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THE GLOBAL FINANCIAL MELTDOWN - Printable Version

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LaRouche - moeenyaseen - 09-16-2007

CAPTAINS' PRIORITIES AND REQUISITE VIRTUES IN DEEP FINANCIAL STORM
ATCA

In following the ATCA Socratic dialogue, I was struck by Hamid Hakimzadeh's "The Physics of Humpty Dumpty," considering the parallels between thermodynamics, entropy and market conditions, and also the question of  "Where are the clients' yachts?" in thinking about the winners and losers in the current credit crunch.

It is true that more people, whose risks could not otherwise have been spread widely enough, have been enabled by securitization and related financial product innovation to have mortgages -- and therefore houses and boats and higher levels of consumption in general. That is arguably a good thing, even if some people have gone too far.

It would not appear that too many have gone too far though , certainly not as much as proclaimed in the US. US household balance sheets are stronger and more liquid than at any time in recent history, according to data going back to 1945. Households have USD 6.47 trillion in Money Market Funds (MMF) and savings deposited in the first quarter, 50% higher than the USD 4 trillion at the peak of the 1990s boom.

That being said, the average income of financial market "experts" -- read investment bankers and hedge fund managers -- is 10+ times average income in the US. If these financial market functionaries are not delivering extraordinary value, then something may well be awry in the system of finance capitalism, as Mr Hakimzadeh's ATCA submission suggests, and we should debate how to redress this.  It's fair to question whether, if financial engineering sold at a very high price brings enormous misunderstood risk to the system, and adjustments are catastrophic, the risk-adjusted compensation of the purveyors is out of alignment.

We should acknowledge that no one really knows for certain what is going on in the markets at present, or what will happen next, though we may understand markets in the way we understand thermodynamics or the development of wind conditions. Yes, distributed risk through CDOs has rendered many values opaque. Some credit markets are freezing, or refusing to thaw. Some spreads are harder to explain than others. Central bankers are obfuscating with the implication of some clarity hidden behind the curtain -- it's difficult for me to believe that they really know what to do, or that they are not being misled by history.

Investors of all types are trying to figure out what to buy, to sell, or to hold. If they are facing obligations they know they will not be able to meet, their reactions are going to remain quite private until they become public, with uncertain consequence. If anyone should be bailed out of inopportune positions, who are they? Why, exactly? Mounting volumes of cash are pouring into distressed credit funds, so the markets are going to clear, eventually.

This is the stuff of which profound market uncertainty -- which by definition can't be priced -- is made, while the risks -- which some say by definition can be priced -- must necessarily be high. If we were all sailing in the same yacht, we might acknowledge that the weather is ugly and may remain so. Can the ship stand it? Night is coming, the barometer is still falling. Or is it?

New dangers will be harder to see and perhaps impossible to discern until it's too late. The crew grows more fearful, restive, questioning, with perhaps the least experienced -- or those with the most booty in their chests -- among the most frightened. The captain(s) are being asked questions to which they do not have answers. But the leaders, above decks and below, are expected to provide reassurance amid ignorance of what may happen next.  

One is invited to consider the challenges faced by Magellan in searching for a way around the Horn, when no accurate maps existed. The conditions of the ocean and weather kept deteriorating as Magellan sailed south, into currents not previously known. No one knew "if there was a there there (sic)," and the crew became mutinous before Magellan found the way.  He quelled the mutiny with some violence -- to good end, as it turned out.

If we are all in the same boat -- and one may also think of global markets as a casino where the only de facto rule is that one cannot leave -- then it is misguided to try to jump ship in the midst of a storm. In any crisis, we are all served by efforts to reduce fears that promote ill-considered actions and reactions. Better to acknowledge the unknowable unknowns and return to fundamentals that have been proven over time. Being quiet is often a good tactic when all about you are losing their heads and trying to blame someone or something else, as Kipling noted long ago. "Do nothing" can be good advice when not enough information is present, and "say nothing" might be preferable to speculating too openly or loudly on the depth of imminent crisis.

In a system so devoted to widespread home ownership, the "captains" should focus first on saving the houses that deserved to be saved, and seek to reassure the crew that the ship itself is sound, however beleaguered and even leaky at the moment. Humility and patience may be what we most need for now in a system where such wealth has been created in the last decade, and liquidity abounds even in the current state of tightening. Entropy is most to be feared where it is made of fear itself.  

