm presently hitting the mortgage-based securities system and the banking system, that with inevitable global, early, chain-reaction effects hitting all nations, world-wide. The present world monetary-financial system is now thrashing wildly on its death-bed. Soon, without drastic reforms of policy, the movements of the sick man will become more and more violent, but, then, become less, and less, and less; then, soon, without the needed drastic reform, the sick man's movement will finally cease.

The present floating-exchange monetary ship, the ship launched by the U.S.'s George Shultz, and captained, until recently, by Paul Volcker and his successor, mad Captain Greenspan, is sinking. Passengers who are reluctant to move off that floating system now, are to be mourned. This response by me should be read against the background defined and outlined in my just recently published, 44,000- word prolegomena for a U.S. Democratic Party's 2008 Presidential campaign platform, "The End of Our Delusion." The Preface and the first two of the three chapters of that prolegomena are devoted to the indispensable historical and physical-scientific background which is necessary for comprehension of the relatively more crucial programmatic features, which are addressed in the third chapter of that prolegomena.

As I indicated in my international LPAC webcast of July 25, 2007, where I announced the actual opening of the breakdown-phase of the worldwide monetary system, the new global crisis is already under way. That international crisis is a general breakdown-crisis of the present world monetary-financial system, but NOT NECESSARILY an economic breakdown-crisis. The physical economy can be saved, if appropriate reforms are made in time; the planet's present, "floating exchange-rate" monetary-financial system can not be saved.

The crisis will proceed in successive phases. We have entered the first phase, which is typified by the collapse of a global real-estate bubble on which the entire current monetary- financial system hangs today. The most immediate of these challenges, is being presented at this time. The U.S.A. and other governments most now react to the need for an immediate placing of home mortgages and chartered banks of the U.S. under bankruptcy protection by law. This measure is the indispensable lawful protection needed to prevent an uncontrollable, chain-reaction, hyper-inflationary collapse of the present world monetary-financial system as a whole. An uncontrolled crisis of that type would be comparable to the chain-reaction set into motion by the Fourteenth-Century collapse of the House of Bardi.

At the present moment, a set of very influential and other public and private U.S. figures, of which I am a functioning part, have formed a de facto pilot-group in support of what I have proposed as providing protection for households against foreclosures of mortgages, and also providing protection for chartered banks, but not other kinds of financial institutions operating outside the chartered banking system itself.

This emergency reform is indispensable. Without it, other reforms needed could not be implemented successfully. We must return immediately, to a virtual reestablishment of a global, fixed-exchange-rate mode of Bretton Woods system of international and national credit. This must be understood as in the form which had been intended under U.S. President Franklin Roosevelt, and not the form matters took, immediately, under President Harry Truman.

The general reform of the world's monetary-financial system must be premised on an underlying physical-economic commitment expressed in chiefly long-term capital investments in capital-intensive modes, and in a global climate of a simple underlying interest-rate for long-term lending of 1-2%. At least half of the investment would be in long-term modern infrastructure, and the remainder in agriculture and industry. The combination of the elements of this program will represent an investment cycle of about fifty years maturity of new obligations generated.

Without U.S.A. cooperation with Russia, China, and India in creating a nucleus around which to bring in other nations, the needed organization of a revival of the physical economy would lack the indispensable "political detonator" which the launching of such a general reform requires. If relevant forces in the U.S. present that proposal, to form a sponsoring body for the assembly of a broader range of nations (as a coalition within the UNO) to Russia, China, and India, it were reasonably certain that Russia would accept a serious such proposal, and, with Russia's participation, the conditions for the formation of a sponsoring group of the four will exist. On the matter of lapse of time, we must take into account the shocked state of mind in nations which are witnessing the daily disintegration of the system, under their eyes."



NEW YORK CITY FORECLOSURES ARE MICROCOSM OF GLOBAL COLLAPSE
http://www.larouchepac.com/news/2007/08/...lapse.html

A devastating study by New York State Senator Jeffrey D. Klein released on Aug. 27 names the top ten banks which hold the subprime mortgage notes on foreclosed properties in New York City. Among them are Deutsche Bank, Wells Fargo Bank, or U.S. Bank, N.A. (which are the three top lenders to New Yorkers with the highest number of foreclosure filings between July 1, 2006 and July 31, 2007). Over that period foreclosure filings listed from these banks were: Deutsche Bank, 2,299; Wells Fargo, 1,791; and U.S. Bank, N.A., 1,711. The notorious opium bank HSBC was in fourth place with 989 foreclosure filings.

As LPAC reported Aug. 27, an expected 60% increase in the rate, over 2006, of foreclosure filings is likely by the end of 2007. Klein's survey covers the 5 boroughs of New York City and the adjacent counties of Westchester and Nassau. The foreclosures are particularly hitting African-American and Hispanic borrowers in these areas with rates ranging from 15% to 87% in various neighborhoods.

In just 2005, statewide in New York, subprime loans totaled $28.5 billion and of those it is predicted 20.9% will fall into foreclosure this year.

Sen. Klein, who has proposed legislative action, is clear: "The sub-prime lending crisis has reached a climax and the effects can be felt at every level from the world financial markets, to the individual homeowner, to the homeowner's neighbor whose property values plummet as communities are flooded with foreclosures." It is "unacceptable" to "remain idle" as people "slip into economic depression," and it is "unconscionable that a bank can knowingly buy debt that was accrued through predatory loans perpetrated against the very people this country is supposed to protect..."


THE TALLER THE BUILDING, THE LONGER THE JUMP: MAJOR BANKS CONTINUE TO COLLAPSE
http://www.larouchepac.com/news/2007/08/...psing.html

More top banks are being revealed as having heavy exposure in the asset backed commercial paper (ABCP) bubble on both sides of the Atlantic and deep into Asia and the Pacific. The international press reports the following victims:

* The Boston based State Street bank has been identified as having no less than $22 billion of exposure in ABCP, held in six "conduits" which account for no less than 17% of its assets. This is the highest exposure of any European or American bank revealed so far. This compares with the 15% exposure of the German IKB bank and the 6% of the German WestLB bank according to timesonline.

* Standard and Chartered stock price came under pressure last week and into this week amid rumors that Whistlejacket Capital, its $18 billion conduit was in trouble. This followed a decline last week of HBOS stock price by 4% following its bailout of Grampian Funding, its $35 billion conduit.

* The stock price of Singapore's largest Bank, DBS Group Holdings, fell by 2% after it admitted it will have to fund a $921 million worth of ABCP. JPMorgan told its clients to avoid DBS stock, reported that it held a Singapore $10 billion bond portfolio classified as "held for trading" according to Reuters.

* Barclay's role in organizing the "SIV-Lites", (Structured Investment Vehicles) for Sachsen LB, which collapsed last week, has brought the British bank under deep scrutiny according to today's Financial Times. This, according to the FT, has left Barclay's with an exposure in the "low hundreds of millions of dollars." They also report that Edward Cahill, the Barclay's executive responsible for setting of the Barclay's own as well as Sachsen's SIV-Lites, has not been seen since his resignation last week.

* Raptor Global Fund of Tudor Investment, an $8.5 billion hedge fund, lost 8% of its value this year, mostly in August.


"WITH THIS GLOBAL FINANCIAL CRISES UNFOLDING, U.S. MUST WITHDRAW TROOPS FROM IRAQ IMMEDIATELY"
http://www.larouchepac.com/news/2007/08/...hdraw.html


Lyndon LaRouche called for the immediate withdrawal of all American military forces from Iraq, citing the unfolding combined housing and banking crises, that make any extension of the U.S. military engagement in Iraq a total folly.