GEO-POLITICAL RISK AND INFLATION BASED BLACK SWANS

Dr Philippa Malmgren
ATCA

People now believe that geopolitical risk is something from the past and inflation is dead. ATCA has pointed out that it might become very difficult, "if there is a sudden arrival of another Black Swan -- outlier event -- which sends a shock to the world economy alongside the presently unfolding global credit crunch."

While it is nearly impossible to accurately predict the timing, in our view, the landscape is changing in ways that will give rise to more Black Swans in the foreseeable future.  As Nassim Taleb points out, "Black Swans" are unpredictable events.  Yet, such events are always preceded by some signals however faint. There are many faint signals at the moment. But all eyes are now focused on the complex day-by-day unfolding of the financial crisis. So, it is perhaps not surprising that few are watching broader forces that are changing the investment landscape.  

In contrast, I think the peace dividend is nearly over and inflation is back from the dead. In addition, the shock absorber of freely available and cheap money, which protected the financial markets and businesses from these issues, is now gone.

The fall of the Berlin Wall brought about both the Peace Dividend and the Great Moderation of Inflation, as central bankers refer to it. Millions of people entered the global workforce and thereby pushed down wages and prices while, simultaneously, governments were able to devote fewer resources to the preparation for or prevention of conflict. The markets and the business community have become accustomed to operating in a world where there is little or no inflation or conflict premium. Geopolitical risks cannot hurt the markets and inflation is dead. This has been the common wisdom.  This view helped contribute to a period when growth was strong and risk premia fell to record lows.  

All this changed earlier this summer when the cost of capital suddenly went up, as presented and discussed by the distinguished ATCA network. This event hit the retail market (subprime mortgages) and then the wholesale market (commercial paper). One fears that even now there is insufficient recognition of the fact that every deal, every trading strategy, every business and every economy is rather more vulnerable to unexpected developments than was the case when capital was cheap and freely available to cushion us from shocks.

US-China

The US-China relationship has been deteriorating for some time.  It is not only the potential protectionism rising in the US Congress that underlies this. There have also been a series of specific security incidents over the last twelve months that have given rise to increasing distrust on both sides.

On the fourth of July 2006, North Korea launched seven missiles, one of which was an ICBM. In response, the US sent spy satellites over North Korea, which, of course gave the US greater access to intelligence images of China as well, thus raising distrust in China. The Chinese authorities responded in turn by using lasers to blind the US satellites as they passed by, thus rendering them useless. North Korea then undertook a nuclear test in October, which further reinforced views on the US side that China was not making best efforts to restrain North Korea's nuclear ambitions. Then, on January 11th, China used a kinetic kill vehicle to destroy its own ageing weather satellite in space. This technical feat demonstrated clearly to the US that American satellites are now potentially vulnerable to China. The US and its allies effectively control the shipping lanes across Asia and into the Middle East, a fact that makes China feel vulnerable. The US is now concerned that China's sense of vulnerability is causing China's leaders to turn to new technology to counter the US threat. China now has the capacity to render the US Navy in the Pacific quite useless given the US Navy's dependence on satellites for all navigation and missile guidance systems. Meanwhile the Pentagon claims that China's military is proving ever more capable in their efforts to hack into US defence networks.  It is fairly clear from the Pentagon's most recent reports and from comments from the Chinese leadership that both sides intend to spend more money perfecting their relative capabilities and protecting their relative vulnerabilities.

Meanwhile, new power blocs are forming that reflect this distrust. The US has tried to pull India closer to it by offering full access to nuclear technology, high technology and military cooperation. Meanwhile, the US continues to ban high tech sales to China and to reduce military cooperation. China, in return, has brought Russia and central Asian states into the Shanghai Cooperation Organization, which just held its first joint military exercises. India has been invited to join as an observer but, so far, the US is not welcome.

China and Russia have, of course been facing off against the US over Iran for some time. For China, Iran represents the only major oil-producing nation in the Middle East that is not aligned with the US. For the US, Iran represents a serious nuclear and strategic threat to the US and its oil-producing allies in the region.

Iran and the Nuclearization of the Middle East

The rhetoric between Iran and the US is becoming ever more strident.  On September 16th, the French Foreign Minister said, "We have to prepare for the worst, and the worst is war" with regard to Iran. Germany recently killed any hope of a diplomatic resolution when they said no to any more sanctions, thus opening the door to other avenues. Obviously everyone believes that a military confrontation with Iran would be an unmitigated disaster, as would be a nuclear Iran.