LaRouche warned, "We now have a combination of a banking and housing crisis, which is only the front-end of the biggest financial collapse in modern history. For anyone to talk about extending the war in Iraq, under these already unfolding conditions, is insane." LaRouche elaborated, "We need an immediate withdrawal of all American forces from Iraq. It can and must be done, by effective diplomacy. We can create the kind of coalition of Iraq's neighbors and other nations, by diplomacy, that would make the immediate withdrawal of American troops a stabilizing factor. Let us face the real problem, standing in the way of this only viable solution: The President of the United States is becoming more infantile by the day, and the Vice President of the United States is a criminal. Dick Cheney's removal from office is therefore an immediate, urgent priority for the U.S. Congress and others."

LaRouche returned to the issue of the global financial collapse, already unfolding. "We must change the agenda of the U.S. government to address the biggest financial crisis in history. We must address the immediate housing crisis, the danger that the entire banking system is about to collapse. We must, therefore, disengage from the Iraq war. Start the process of getting the troops safely disengaged now," LaRouche demanded. He further elaborated, "By announcing the immediate withdrawal of American troops from Iraq, we can begin, today, to redeploy our forces, out of Baghdad and other combat zones, in preparation for their orderly withdrawal--as we work, diplomatically, with Russia, China, Europe, the neighboring countries, including Iran, Syria, Turkey, Saudi Arabia and Jordan, the nations of the Organization of Islamic Conference (OIC), and others. This can be done, immediately. Clearly the complete withdrawal of American forces will take some time, but the policy must be set now, and the issue of the global financial collapse, the systemic disintegration, must be directly acknowledged."

LaRouche noted that he appreciated the sentiments of some Congressional leaders, like Sen. John Warner (R-Va.), who has called for the President to announce a token withdrawal of American troops by the end of the year. But he warned that this is insufficient to address the true nature of the crisis. "Some people are beginning to think that the Iraq war is part of our national heritage. That is the real tragedy; to keep the troops there--except for some perverse desire to please those among the British who wish to see the United States destroyed before Bush and Cheney leave office."

LaRouche concluded, "Therefore we must leave now. There is an immediate case for diplomacy, not continued shooting.

The United States is becoming more infantile by the day, and the Vice President of the United States is a criminal. Dick Cheney's removal from office is therefore an immediate, urgent priority for the U.S. Congress and others."

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#43
FED BENDS RULES TO HELP TWO BIG BANKS
http://globalresearch.ca/index.php?context=va&aid=6642

If the Federal Reserve is waiving a fundamental principle in banking regulation, the credit crunch must still be sapping the strength of America's biggest banks. Fortune's Peter Eavis documents an unusual Fed move.

Peter Eavis

NEW YORK (Fortune) -- In a clear sign that the credit crunch is still affecting the nation's largest financial institutions, the Federal Reserve agreed this week to bend key banking regulations to help out Citigroup

(Charts, Fortune 500) and Bank of America (Charts, Fortune 500), according to documents posted Friday on the Fed's web site.

The Aug. 20 letters from the Fed to Citigroup and Bank of America state that the Fed, which regulates large parts of the U.S. financial system, has agreed to exempt both banks from rules that effectively limit the amount of lending that their federally-insured banks can do with their brokerage

affiliates. The exemption, which is temporary, means, for example, that Citigroup's Citibank entity can substantially increase funding to Citigroup Global Markets, its brokerage subsidiary. Citigroup and Bank of America requested the exemptions, according to the letters, to provide liquidity to those holding mortgage loans, mortgage-backed securities, and other securities.

This unusual move by the Fed shows that the largest Wall Street firms are continuing to have problems funding operations during the current market difficulties, according to banking industry skeptics. The Fed's move appears to support the view that even the biggest brokerages have been caught off guard by the credit crunch and don't have financing to deal with the resulting dislocation in the markets. The opposing, less negative view is that the Fed has taken this step merely to increase the speed with which the funds recently borrowed at the Fed's discount window can flow through to the bond markets, where the mortgage mess has caused a drying up of liquidity.

On Wednesday, Citibank and Bank of America said that they and two other banks accessed $500 million in 30-day financing at the discount window. A Citigroup spokesperson declined to comment. Bank of America dismissed the notion that Banc of America Securities is not well positioned to fund operations without help from the federally insured bank. "This is just a technicality to allow us to use our regular channels of business with funds from the Fed's discount window," says Bob Stickler, spokesperson for Bank of America. "We have no current plans to use the discount window beyond the $500 million announced earlier this week."

There is a good chance that other large banks, like J.P. Morgan (Charts, Fortune 500), have been granted similar exemptions. The Federal Reserve and J.P. Morgan didn't immediately comment.

The regulations in question effectively limit a bank's funding exposure to an affiliate to 10% of the bank's capital. But the Fed has allowed Citibank and Bank of America to blow through that level. Citigroup and Bank of America are able to lend up to $25 billion apiece under this exemption, according to the Fed. If Citibank used the full amount, "that represents about 30% of Citibank's total regulatory capital, which is no small exemption," says Charlie Peabody, banks analyst at Portales Partners.

The Fed says that it made the exemption in the public interest, because it allows Citibank to get liquidity to the brokerage in "the most rapid and cost-effective manner possible."

So, how serious is this rule-bending? Very. One of the central tenets of banking regulation is that banks with federally insured deposits should never be over-exposed to brokerage subsidiaries; indeed, for decades financial institutions were legally required to keep the two units completely separate. This move by the Fed eats away at the principle.

Sure, the temporary nature of the move makes it look slightly less serious, but the Fed didn't give a date in the letter for when this exemption will end. In addition, the sheer size of the potential lending capacity at Citigroup and Bank of America - $25 billion each - is a cause for unease. Indeed, this move to exempt Citigroup casts a whole new light on the discount window borrowing that was revealed earlier this week. At the time, the gloss put on the discount window advances was that they were orderly and almost symbolic in nature. But if that were the case, why the need to use these exemptions to rush the funds to the brokerages?

Expect the discount window borrowings to become a key part of the Fed's recovery strategy for the financial system. The Fed's exemption will almost certainly force its regulatory arm to sharpen its oversight of banks' balance sheets, which means banks will almost certainly have to mark down asset values to appropriate levels a lot faster now. That's because there is no way that the Fed is going to allow easier funding to lead to a further propping up of asset prices.

Don't forget: The Federal Reserve is in crisis management at the moment. However, it doesn't want to show any signs of panic. That means no rushed cuts in interest rates. It also means that it wants banks to quickly take the big charges that will inevitably come from holding toxic debt securities. And it will do all it can behind the scenes to work with the banks to help them get through this upheaval. But waiving one of the most important banking regulations can only add nervousness to the market. And that's what the Fed did Monday in these disturbing letters to the nation's two largest banks.


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#44
ON MARKET PREDICTIONS IN THE CURRENT CHAOTIC ENVIROMENT
Richard C. Cook
http://globalresearch.ca/index.php?context=va&aid=6639



No one can predict how deep the decline in Western economies that is underway will go, because there is so little transparent information. Within the U.S., the government is hiding the severity of the crisis in order to prevent a collapse of consumer confidence.

Realize that the problem does not lie on the side of production. Global industry has the capacity to produce a huge quantity of goods and services. There is even a glut in some sectors, such as automobiles, textiles, IT, and other consumer products.

Rather the problem, as with the Great Depression, is that purchasing power at the consumer level is lacking. In the U.S., purchasing power, as measured by M1, is already in a recession-level decline. The causes are the high level of consumer debt, high cumulative levels of taxation on the dwindling middle class, and the tragic erosion of wages and salaries from job outsourcing.

In the absence of purchasing power, the Federal Reserve has chosen the strategy of trying to outrun collapse by creating inflation. This is the meaning of the bail-outs that are going on. It's an attempt to devalue debt at the macro level. It’s a hidden tax on everyone but the super-rich. Everyone else is poorer today than they were yesterday.

How long this can go on is unpredictable. It's another bubble following on the housing and asset bubbles that are already bursting on a daily basis before our eyes.

I don't see any responsible analyst who foresees any better outcome than a recession that would see the DJIA at a level of 8000-8500 within a few months. Again, maybe the Fed's printing presses can hold this level of decline at bay for a while longer, but I doubt it.

There are major players in the markets who see an even steeper decline coming even sooner. Some say as soon as a month.

There is also a real chance of an eventual depression-level contraction. How much of a chance, I don't know. This conceivably could lead to a total collapse of consumer markets, economic paralysis, and widespread homelessness and starvation. Yes, even in the U.S. Agribusiness, bio-fuel conversion, seedless mega-farming, the disappearance of family farming, and the recent disastrous weather conditions place everyone at risk.

At some point, the federal government, at a minimum, has to step in with New Deal-type relief measures. Whether the Bush administration has that capability is doubtful. Look at New Orleans. They may even try to cover everything up by starting a war against Iran. Are they that crazy? Who can say?

There are also rumors going around that there are plans to allow the markets to be crashed by a terrorist event so as to divert blame. I have gotten no reliable confirmation of these rumors, though there are parties placing what people in the markets are calling "bin Laden"-type bets similar to, but bigger than, the "puts" that were placed before the original 9/11.

These types of bets have been placed in the U.S., European, and Japanese markets that assume a stock market crash of fifty percent within the next five weeks. A report was just carried, I’m told, on CNBC.

Some have said the culprit may be China, but it makes no sense for the Chinese to crash the markets while holding U.S. dollars. Others say it is hedge funds at work to try to drive down the markets in a self-fulfilling prophecy.

But a fifty percent market decline? That’s just not conceivable. Even the hedge funds do not have that much power. The federal plunge protection team—known as the "men in black" by floor traders—would never allow them to do something so disastrous. This has caused some to speculate that the "men in black" are parties to the bets.

These remarks probably give some indication of the chaos going on right now in the U.S. and world economies. The only real solution is a new world financial system based on the concept of credit as a public utility. This is what should be implemented to replace the present system of institutionalized usury.

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#45
B.S. Index
BIG BULL FROM THE MARKET BULLS

http://larouchepac.com/news/2007/08/28/b...bulls.html


Increase  DecreaseAugust 28, 2007 (LPAC)--A quick survey of financial wires today will find a daily dose of B.S. from those trying their best to be bullish as the markets crash, the credit dries up, and foreclosures mount, a result of former Federal Reserve chairman Alan "Bubbles" Greenspan and Wall Street's subprime swindle. Today's bulls:

* The global economy is "very healthy" and the credit crunch stemming from U.S. mortgage losses has "almost passed," Mark Mobius, who oversees $30 billion at Templeton Asset Management Ltd. in Singapore, declaimed. "We're pretty bullish," he said during an interview from Hong Kong. "Markets are probably going to surge ahead to new highs barring any other unforeseen circumstances." Maybe he's lost on a mobius-strip.

* Turbulent markets? No problem, according to Dominic McCormick chief executive at Australia's Select Asset Management, a so-called "alternative" investment firm. Speaking at a recent Portfolio Construction conference held downunder he turbulent conditions "create a higher hurdle for the underlying manager, to deliver positive returns, but given the expertise of some of the underlying managers and the niche strategies" high rates of return are possible. Market corrections and hedge fund failures, he sees them as a catalyst for improving returns. "These periods of market stress can actually provide the basis of better returns going forward," McCormick snorted according to InvestorDaily out of Australia.

* Last, if you're willing to bet on bears and lambs going to slaughter, you can make a, ahem, killing. Paulson Credit Opportunities, a $2 billion fund, bet against subprime lending and it has tripled, through July, its value, the New York Times reveals from a confidential source. Likewise, a small fund, Balestra Capital, bet against mortgage-backed securities and it is now worth $206 million, an 84.7% rise in its value.


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#46
CENTRAL BANKERS, MONETARY POLICY AND MORAL HAZARD

ATCA

Dr.Harald Malmgren CEO, Malmgren Global, based in Washington, DC,
Dear DK and Colleagues


The eyes of financial centres across the world are now turning to Jackson Hole in anticipation of a speech by Federal Reserve Chairman Benjamin Bernanke. The Federal Reserve has held an end-of-summer symposium for central bankers, officials and academics for the past 31 years, 26 of which have been in Jackson Hole, Wyoming. This invitation-only weekend event not only provides the opportunity for carefully prepared written papers but also frank and off-the-record interaction among the world's most powerful central bankers.

This year's theme - housing markets and monetary policy - lies at the heart of the unfolding crisis in global markets. All of the central bankers at this gathering, including those from the Federal Reserve, the ECB, the Bank of England and the Bank of Japan, will have the opportunity to talk to each other informally about what they have learned from their own market contacts and how they now perceive the scope and depth of financial turmoil and the potential impact on the economic outlook.

At the onset of the financial crisis a few weeks ago the main central banks' responses to the subprime mortgage impact on credit markets varied widely - The ECB injected money markets with large doses of liquidity. The Bank of England refused to implement any unusual measures. The Fed tried a series of small steps to improve interbank lending, followed by a major change in discount window policy. These positions in part reflected the specific cracks that appeared in credit markets in each jurisdiction. The first evidence of potential danger to big institutions appeared, surprisingly, in Europe, where a number of European financial institutions became engaged in urgent efforts to unwind positions infected with failing mortgage debt obligations. The ECB's response was to add liquidity in large volume.

But the differences among central banks also reflected different approaches to balancing inflationary threats while revitalizing troubled credit markets. Since then the differences between the central banks may have narrowed, as serious problems spread far beyond subprime mortgage debt to critical segments of the global credit markets, including the commercial paper market and the market for CDOs, structured investment vehicles, and other securitized debt. There is also now emerging a huge question about valuation of relatively illiquid securitized debt obligations, as pressures grow for "mark to market" valuations - such valuations require buyers and sellers, but right now there are many sellers of distressed assets and virtually no buyers.

Although some central bankers had said just a few weeks ago that the subprime mortgage crisis would be "contained," it is now generally recognized that broad swathes of the credit markets have seized up. At Jackson Hole it is likely that a common diagnosis will emerge that a severe credit crunch is under way, even if the central banks continue to use different tools in response to this credit crunch.

At essentially the same time that this rapid deterioration in the market for complex debt obligations has been developing, central bankers and other regulators had been pressuring bankers to cut back the fast and loose leveraging of hedge fund investors. Now, growing margin calls have been forcing many funds to sell off good assets when confronted with the collapse of demand for their holdings of securitized debt and other risky assets. Deleveraging is certainly a contributing factor in vanishing credit market liquidity.

The formal agenda of the symposium's series of lectures was set months ago, to focus on housing and monetary policy, but it is timely for markets that are anxiously awaiting new insights from the central banks. The academic papers may prove interesting, but they are also likely to reveal how little is known about valuations of securitized debt obligations, including CDOs, and how little is known about house prices. The hard reality is that there is great uncertainty about how house prices and changes in homeowner wealth will affect national economies - and even the world economy.