The US and Iran already believe they are in the midst of such a confrontation. The US maintains two aircraft carrier battle groups just off Iran's shore. From these carriers the US and its allies are constantly pushing up against Iran's borders and testing Iran's reaction function (which is how the incident involving British marines happened back in March). Iran accuses the US of fomenting domestic instability through its support of opposition groups while the US accuses Iran of waging proxy war against American troops inside of Iraq. The threat of an accident or an incident arising from the ever more tense relations between the US and Iran carries an ever present potential black swan. As diplomacy increasingly fails to resolve the issue, one must assume that other, more potentially disruptive solutions are being considered on both sides.

Meanwhile, Saudi, Egypt and Turkey all view Iran as a mortal threat and each are seeking to defend themselves by becoming a nuclear power. A few years ago, international observers were shocked to find out how close India and Pakistan had advanced to the brink of a nuclear exchange. Considering that there is no history of stable cooperation among these Middle Eastern nations and, that most of them are a mere one heart attack or one coup away from a change in leadership, it is hard to imagine that the rise of nuclear capabilities in the Middle East is anything other than a series of black swans in the making.

Russia

Russia's potential to spawn a black swan at any time is significant. Consider recent events. After the US announced its intention to place anti-missile defences in the Czech Republic and Poland (in response to Iran's long range missile advances), Russia announced that the US had broken the terms of the Anti-Ballistic Missile Treaty. Russia is no longer, therefore, sharing nuclear information with the US. Last month, Russia's President formally announced (at the recent joint SCO military exercises they conducted with China) that it intends to resume long-range strategic bomber missions across the Atlantic, Pacific and elsewhere. On the day that the British decided to expel Russian diplomats over the Litvinenko affair, Russian bombers buzzed both Scavenger in Norway and Aberdeen in the UK (both symbolic for the role they play in the production of North Sea oil).  Such air incursions have occurred repeatedly since last May. In the last few days, the British RAF scrambled to intercept eight Russian bombers before they entered British airspace. The Pentagon has made it public that these incursions have been occurring over Alaska for many months. A Russian plane recently flew over Georgia and either deliberately or inadvertently dropped a missile which failed to explode. This incident has given rise to a serious investigation within the UN Security Council.

Russia has also been increasingly willing to use state power, including control over energy and commodity assets as means of compelling neighbouring states to behave, as Russia would like. Russia's claim to resources in the Arctic seabed has triggered an ownership race among Canada, Norway and Denmark.

Perhaps the most interesting example of a black swan type of event occurred in May. Estonia's government announced it would move a statue from a major town square in Tallinn to a nearby cemetery.  The statue depicts the unknown Russian soldier rescuing Estonia from the Germans in WWII, and its removal gave rise to substantial protests from Russia and by the Russian community in Estonia. Suddenly, the Estonian government found themselves victims of a massive cyber attack that shut down all government websites, most media websites and many banking and finance websites. Estonia's economy is especially web-based and the attack was therefore quite crippling to the economy. Estonia accused Russia of launching the attack and brought NATO's cyber warfare experts in to examine the problem. NATO did not name Russia as the culprit but made it clear that only a state could muster these kinds of cyber resources. NATO actively considered actions under Article V of the NATO Treaty (military defence of Estonia) but concluded that legally, NATO could not define a cyber-attack as a military action. In other words, a broader confrontation between NATO and Russia was averted mainly on a technicality.

Inflation

Not all black swan events arise from geopolitical developments. Traditional economics can foster black swans as well. In his new book, Alan Greenspan warns that the Fed needs to be very careful about cutting interest rates, in spite of the financial crisis. If they cut too much, he says the inflation rate will probably rise to unsustainably high levels.  We have a strange inflation picture at the moment. In most major economies official measures of core inflation are either stable or falling. But, the price of virtually everything a person needs to buy to live is going up substantially: energy, food, education, all services, and now some manufactured goods. Some say that the CPI models that predate the exclusion of food and energy show that the core inflation rate is already running at nearly 10%. Within the Fed there is a substantial debate about whether more attention ought to be paid to headline inflation. Many traders think we already have negative real interest rates.

The oil price keeps breaking all time record high (keep in mind that people care more about nominal than real prices). Consider the recent headlines that help keep the oil price high: Israel has bombed a suspected nuclear facility in Syria, the US is considering a tougher policy toward Iran or that Saudi has just increased their oil field defence force from 5,000 men to 35,000 men. Oil has been high and non-inflationary for a while now. But that was when demand pulled the price higher. It may be different when demand wanes in a slowdown and supply or geopolitics keeps the price high.