For Fed Chairman Bernanke, this is "prime time." He is on stage in the midst of the biggest credit market crisis in some years - some bankers say it is the biggest crisis in decades. Fed Chairman Bernanke faces a daunting challenge in trying to explain on Friday what he believes to be happening and what he considers the appropriate responses. Virtually anything he says runs the risk of spooking markets: If he says bold action is needed, that will be interpreted as newfound pessimism about the potential for economic slump or recession. He could instead say that minor, incremental monetary measures are the right stuff, and that he does not want to use indiscriminate interest rate cuts to ease pain for the bankers and traders who were responsible for the bursting of a bubble. If the market doesn't hear that Bernanke will cut the target rate any time soon, there would likely be a market swoon and a tide of criticism that Bernanke is out of touch with reality.

Bernanke starts from a clearly different stance than the stance taken by Chairman Greenspan in the past when confronted with credit market turmoil. Greenspan believed the Fed should simply keep credit markets from freezing up with rate cuts and rate hikes, while letting markets work out the details. It is evident that Bernanke strongly prefers a more cautious approach, using surgical tools to deal directly with identifiable "glitches" in credit markets, while valiantly trying to avoid generating increased moral hazard. This kind of response was evident in the Fed's surprise cut in the discount rate combined with a highly innovative reinterpretation of how the discount window functions. Bernanke gained some public applause for his cleverness, but much quiet criticism that the new discount window tool could only work effectively if the cut in the discount rate was much deeper than the 50 basis points cut made by the FOMC.

Fundamentally, Bernanke believes that even in times of financial turbulence, decisions on interest rates should be based on a forward-looking economic forecast and a balance of risks around that forecast. Bernanke is clearly still worried about inflation. At least until now, he has not foreseen economic slump or recession that might melt away the threat of inflation. Instead he has been worrying about such problems as rising rental costs as households turn from buying to renting - the cost of home rentals is a surprisingly large component of the rate of inflation about which the Fed worries. Bernanke and his colleagues are worried about the potential weakening of the dollar if the Fed cuts its target rate boldly, because a sharply weaker dollar would pump up the inflation rate.

Essentially, Bernanke is still relying on "incoming data" and the economic forecasts of the Fed staff, which assume continued - albeit somewhat slower - economic growth. Up to now at least, Bernanke has been far more optimistic than many investors and traders about potential damage to economic growth from credit market stresses.

Given his assignment to include comments about the housing market, Bernanke will have to express a plausible, realistic opinion on the severity and likely duration of the apparent housing slump. If he relies on data, he may be able to avoid deep pessimism, because deterioration in housing data appears well after market moves. If he acknowledges the deep pessimism, which prevails among lenders, home builders, and real estate brokers about the huge and growing inventory of unsold homes and the significant declines in prices that are now becoming evident, then his address will give a boost to the bears. If he sounds upbeat, the bulls and bears will both say he is ignorant and his prognostications will be devalued.

Ultimately, whatever Bernanke says about housing may be eclipsed by President Bush's expected Friday morning announcement of a major new homeowner protection initiative, which clearly implies that the President and Treasury Secretary Paulson believe extraordinary measures are needed

Fed officials are very aware that the pricing in of expected rate cuts by the markets has helped offset the tightening effect of the drying up of credit. Their emergency policy statement on August 17 was interpreted by bankers and traders as validation of the growing market assumption that the Fed would be easing policy. Bond markets have been especially strong as investors have piled into Treasuries while exiting many risky types of assets. Yet in recent days Bernanke seemed to send signals that rate cuts may not be the best next step, and that if it becomes necessary to make cuts, they will likely come far more slowly than troubled investors and traders might like.

Ultimately, Fed officials probably know little more than bankers and traders about the true extent of the unknown, opaque securitized debt market, including derivatives based upon it. Therefore, maintaining a degree of optimism about underlying economic growth, Fed officials themselves most likely do not yet have a clear idea about how they will deal with the rapidly unfolding credit crises. Bernanke and his colleagues seem to want to wait and see whether the credit markets will remain dysfunctional, and for how long. Unfortunately, if they wait until the evidence is absolutely clear, it may be too late. A certain amount of guessing and interaction with markets will be needed - but bankers under stress may not be willing to tell the Fed or other central bankers the whole truth, nor will they be keen to reveal fully their problems to their competitors or their shareholders. Widespread deception or obfuscation seems to be a critical part of the present credit crisis.

For investors and traders, a bigger question now is whether "lubrication" of credit markets by the Fed and other central bankers will be enough to stabilize the evident deterioration in credit markets, or whether the problems of growing distrust and loss of credibility among financial institutions, pension funds, and other investors will overwhelm whatever the central banks try to do.



Reply
#47
MOUNTING WORLDWIDE PATTERN OF FINANCIAL BREAKDOWN
http://www.larouchepac.com/news/2007/09/...kdown.html

Contrary to the financial press-directed myths, that "the markets have calmed down," there is a pattern over the past 48 hours, that shows the intensification of the systematic world financial breakdown, and the resulting panic coming to the surface.

** Speaking at the Kansas City Federal Reserve's annual conference at Jackson Hole, Wyoming, which many of the world's leading bankers and economists attend, economist Martin Feldstein delivered a panicked warning. "The economy could suffer a very serious donwturn," Feldman, President Reagan's former chairman of the Council of Economic Advisers said, presenting the possibility of a tightening credit crunch. Feldstein stated, "A sharp reduction in the interest rate, in addition to a vigorous lender-of-last resort policy, would attenuate that very bad outcome," and made the case for slashing the Federal Reserve's federal funds rate by 1 full percentage point, from its current 5.25% to 4.25%.

Also at Jackson Hole, Federal Reserve Board governor Frederic Mishkin said Sept. 1, that "central bankers should ease monetary policy quickly and aggressively in response to a big fall in house prices," according to the Sept. 2 Financial Times.

(Economist Lyndon LaRouche has made it manifestly clear that the money-pumping proposals of the type that Feldstein and Mishkin advocate, would create a hyperinflation by far more serious than that of 1923 Weimar Germany.)

** The seizing up of credit markets. Bloomberg reported Sept. 2, that during August, the yield on three-month Treasury bills fell by 84 basis points-- from 4.95% to 4.11%-- the largest single monthly fall since Sept 2001, the month when 9/11 occurred. Such a large fall could only occur, as investors flee other investments, and make heavy purchases of 'safe' Treasury bills, which drives the price of those Treasuries up, and thus, simultaneously, (inversely) pushes the yield on Treasuries down.

In parallel, the global commercial paper market has contracted 11% over the past three weeks from $2.22 trillion outstanding globally, to $1.98 trillion.

** Citigroup Foreign Exchange, a division of Citigroup released a newsletter Aug. 24, first made public yesterday, that projected that, due to the similarity between 1987 and 2007, based on parameters such as the "the leverage buyouts/merger mania," conditions possibly exist for a repeat of the 1987 stock market crash.

** Robert Diamond, the CEO of Britain's Barclays, in an exclusive interview Sept. 2 with the Sunday Telegraph, made a plea to the central banks, "we need to find a way to get liquidity into the short end of the curve [short-term financial paper]. ... That's down [up to] to central banks." On Aug. 31, Barclays, which is Britain's third largest bank and the fourth largest financial services company in the world, was forced to borrow 1.6 billion pounds ($3.2) from the Bank of England's "special facility" in order to bail out its Cairn Capital hedge fund, which is still hemorrhaging.



FINANCIAL CRISIS: 'EPISODE' or 'CLASSIC BANK RUN'?
http://www.larouchepac.com/news/2007/09/...k-run.html

Last Friday at Jackson Hole, Wyoming, where 34 central bankers gathered for their annual "bonding" session, Federal Reserve Chairman Ben Bernanke described the current financial collapse as merely an "episode." Not only private economists there, but also Bernanke's German counterpart, Bundesbank President Axel Weber, had a very different characterization of the deepening financial crisis.

The front page the Sept. 3 Financial Times reports comments made by Weber, in which he compared the situation today to a "classic bank run".

"What we are seeing is basically what we see underlying all banking crises," Weber said, "but now it is happening outside traditional banking structures, among conduits and structured investment vehicles."

This is the first time since the crisis broke in early August, that a central banker dared to to call it a "banking crisis," and to make such a comparison. But according to the Financial Times, it is an assessment shared by policy makers in the U.S. Federal Reserve, if not by Bernanke himself.

The London Independent quotes Weber saying, "What we need to do as central bankers, and we are clearly doing that, is to help them in the de-leveraging process. There is no underlying problem of solvency, it's one of liquidity. So swift action is needed.



DEBT IS NOT AN ASSET
John Hoefle
http://larouchepac.com/news/2007/09/01/d...asset.html

"I don't know how the financial system is going to survive through October," Lyndon LaRouche commented on Aug. 31, after reviewing recent developments on the global financial front. We need to get the firewalls up fast to protect the population, he added.

The growth of the global financial system is premised upon a very simple fraud, namely the treatment of unpayable accumulated debts as assets. Those "assets" are then leveraged many times over, turning thousands into millions into billions into trillions of dollars of financial bets. With each passing year, the financial system gets further divorced from reality, further past the edge of the cliff.

Incurring debt can be useful, if the monies obtained by that debt are used to build up the productive capacity of a society, but when that debt becomes a substitute for productive activity, then it just makes the situation worse. That's the problem we face today. Since our economy operates upon borrowed money--households, businesses and governments--every default carries the risk of triggering an avalanche of losses, and threatens to set off a chain reaction which will take down the system itself. Each loss brings us closer to that chain reaction, and the losses are coming fast.

Economic Deficit
Since the economic and political policy shifts of the 1967-1970 period, at the direction of the financial oligarchy, the United States has deliberately dismantled what was once the most powerful industrial machine in the world, backed by a society committed to scientific and technological development, and replaced it with a information and service economy based upon computers, services and financial speculation. Under this regime, the incomes--in real terms--for most of the population began to decline, particularly for those people who lost their higher paying industrial jobs; at the same time, the costs of living began to rise. To make up the difference, households began taking on debt, primarily via credit cards, car loans and home mortgages. Businesses also escalated the use of borrowed money, via bank loans, commercial paper and the bond markets. Debt became a way of life, slowly losing its stigma and after a while, we were so hooked that we began to pretend that we were managing our debt, instead of our debt managing us.

This debt grew and grew, and began piling up in the banking system. The banks could only hold so much. Everyone understood that while individual debts could be paid, the total debt could not, so an elaborate system of rolling over old loans into new loans was established, and the banks began packaging this debt into securities and selling them to investors, in amounts never before seen. These securities might be based on debt that could never be paid, but in accounting terms they still qualified as assets on the books of the investors, who then borrowed against them or turned them into other securities, which they could sell. Pretty soon, the values of all the securities, derivatives and other bets dwarfed the amount of debt upon which they were nominally based, and far outpaced the value of the physical assets upon which the entire edifice rested. As this mess grew, it got pushed farther and farther off the balance sheets of the banks, into the off-balance-sheet netherworld of the derivatives markets and the hedge funds, operating through unregulated pirate coves like the City of London's Cayman Islands.

This speculative casino grew so large that it took over the global economy, and the more it grew, the more voracious its appetite for funds. Real estate prices were pushed up in the U.S., in Europe, Japan and elsewhere to create new debt to feed the machine, vacuuming money out of households, businesses and governments, sucking the real economy dry. Eventually, as had to happen, the casino got so big that there wasn't enough money to keep it going.

One of the key components of this bubble, the U.S. housing market, hit the wall in 2005. The rate of increase of home prices stalled, and began to fall to the point where many areas are now seeing not just a slowing rate of increase, but absolute decreases in housing prices. To try to keep the game going in the face of this decline, the financiers began loosening mortgage standards and relaxing loan terms, anything to make a sale. This was not about selling homes, but about selling mortgages, keeping the money flowing into the casino. Houses, from the standpoint of the casino, were a byproduct of their debt-farming scheme.

Shockwaves
Since the global financial system is basically a giant pyramid scheme which must grow lest it collapse, the shrinking of the money flow has triggered shockwaves of losses reverberating through the system. As prices fall, those who bought at the peak of the market are the first to run into trouble, with mortgages worth more than their homes. Many of these buyers also had the loosy-goosy mortgages; some had ARMs, and are faced with escalating monthly mortgage payments even as their home values fall, other buyers lose their jobs or have health problems, and still others bought homes for speculation. Whatever the reason, the level of defaults and foreclosures began, and continues to rise while prices fall, and that spells trouble for the trillions of dollars of financial paper based upon real estate values.

These defaults set off what has become known as the "subprime crisis," which is said to be the cause of our current turmoil. If only the buyers had been more responsible, if only the subprime lenders had been less greedy, then we wouldn't have this "contagion" infecting an otherwise healthy system, we were told. As cover stories go, it was pretty successful, pushed by the bankers and the media cartels. It had all the right elements: little guys victimizing the poor innocent banks, families threatened with losing their homes, and no mention that this was a direct result of the nature of the financial system itself. All that drama and a coverup in one neat package.

Still, while a good cover story might shift the blame, it can't hide the losses, and the losses are growing day by day. Since assets these days are just someone else's debts, each default on a debt blows out someone's asset, and as the losses pile up, they trigger shockwaves of defaults through the system. To make matters worse, there are trillions of dollars of leveraged assets in the system, the value of which depends upon rising real estate values. That is, they are perceived to have value based upon the expectation that you will be able to sell them to someone else for more than you paid for them. When prices stop rising, the game is over.

A good example of how this works begins with Bear Stearns, a leading subprime lender which poured billions of dollars of mortgage-backed securities and collateralized debt obligations into hedge funds it controlled, only to see those hedge funds blow up. Merrill Lynch, which had loaned one of the fund some considerable amount, then seized and tried to sell some of the fund's securities that had been pledged as collateral. Merrill found it could only get some 50 cents on the dollar of face value, so it stopped the sale.

The implications of this failed sale are enormous, because it revealed publicly that the securities were not worth what they were being valued at on the fund's books, that the official valuations were fictitious--and not just at Bear Stearns or its hedge funds. Merrill Lynch stopped the sale not because of the losses it would take on the collateral, but because of the losses it and all its peers would take were they to begin writing down their own overvalued assets. Anything even approaching accurate accounting would blow them all out of the water.

Another bank which took a big hit in the Bear Stearns fiasco was Barclays, the British giant, and Bear Stearns is only part of its problems. Besides having some $300 million in the Bear Stearns funds, it also owns EquiFirst Corp., the subprime mortgage lender.

Barclays appears to be in big trouble at the moment. In addition to the losses from Bear Stearns, Barclays reported also faces significant losses from its involvement with German bank SachsenLB, which is being taken over by another German bank, LBBW. These losses arise from the meltdown in the asset-backed commercial paper market. Barclays has also agreed to "rescue" a $1.6 billion debt fund run by Cairn Capital, another player in the asset-backed commercial paper market. To keep its doors open, Barclays has borrowed some $4 billion from the Bank of England in the last two weeks, and there is no reason to believe the situation will improve.