The price of many foods is rising apace. The United Nations is warning that rising food prices are already causing civil unrest in a number of emerging market countries.  Recent headlines show that the price of wheat and corn keep hitting new highs and that these costs are changing consumption patterns. The Italians are holding a one day strike against the rising price of pasta. New York steak houses are issuing press releases that say that so much corn has been diverted to ethanol production that they have insufficient supply to feed their customers. The CEO of Nestle has said that rising food prices are not cyclical but structural and will remain a pressure on the world economy for years to come.

Wages and prices are rising in China and India. Indian firms are starting to outsource to Mexico because wages are cheaper there. If the financial crisis causes capacity in India or China to contract, then we should expect higher prices for goods and services as pricing power is restored.  

Inflation is not only an economic phenomenon. It is a political phenomenon as well. China is clearly concerned about rising inflation and is quite determined to take the necessary steps to defeat it. Usually, defeating inflation involves slowing and weakening economic growth. This is worrying given the widely held assumption that Asia can withstand the financial market and real economy turbulence that is so violently affecting the West right now.

Conclusion

No doubt, many will argue that I am exaggerating things that are of little real consequence. Diplomats will say that all these issues can all be resolved with time and negotiation, others will argue that these issues will subside when President Bush leaves office, some believe that there is bound to be a shift of power in a more multilateral direction and these issues arise from and will be resolved by that fact.  On the economic side most will be preoccupied with the threat of deflation rather than the risk of inflation. However, whatever one may think of these individual issues, the current vulnerability of the financial markets only increases the risk that one or several of these developments will give rise to a black swan at the worst possible time.




RE: LaRouche - moeenyaseen - 09-22-2007

BANK RUN OR STEALTH BAILOUT : GLOBAL CREDIT CRISIS HITS MAIN STREET

Dr. Ellen Brown
http://globalresearch.ca/index.php?context=va&aid=6844

In July 2007, the global credit crisis hit Wall Street. In September 2007, it hit Main Street, in what has been called the worst bank run since the 1970s.

Northern Rock, Britain's fifth-largest mortgage lender, was besieged at branches across the country, as thousands of worried customers queued for hours in hopes of getting their money out before the doors closed. Bank officials feared that as much as half the bank's deposit base could be withdrawn before the run was over. By September 14, 2007, Northern Rock's share price had dropped 30 percent, and on September 17 it dropped another 35 percent. According to one official, "If the run on deposits looks out of control, Northern Rock would effectively be nationalised and put into administration so it could be wound down."1i The bloodletting slowed after the government issued an emergency pledge to Northern Rock's worried savers that their money was safe, but analysts said the credit crisis was here to stay.

As BBC News explained the problem: "Northern Rock has struggled since money markets seized up over the summer. The bank is not short of assets, but they are tied up in loans to home owners. Because of the global credit crunch it has found it difficult to borrow the cash to run its day-to-day operations."2 The problem reflects a fundamental flaw in the modern banking system: it is built on a confidence trick. The same money that is supposedly being "saved" by depositors is also being "lent" many times over in the form of long-term mortgage commitments. As the late Murray Rothbard observed:

[Depositors] think of their checking account as equivalent to a warehouse receipt. If they put a chair in a warehouse before going on a trip, they expect to get the chair back whenever they present the receipt. Unfortunately, while banks depend on the warehouse analogy, the depositors are systematically deluded. Their money ain't there.

An honest warehouse makes sure that the goods entrusted to its care are there, in its storeroom or vault. But banks operate very differently . . . Banks make money by literally creating money out of thin air, nowadays exclusively deposits rather than bank notes. This sort of swindling or counterfeiting is dignified by the term "fractional-reserve banking," which means that bank deposits are backed by only a small fraction of the cash they promise to have at hand and redeem.3

While Northern Rock was being stampeded by angry depositors, Countrywide Financial, the largest U.S. mortgage lender, managed to fend off bankruptcy, at least for the time being, with $12 billion in new-found financing. Financing found where? It is an interesting question. Peter Ralter observed in LeMetropoleCafe.com on September 16, 2007:

[W]hy is it that the $2 billion investment by Bank of America in Countrywide was front page news in August while the company's new $12 billion financing is buried on the business pages? Isn't it funny, too, that Countrywide didn't specify who is providing all that money, saying only that it comes from "new or existing credit lines." There was no comment, either, on the credit or interest terms—this for $12 billion! It makes me suspect that Countrywide's new angel isn't the B of A, but rather the B of B; the Bank of Bernanke.4

John Hoefle, writing in EIR in 2002, observed, "Major financial crises are never announced in the newspapers but are instead treated as a form of national security secret, so that various bailouts and market-manipulation activities can be performed behind the scenes." At least that is true in the United States, where bailouts are primarily conducted by the Federal Reserve, a private corporation answerable to the private banks that are its real owners. In England, by contrast, the Bank of England is actually owned by the British government. Hoefle argues that Congress delegated the money-creating power to the private Federal Reserve in violation of its Constitutional mandate, making the Fed's activities illegal.5

Murray Rothbard would no doubt have agreed. Before 1913, he observed, whenever a bank's depositors demanded more cash than the bank had on hand, the bank would have had to close its doors. The Federal Reserve Act of 1913 shored up the system by allowing troubled banks to "borrow" from the Federal Reserve, which created the money essentially by counterfeiting it on its books. By rights, said Rothbard, the banks should be put into bankruptcy and the bankers should be jailed as embezzlers, just as they would have been before they succeeded in getting laws passed that protected their swindling. But instead, banks considered "too big to fail" are routinely bailed out from their folly, in a form of social welfare reserved only for the rich. The result is "moral hazard": profligate risk-takers are rewarded and encouraged to take even more risks.

At one time, bank bailouts were done openly by the Federal Deposit Insurance Corporation (FDIC) under the auspices of Congress, with the burden falling on more solvent banks or the taxpayers; but that solution cost votes and was politically unpopular. The failure of President George Bush Sr. to win a second term in office was blamed in part on the Long Term Capital Management bailout that was engineered during his first term. In a 2005 statement arguing against the imposition of new "insurance premiums" on the banks, Congressman Ron Paul said:

These "premiums," which are actually taxes, are the primary source of funds for the Deposit Insurance Fund. This fund is used to bail out banks that experience difficulties meeting commitments to their depositors. Thus, the deposit insurance system transfers liability for poor management decisions from those who made the decisions to their competitors. This system punishes those financial institutions that follow sound practices, as they are forced to absorb the losses of their competitors. This also compounds the moral hazard problem created whenever government socializes business losses. In the event of a severe banking crisis, Congress likely will transfer funds from general revenues into the Deposit Insurance Fund, which would make all taxpayers liable for the mistakes of a few.6

The Federal Reserve's new approach to rescuing failed banks is evidently to avoid political objection by doing it behind the scenes, using fiat money created for the purpose. Rather than taxing other banks or the taxpayers at large, the Federal Reserve imposes an indirect tax in the form of inflation. Like other central banks, the Federal Reserve is a "lender of last resort," which means it can create money out of nothing with accounting entries.7 Adding new money to the economy without adding new goods or services, however, is not without cost. It shifts the cost to the public, driving prices up, taxing us at the grocery store and the pump. Meanwhile, errant bank managers are rewarded by being allowed to keep their winnings and continue in their risky ventures.

The system is clearly flawed, but what is the alternative - thousands of people queuing to get their money back as in England? That was the nineteenth century solution. In an article titled "Anatomy of a Bank Run", Murray Rothbard wrote:

[I]t was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation. But now bank runs - at least for the overwhelming majority of banks under federal deposit insurance - are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation. Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.8

The obvious problem with that solution is that it would penalize the prudent savers who wound up losing their savings, and the banks' shareholders who invested under different rules. There is really no good solution under the current debt-based banking system, because it is basically a pyramid scheme. Collapse is built into the system, because there is never enough money to meet the cumulative debt burden. Virtually the entire money supply originates as a debt to private banks; and since banks create the principal but not the interest necessary to pay back their loans, new loans must continually be taken out to come up with this interest. When no more borrowers can be found, the pyramid must and will collapse. It will collapse either in those painful increments called the recessions and depressions of the "business cycle," or all at once.

(See E. Brown, "Market Meltdown: The End of a 300 Year Ponzi Scheme,"
September 3, 2007, http://www.webofdebt.com/articles.)

The only way to get off this endless wheel of inflation and depression is to change the way money is created. Rather than coming into existence as an interest-bearing debt to private banks, our national currency needs to be issued as "legal tender" by the people themselves, following the innovative system of debt-free money devised by the American colonists before the private central banking scheme was imposed on the world.

(For more on this, see E. Brown,"Captured by the Debt Spider,"
http://www.webofdebt.com/excerpts/introduction.php.)