Worse To Come
To keep this game going in recent years, the central banks began increasing the rate at which they were pumping money into the financial system. The rate of money being poured in was so great that the rate of the rate of increase in monetary emissions surpassed the rate of the rate of the growth of financial aggregates (the total of stocks, bonds, derivatives, etc.), creating hyperinflation of financial assets. We have long since passed the point where this is a debt problem which can be bailed out.  

What is occurring can only be understood from the standpoint of LaRouche's Triple Curve pedagogy, with a decline in physical assets and hyperbolic growth in financial and monetary aggregates, not as separate developments but as part of one continuous function. The more the physical economy is looted to provide assets for the bubble, the quicker the foundation upon which all the money and speculation erodes, in a self-feeding collapse. If you stop feeding the bubble it collapses, and if you continue feeding it, it also collapses. Such concepts are well beyond the capabilities of Wall Street's algorithms.

When debts are treated as assets, the assets of the system become an enormous liability, and a bubble which is built on the leveraging of such worthless assets, will collapse in a reverse leverage chain reaction much faster than it was constructed. Each time an asset collapses, it increases the rate of collapse of other assets, and accelerates the rate of collapse of the system as a whole. During periods like the present, when nearly all of the speculators are trying to sell their risky assets and flee into the security of Treasuries, the value of the assets fall with each attempted sale. They are worthless if no one will by them, and worthless even if someone does.

This collapse is playing out with different speeds in different countries, but all subsumed within an overall global decline in physical productivity and hyperinflationary increases in monetary and financial obligations. The rate of this collapse will increase hyperbolically, and the system will be gone by mid-October, LaRouche said. The explosions we are seeing now are mere grenades, with much larger ones to come. If the system hits a big landmine, it may not even make it to October. The greater the losses, the more unstable the system.

The only way to avoid a catastrophic explosion, LaRouche said, is to freeze the system, to put up firewalls to protect the population and the productive part of the economy, as outlined in his Homeowners and Bank Protection Act. The problem must be treated as a whole; trying to deal with selected aspects individually will solve nothing, and fail to stop the catastrophe.



ERECT A FIREWALL NOW: DEBT IS NOT AN ASSET


"My estimate is that by the end of September, you won't have the United States, unless something is done about this crisis. I know what we're dealing with here. We're dealing with something which is analogous to what happened in Germany in the middle to Fall of 1923. It takes a different form; because what they're doing today is that they're monetizing worthless paper, and using that to create hyperinflation in the market. And this hyperinflation is hungrier and hungrier… and those inflationary effects are accelerating the breakdown of the housing sector. So that in about 30 days more of this stuff, you are going to have a blow-out of the U.S. economy, comparable to what happened in Germany, going in the direction of what happened in Germany in the Fall of 1923. We're that close." -- Lyndon H. LaRouche

We are now half-way through the month of September. One federal Congressman must have the courage to step forward and make himself or herself the primary sponsor of the proposed Homeowners and Bank Protection Act of 2007. Once this occurs, the LaRouche Political Action Committee will turn the country upside-down to rush this bill through Congress, before the oncoming foreclosure tsunami drives millions of families out of their homes and sets off a downward spiral of social chaos, destroying the United States. The HOBPA will place chartered banks under protection and will freeze all existing home mortgages, erecting a legislative firewall between the inevitable collapse of the Cayman Islands-centered speculative financial system and the every-day lives of American citizens.

"The lobbyists and managers of the offshore unregulated hedge funds know that they are already hopelessly bankrupt, and they are hysterically lying and pressuring Congress to cover up that reality. Only a mobilization of the American people, and local and state elected officials, can create the counter-pressure on Congress to assure that they do the right thing: Pass LaRouche's Homeowners and Banks Protection Act of 2007 -- with a veto-proof majority."

Every activist receiving this e-mail has the responsibility to generate a groundswell, pressuring Congress to pass the Homeowners and Bank Protection Act, now! State governors, representatives, assembly-men, legislators, city-councilmen, and county commissioners can all personally endorse this draft legislation – send signatures and endorsements into the LaRouche Political Action Committee, and become part of the trans-national crossfire effort to force the U.S. Congress to react, before it is too late!

"What else can you, as a citizen, do? Support the LaRouche Political Action Committee, and through it, the activities of the LaRouche Youth Movement. The hedge funds and other financial looters have armies of well-paid lobbyists mercilessly squeezing Congress to do nothing. For the American people, LPAC represents the only lobbying force in Washington and in the state capitals and city councils on behalf of the General Welfare. Make your contributions today."




THE PREDICTED FINANCIAL STORM HAS ARRIVED  
Gabriel Kolko
http://www.informationclearinghouse.info...e18296.htm


Contradictions now wrack the world's financial system, and a growing consensus exists between those who endorse it and those who argue the status quo is both crisis-prone as well as immoral. If we are to believe the institutions and personalities who have been in the forefront of the defense of capitalism, we are on the verge of a serious crisis-if not now, then in the near future.

The International Monetary Fund (IMF), the Bank for International Settlements, the British Financial Services Authority, the Financial Times, and innumerable mainstream commentators were increasingly worried and publicly warned against many of the financial innovations that have now imploded. Warren Buffett, whom Forbes ranks the second richest man in the world, last year called credit derivatives-only one of the many new banking inventions-"financial weapons of mass destruction." Very conservative institutions and people predicted the upheaval in global finances we are today experiencing.

The IMF has taken the lead in criticizing the new international financial structure, and over the past three years it has published numerous detailed reasons why it has become so dangerous to the world's economic stability. Events have confirmed its prognostication that complexity and lack of transparency, the obscurity of risks and universal uncertainty, especially regarding collateralized debt and loan obligations, will cause a flight to security that will dry up much of the liquidity of banking. "…Financial innovation itself," as a Financial Times columnist put it, "is the problem". The ultra-creative system is seizing up because no one understands where risks are located or how it works. It began to do so this summer and fixing it is not very likely.

It is impossible to measure the extent of the losses. The final results of this deluge have yet to be calculated. Even many of the players who have stakes in the countless arcane investment instruments are utterly ignorant. The sums are enormous.

Only a few of the many measures give us a rough estimate:

The present crisis began-it has scarcely ended there--with subprime mortgage loans in the U.S., which were valued at over $1.3 trillion at the beginning of 2007 but are, for practical purposes, worth far, far less today. We can ignore the impact of this crisis on U.S. housing prices, but some projections are of a 10 percent decline-another trillion or so. Indirectly, of course, the mortgage crisis has also brought many millions of people into the larger financial world and they will get badly hurt.

What the subprime market did was unleash a far greater maelstrom involving banks in Germany, France, Asia, and throughout the world, calling into question much of the world financial system as it has developed over the past decade.

Investment banks hold about $300 billion in private equity debts they planned to place-mainly in leveraged buy-outs. They will be forced to sell them at discounts or keep them on their balance sheets-either way they will lose.

The near-failure of the German Sachsen LB bank, which had to be saved from bankruptcy with 17.3 billion euros in credit, revealed that European banks hold over half-trillion dollars in so-called asset backed commercial paper, much of it in the U. S. and subprime mortgages. A failure in America caused Europe too to face a crisis. The problem is scarcely isolated.