NOTES



1 Iain Dey, et al., "Angry Savers Force Northern Rock to Be Sold," Telegraph.Co.Uk (September 16, 2007).

2 "Fears Over Rock’s Online Accounts," BBC News, http://newsvote.bbc.co.uk (September 16, 2007).

3 Murray Rothbard, "Fractional Reserve Banking," The Freeman (October 1995), reprinted on www.LewRockwell.com.
4 Peter Ralter, "News of the Day," LeMetropoleCafe.com (September 16, 2007).

5 John Hoefle, "The Federal Reserve Vs. The United States," Executive Intelligence Review, April 12, 2002.

6 Ron Paul, "Reject Taxpayer Bank Bailouts," LewRockwell.com (May 4, 2005).
7 James Barth, et al., "Financial Crises and the Role of the Lender of Last Resort," Federal Reserve of Atlanta Economic Review (January 1984), pages 58-67. See E. Brown, "Financial Meltdown," September 3, 2007, http://www.webofdebt/articles.com .

8 Murray Rothbard, "Anatomy of the Bank Run," Free Market (September 1985), reprinted on www.LewRockwell.com.





LaRouche - moeenyaseen - 09-23-2007

FAILING BANKS,TOXIC BONDS AND MORTGAGE LAUNDERING                  
Mike Whitney
http://www.informationclearinghouse.info/article18410.htm


“The entire global financial structure is becoming uncontrollable in crucial ways that its nominal leaders never expected, and instability is its hallmark. The scope and operation of international financial markets, their “architecture”, as establishment experts describe it, has evolved haphazardly and its regulation is inefficient — indeed, almost nonexistent. Banks do not understand the chain of exposure and who owns what: senior financial regulators and bankers now admit this.” Gabriel Kolko “An Economy of Buccaneers and Fantacists”

     “Ben Bernanke, the Federal Reserve chairman, is like a man who, after spending a lifetime playing with train sets, finally gets to drive the real thing - only to find it hurtling towards the edge of a cliff.” U.K. Observer

By now, you’ve probably seen the photos of the angry customers queued up outside of Northern Rock Bank waiting to withdraw their money. http://news.bbc.co.uk/2/hi/uk_news/6998507.stm  The pictures are headline news in the UK but have been stuck on the back pages of US newspapers. The reason for this is obvious---the same Force 5 economic-hurricane that just touched ground in Great Britain is headed for America and gaining strength on the way.

    This is what a good old fashioned bank run looks like---the likes of which we haven’t seen since the Great Depression. And, just like 1929, the bank owners are frantically trying to calm down their customers by reassuring them that their money is safe. But—human nature being what it is---people are not so easily pacified when they think their hard-earned savings are at risk. The bottom line is this: The people want their money---not excuses.

  But Northern Rock doesn’t have their money and, surprisingly, it is not because the bank was dabbling in risky subprime loans. Rather, NR had unwisely adopted the model of “borrowing short to go long” in financing their mortgages just like many of the major banks in the US. In other words, they depended on wholesale financing of their mortgages from eager investors in the market, instead of the traditional method of maintaining sufficient capital to back up the loans on their books.

  It seemed like a nifty idea at the time and most of the big banks in the US were doing the same thing. It was a great way to avoid bothersome reserve requirements and the loan origination fees were profitable as well. Northern Rock’s business soared. Now they carry a mortgage book totaling $200 billion dollars.

  $200 billion! So why can’t they pay out a paltry $4 or $5 billion to their customers without a government bailout?

    It’s because they don’t have the reserves---and, because the bank’s business model is hopelessly flawed and no longer viable. Their assets are illiquid and (presumably) “marked to model”---which means they have no discernible market value. They might as well have been “marked to fantasy”---it amounts to the same thing.  Investors don’t want them. So Northern Rock is stuck with a $200 billion albatross that’s dragging them under.

    A more powerful fiscal-tsunami is about to descend on the United States where many of the banks have been engaged in the same practices and are using the same business-model as Northern Rock. Investors are no longer buying CDOs, MBSs, or anything else related to real estate. No one wants them whether they’re subprime or not. That means that US banks will soon undergo the same type of economic gale that is battering the UK right now. The only difference is that the US economy is already listing from the downturn in housing and an increasingly-jittery stock market.  

   That’s why Treasury Secretary Henry Paulson rushed off to England yesterday to see if he could figure out a way to keep the contagion from spreading.

Good luck, Hank.

   It would interesting to know if Paulson still believes that “This is far and away the strongest global economy I’ve seen in my business lifetime”, or if he has adjusted his thinking as troubles in subprime, commercial paper, private equity, and credit continue to mount?  

SECURITIZATION: Is it really just Mortgage laundering?

  For weeks we’ve been saying that the banks are in trouble and do not have the reserves to cover their losses. This notion was originally pooh-poohed by nearly everyone. But it’s becoming more and more apparent that it is true. We expect to see many bank failures in the months to come. Prepare yourself. The banking system is mired in fraud and chicanery. Now the schemes and swindles are unwinding and the bodies will soon be floating to the surface.  

   “Structured finance” is touted as the “new architecture of financial markets”. It is designed to distribute capital more efficiently by allowing other market participants to fill a role which used to be left exclusively to the banks. In practice, however, structured finance is a hoax; and undoubtedly the most expensive hoax of all time. The transformation of liabilities (dodgy mortgage loans) into assets (securities) through the magic of securitization is the biggest boondoggle of all time. It is the moral equivalent of mortgage laundering. The system relies on the variable support of investors to provide the funding for pools of mortgage loans that are chopped-up into tranches and duct-taped together as CDOs (collateralized debt obligations). Its madness; but no one seemed to realize how crazy it was until Bear Stearns blew up and they couldn’t find bidders for their remaining CDOs. It’s been downhill ever since.  

Structured Finance: The new market plumbing springs a leak

The problems with structured finance are not simply the result of shabby lending and low interest rates. The model itself is defective.

   John R. Ing provides a great synopsis of structured finance in his article, “Gold: The Collapse of the Vanities”:

       “The origin of the debt crisis lies with the evolution of America's financial markets using financial engineering and leverage to finance the credit expansion…. Financial institutions created a Frankenstein with the change from simply lending money and taking fees to securitizing and selling trillions of loans in every market from Iowa to Germany. Credit risk was replaced by the "slicing and dicing" of risk, enabling the banks to act as principals, spreading that risk among various financial institutions….. Securitization allowed a vast array of long term liabilities once parked away with collateral to be resold along side more traditional forms of short term assets. Wall Street created an illusion that risk was somehow disseminated among the masses. Private equity too used piles of this debt to launch ever bigger buyouts. And, awash in liquidity and very sophisticated algorithms, investment bankers found willing hedge funds around the world seeking higher yielding assets. Risk was piled upon risk. We believe that the subprime crisis is not a "one off" event but the beginning of a significant sea change in the modern-day financial markets.” (John R. Ing “Gold: The Collapse of the Vanities”)

  The investment sharks who conjured up “structured finance” knew exactly what they were doing. They were hyping dog-pelts as fine mink and selling off them to anyone foolish enough to buy them. They were in bed with the ratings agencies----off-loading trillions of dollars of garbage-bonds to pension funds, hedge funds, insurance companies and foreign financial giants. It’s a swindle of epic proportions and it never would have taken place in a sufficiently regulated market.  

MAKING THE CASE FOR ECONOMIC PREEMPTION

   The Bush administration needs to come to grips with the “systemic” problems of the current market-model and act fast. When crowds of angry people are huddled outside the banks to get their money; the system is in real peril. Credibility must be restored quickly. This is no time for Bush’s “free market” nostrums or Paulson’s soothing bromides (We think the problem is “contained”) or Bernanke’s feeble rate cuts. This requires real leadership.

   The first thing to do is take charge----alert the public to what is going on and get Congress to work on substantive changes to the system. Concrete steps must be taken to build public confidence in the markets. And there must be a presidential announcement that all bank deposits will be fully covered by government insurance.

   The lights should be blinking red at all the related government agencies including the Fed, the SEC, and the Treasury Dept. They need to get ahead of the curve and stop thinking they can minimize a potential catastrophe with their usual public relations mumbo jumbo.  

U.S. BANKS: Waiting for the storm-surge

   Last week, an article appeared in the Wall Street Journal, “Banks Flock to Discount Window”. (9-14-07) The article chronicled the sudden up-tick in borrowing by the struggling banks via the Fed’s emergency bailout program, the “Discount Window”.

   WSJ:

   “Discount borrowing under the Fed’s primary credit program for banks surged to more than $7.1 billion outstanding as of Wednesday, up from $1 billion a week before.”

   Again we see the same pattern developing; the banks borrowing money from the Fed because they cannot meet their minimum reserve requirements.

  WSJ: “The Fed in its weekly release said average daily borrowing through Wednesday rose to $2.93 billion.”

$3 billion.

  Traditionally, the “Discount Window” has only been used by banks in distress, but the Fed is trying to convince people that it’s really not a sign of distress at all. It’s “a sign of strength”.