The leading victim of this upheaval are the hedge funds. What are hedge funds? There are about 10,000 and, all told, they do everything. Some hedge funds, however, provided companies with capital and successfully competed with commercial banks because they took much greater risks. A substantial proportion is simple gamblers; some even bet on the weather--hunches. Many look to their computers and mathematics for models to guide their investments, and these have lost the most money, but funds based on other strategies also lost during August. The spectacular Long-term Capital Management 1998 failure was also due to its reliance on ingenious mathematical propositions, yet no one learned any lessons from it, proving that appeals to reason as well as experience fall on deaf ears if there is money to be made.

Some gained during the August crisis but more lost, and in the aggregate the hedge funds lost a great deal-their allure of rapid riches gone. There have been some spectacular bankruptcies and bailouts, including some of the biggest investment firms. Investors who got cold feet found that withdrawing money from hedge funds was nigh on impossible. The real worth of their holdings is hotly contested, and valuations vary wildly. In reality, there is no way to appraise them realistically-they all depend largely on what people want to believe and will take, or the market.

We are at an end of an era, living through the worst financial panic in many decades. Now begins global financial instability. It is impossible to speculate how long today's turmoil will last-but there now exists an uncertainty and lack of confidence that has been unparalleled since the 1930s-and this ignorance and fear is itself a crucial factor. The moment of reckoning for bankers and bosses has arrived. What is very clear is that losses are massive and the entire developed world is now experiencing the worst economic crisis since 1945, one in which troubles in one nation compound those in others.

All central banks are wracked by dilemmas. They have neither the resources nor the knowledge, including legal powers, to remedy the present maelstrom. Although there is clamor from financiers and assorted operators to bail them out, the Federal Reserve must also weigh the consequences of its moves, above all for inflation. Then there is the question of "moral hazards." Is the Federal Reserve's responsibility to save financial adventurers from their own follies? Throughout August the American and European central banks plunged about a half-trillion dollars into the banking system in an attempt to unfreeze blocked credit and loans that followed the subprime crisis-an event which triggered a "flight to safety" which greatly reduced banks' willingness to loan. In effect, the Federal Reserve relied on banks to restore confidence in the financial system, subsidizing their efforts.

Central banks' efforts succeeded only very partially but, in the aggregate, they failed: banks and investors now seek security rather than risk, and they will sit on their money. The Federal Reserve privately acknowledges its inability to cope with an inordinately complex financial structure. European central bankers are in exactly the same dilemma: they simply don't know what to do.

But this scarcely touches the real problem, which is structural and impinges wholly on the way the world financial structure has evolved over the past two decades. As in the past, there is a critical split in the banking and finance world and each has political leverage along with clashing interests. More important, central banks were not designed to cope with today's realities and have neither the legal powers nor knowledge to control them.

In this context, central banks will have increasing problems and the solutions they propose, as in the past, will be utterly inadequate, not because their intentions are wrong but because it is impossible to regulate such a vast, complex economy-even less today than in the past because there is no international mechanism to do so. Internationalization of finance has meant less regulation than ever, and regulation was scarcely very effective even at the national level.

Not only leftists are naïve but so too are those conservatives who think they can speak truth to power and change the course of events. Greed's only bounds are what makes money. Existing international institutions-of which the IMF is the most important--or well-intentioned advice will not change this reality.

Reply
#48
U.S. BANKRUPTCY JUDGE ASSERTS AMERICAN OVER CAYMAN ISLAND "LETTERBOXES"; BRITISH ARE STUNG
http://www.larouchepac.com/news/2007/09/...cayma.html

Lyndon LaRouche has lauded a Federal Bankruptcy Court Judge's Aug. 30, 2007 ruling, quashing efforts by Bear Stearns to assert Cayman Islands sovereignty over two of their New York-based hedge funds that recently went bust in the sub-prime mortgage blowout. "Look at what this means," said LaRouche. "The sovereign of the Cayman Islands and other off-shore entitites is the Queen. Will the British monarch concede that she will not extend protection to corporations attempting to use her territory as a means of defrauding American investors?" The court ruling has dramatic implications for the entire Anglo-Dutch offshore, unregulated financial system, at the heart of the global bubbble.

The Aug. 30 ruling by Judge Burton R. Lifland, of the United States Bankruptcy Court in New York, rejected claims by Bear Stearns that two of their now-bankrupt hedge funds, could file their bankruptcy liquidation proceedings on the Cayman Islands, rather than in the United States. The Judge did a careful review of Chapter 15 proceedings under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which allows companies primarily based abroad, to file liquidation proceedings in their primary location and receive U.S. court approval for those findings. In the case of Bear Stearns' High-Grade Structured Credit Stratgegies Master Fund, Ltd. and High-Grade Structured Credit Strategies Enhanced Leverage Master Fund, Ltd., Judge Lifland found that "The Petitioner's own pleadings provide the evidence to establish that the Funds' COMI ("center of main interest'') is in the United States, not the Cayman Islands. The only adhesive connection with the Cayman Islands that the Funds have is the fact that they are registered there... The Verified Petitions have demonstrated... there are no employees or managers in the Cayman Islands, the investment manager for the Funds is located in New York, the Administrator that runs the back-office operations of the Funds is in the United States along with the Funds' books and records and prior to the commencement of the Foreign Proceeding, all of the Funds' liquid assets were located in the United States... Thus I cannot grant recognition of the Foreign Proceedings as main proceedings.''

Judge Lifland went even further, rejecting Bear Stearns' claims that they conducted "nonmain'' business on the Cayman Islands, allowing a back-door access to their jurisdiction. The ruling found that the two Bear Stearns funds did not even conduct "nontransitory economic activity'' on the island, and there were no funds deposited there until after the bankruptcy filing. "Accordingly,'' Judge Lifland wrote at the conclusion of his 19-page opinion, "because the Foreign Proceedings are not pending in a country where the Funds have their COMI or where they have an establishment, the Foreign Proceedings are not eligible for relief as main or nonmain proceedings under chapter 15.''

Briefed on the Judge's ruling, Lyndon LaRouche declared on Sept. 1, "This is wonderful, because it puts the entire issue in the proper perspective. A U.S. Judge has rejected the idea of British sovereignty over what are fundamentally U.S. based financial entities, despite their 'letterbox' presence on the Cayman Islands. This is an assertion of U.S. sovereignty, against an attempted British invasion via the 'Pirates of the Caribbean.''' LaRouche added, "The Cayman Islands house some of the nasties crocodiles in all of the Caribbean. This is a ruling that has dramatic ramifications. I applaud the Judge's action.''

Reply
#49
SO NOW IS THE TIME TO OUTLAW HEDGE FUNDS
http://www.larouchepac.com/news/2007/09/...funds.html


At his March 2007 international webcast, Lyndon LaRouche told a questioner from the prominent Washington think tank, the Brookings Institute, that the only solution on hedge funds by that time was to outlaw them. The following is an excerpt from that webcast.

Freeman: Lyn, the next question comes from a fellow of the Hamilton Project over at Brookings, and it's on the question of this new transparency legislation. He says, "Mr. LaRouche, as you know, there is transparency legislation that has been proposed in the Senate, that would subject hedge funds to the same rules and regulations as those of other financial and trading outlets. Although we're all aware that it will not solve all of our problems, it would certainly produce a very sizable sum of tax revenues, which is obviously critical in light of the current Federal deficit. I have, for a long time, been under the impression that you had advocated precisely these types of measures. Yet now, your representative has argued with me that while that's all fine and good, that it would not appreciably affect anything. I do understand that your position is that we need to move to reorganization of the financial system as a whole, but it would still seem to me that taking such action and producing some liquidity in the midst of the crisis that we face right now, would be beneficial to everyone. Could you please comment on this?"

LaRouche: You're out of time! Time has been exhausted for that. Of course I supported such measures in times past. But now it's too late! The train has left the station! This system is coming down now! The only thing that you can do which makes any sense is to outlaw this kind of practice. The only action that means anything. It should be outlawed immediately! Now, that would have catastrophic effects, too, because the entire financial system today depends upon that swindle. You have to look at my Triple Curve, the phase two Triple Curve [ Figure 1]. Look at where we are on that map. You're now in an out-of-control, hyperinflationary skyrocket. The only thing you can do is bring it down. When you bring it down, where do you land? How do you land? What's your parachute?

What you have to deal with now: Declare this stuff illegal. You don't have to tax them. You confiscate everything in sight! Best taxation we can get. Confiscate it! It's unheard of! Look what it's doing, look at the damage this stuff is doing to the world. It takes perfectly legitimate firms, which were established by responsible people, moves in on them, grabs them on leverage without actually paying for them, loots them of all the cash and assets it has to pay for what they got free, in net effect, and then moves onto the next place, leaving a stinking hulk behind. You want to find a way to tax these guys? You want to exterminate them! Shut the things down! These should never have been allowed to happen. There is no concept of real equity in a system that allows this to occur.

A guy sits out there with a bunch of borrowed money, borrowed from fictitious sources, he puts it up as a showing of his money; he says, "We're buying that stock! We're going to get control of this company!" He gets control of the company, he loots the treasury to cover the debt he had in buying the place up, skims the fragments off, and runs off to the next place. These are locusts, as described by Müntefering of the Social Democratic Party in Germany. They're locusts. A guy comes in, robs your house, and says, "Now you owe me for the repairs to this house!" What people get sucked into is the idea, "Well, we have to do it in a business-like way." Well, give them the business!

Reply
#50
LAROUCHE's EMERGENCY ADDRESS TO THE CITIZENS OF THE USA
http://larouchepac.com/news/2007/09/01/u...-econ.html

The following statement, below, was recorded this morning by Physical Economist Lyndon LaRouche, to spell out precisely what must be done in the face of the biggest crash in modern history. Referring to the Homeowners and Bank Protection Act of 2007, which he has designed; what has become increasingly obvious, is that if we don't pass this legislation, there will be no protection against what will hit the nation soon.


What has been set forth is the only proposal that will succeed. There are no other options. What LaRouche has set forth, nothing more nor less, is what is required.


This is Lyndon LaRouche speaking. We are faced with the greatest financial crisis, globally, which has been known to humanity in centuries. This goes far beyond the experience of the immediate period following the World War, such as the Great Depression of 1930s, but we can handle it.

The problem is, right now, that the President of the United States, the office which should have taken leadership in preparing to defend our nation against the most terrible depression in memory, which is now oncoming, requires us to take special measures, through other agencies, to protect the American people, and other things, until the time that we can get the kind of reform we need to get out of this.

Our immediate concern must be to save the United States from being destroyed, and that is really a possibility, by what is now oncoming. This is the greatest financial collapse, of a form similar to what happened in Germany in 1923, that we have known in living history of our time. In my time, as well as yours.

However, we can handle this problem. It requires mobilization of the Congress, to take an action which will create the equivalent of a firewall against the destruction of essential economy, and of the lives of our people. That can be done. It must be done by the Congress within the month of September.

There is a certain amount of receptiveness to the idea of doing something about this, growing and spreading within the Congress, and elsewhere. That's there.

I've produced a piece of proposed conception of legislation, which will do the job. I have proposed legislation by the Federal government, which will go into emergency implementation, which must be passed within the month of September, because the month of October is enormously dangerous: We dare not risk proposing anything beyond the early part of September. The action must occur by both Houses within September, as emergency legislation, with sufficient support from both Republicans and Democrats in those bodies, to create a bill which will resist a Presidential veto, a veto-proof bill.

If we do that, we may find a depression hitting us in October, which will be far worse than that of 1929-1933. But! If we protect our banks, even if they're bankrupt, and if we protect our homeowners, so none of them are evicted because of this crisis, then, in the month of October and later, we can clean up the mess, and start the process of a general recovery. We need to mobilize to do that.

Now, many people are coming up with so-called reforms and legislation. Most of what I've seen is absolutely worthless junk. The most stupid thing has come from the President of the United States himself, with his proposal. We're talking about millions of evictions coming down now.

Now, to understand this, you have to recognize that there has been a collapse, as most of you should have known by looking around you in your cities and towns, and so forth. Our industry and agriculture have been destroyed. Oh, we have some farming done and so forth, but we don't have many farmers left. Our people, as in the case of the collapse of the auto industry, we have lost the ability to produce not only products, but to produce a basis for a decent standard of living for the people in states such as Michigan, Ohio, Indiana, and so forth. And this is characteristic of what's happened around the world as a whole.

This is our problem.

We can fix this, but we must hold the line. We must have immediate emergency legislation--with no funny stuff, with no little simple reforms, with no gimmicks--of the type I've proposed. It must be enacted during the month of September. It must treated as emergency legislation, according it that kind of priority by both Houses of the Congress. It must produce veto-proof legislation from both Houses of the Congress. It must mobilize Democrats and Republicans, alike, without discrimination. No one is out to cut anyone else's throat; we're out to save the nation. And that's the way we must approach this. It must be done.

And you are essential in this. You must organize people to understand this. Forget all this nonsense. Don't try to come up with some complicated gimmick. Don't try to do a reform of housing. Don't try to adjust the mortgages. Do nothing of that sort. That is absolute foolishness under these present conditions.

The only other thing you might do, is get the ouster of the Vice President. We couldn't throw out the President and Vice President at the same time, and we don't want the Vice President to become the President. Therefore, we have to dump Cheney. That can be done, if enough Democrats and Republicans, especially their representatives in the Congress, decide to do that. It can be done. Let's do it. And let's get Cheney out, and proceed to the reform which I propose:

Which means that no householder, under Federal protection, will be evicted from their home, and that no bank, or chartered bank, whether a Federal bank or a state-chartered bank, will be closed down. That does mean also that there is no possibility of tolerating putting valuable resources to bail out any other irregular financial institution. The hedge funds must go. The sooner they're gone, the sooner they're bankrupted, they're eliminated, the better off we're all going to be.

Because we're going to have to rebuild this economy, including the physical economy. We're going to get back our industries. We're going to get back our agriculture, We're going to get back our infrastructure. We're going to get back dignity, and we're going to take our position of respected leadership among a community of nations in the world. And that's what we have to do.

No funny stuff, no tricks, no games. Back to basics. Think like FDR. Act immediately in the month of September. Get the Congress to pass this kind of legislation, which creates a firewall of protection of every essential chartered bank, chartered on the state or Federal level. No matter what their problems are financially, we're going to keep their doors open. And we're going to give them Federal protection.

We're going to give Federal protection to all householders, who are threatened with eviction. They're not going to be evicted. The states will help the Federal government do that. That is, the states will be the administrative arm, which locates the people who need the protection, and makes sure they're protected. But the states will act, through the Governor's office, on the basis of the support of Federal law. That's the way to do the job.

Don't go with the monkey-business. Forget the gimmicks. We're out to save the nation. If we have, in September, the kind of legislation I've proposed, enacted, as emergency legislation, then, we can protect the United States with a firewall against destruction. If we don't do that, we may find a situation beyond recall.

So, let's be patriots. Let's be neither Republicans nor Democrats at this moment. Let's be patriots--let's save our nation. Let's create a firewall to prevent the greatest depression that we've ever known.

This is Lyndon LaRouche: Thank you.

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