  Baloney. Banks don’t borrow $3 billion unless they need it. They don’t have the reserves. Period.

  The real condition of the banks will be revealed sometime in the next few weeks when they report earnings and account for their massive losses in “down-graded” CDOs and MBSs.

Market analyst, Jon Markman offered these words of advice to the financial giants:

   “Before they (the financial industry) take down the entire market this fall by shocking Wall Street with unexpected losses, I suggest that they brush aside their attorneys and media handlers and come clean. They need to tell the world about the reality of their home lending and loan securitization teams' failures of the past four years -- and the truth about the toxic paper that they've flushed into the world economic system, or stuffed into Enron-like off-balance sheet entities -- before the markets make them walk the plank.”….” Since government regulators and Congress have flinched from their responsibility to administer "tough love" with rules forcing financial institutions to detail the creation, securitization and disposition of every ill-conceived subprime loan, off-balance sheet "structured investment vehicle," secretive money-market "conduit" and commercial-paper-financing vehicle, the market will do it with a vengeance” (Jon Markman, “What the big banks aren't telling you – yet”)

  Good advice. We’ll have to wait and see if anyone is listening. The investment banks may be waiting until Tuesday hoping that Fed-chief Ken Bernanke announces a cut to the Fed’s fund rate that could send the stock market roaring back into positive territory.

    But interest rate cuts do not address the underlying problems of insolvency among homeowners, mortgage lenders, hedge funds and (potentially) banks.  As market-analyst John R. Ing said, “A cut in rates will not solve the problem. This crisis was caused by excess liquidity and a deterioration of credit standards….A cut in the Fed Fund rate is simply heroin for credit junkies.”

   Well put.

  The cuts merely add more cheap credit to a market that that is already over-inflated from the ocean of liquidity produced by former-Fed chief Alan Greenspan. The housing bubble and the massive credit bubble are largely the result of Greenspan’s misguided monetary policies. (For which he now blames Bush!)The Fed’s job is to ensure price stability and the smooth operation of the markets—not to reflate equity bubbles and reward over-exposed market participants.

  It’s better to let cash-strapped borrowers default than slash interest rates and trigger a global run on the dollar. Financial analyst Richard Bove says that lower interest rates will do nothing to bring money back into the markets. Instead, lower interest rates will send the dollar into a tailspin and wreak havoc on the job market.

   “There is no liquidity problem, but a serious crisis of confidence," Bove said. "In a financial system where there is ample liquidity and a desire for higher rates to compensate for risk, the solution is not to create more liquidity and lower the rates that are available to compensate for risk. ... (The Fed) cannot reduce fear by stimulating inflation."

  "It is illogical to assume that holders of cash will have a strong desire to lend money at low rates in a currency that is declining in value when they can take these same funds and lend them at high rates in a currency that is gaining in value," he said. "By lowering interest rates the Federal Reserve will not stimulate economic growth or create jobs. It will crash the currency, stimulate inflation, and weaken the economy and the job markets." CNN Money)

  Bove is right. The people and businesses that cannot repay their debts should be allowed to fail. Further weakening the dollar only adds to our collective risk by feeding inflation and increasing the likelihood of capital flight from American markets. If that happens; we’re toast.  

SPIRALLING INFLATION

   Consider this: In 2000, when Bush took office, gold was $273 per ounce, oil was $22 per barrel and the euro was worth $.87 per dollar. Currently, gold is over $700 per ounce, oil is over $80 per barrel, and the euro is nearly $1.40 per dollar. If Bernanke cuts rates, we’re likely to see oil at $125 per barrel by next spring.

  Inflation is soaring. The government statistics are thoroughly bogus. Gold, oil and the euro don’t lie. According to economist Martin Feldstein, “The falling dollar and rising food prices caused market-based consumer prices to rise by 4.6% in the most recent quarter.” (WSJ)

  That’s 18.4% per year---and yet, Bernanke is still considering cutting interest rates and further fueling inflation?!?

It’s crazy!

  What about the American worker whose wages have stagnated for the last 6 years? Inflation is the same as a pay-cut for him. And how about the pensioner on a fixed income? Same thing. Inflation is just a hidden tax progressively eroding his standard of living. .

  Bernanke’s rate cut may be boon to the “cheap credit” addicts on Wall Street, but it’s the death-knell for the average worker who is already struggling just to make ends meet.

   No bailouts. No rate cuts. Let the banks and hedge funds sink or swim like everyone else. The message to Bernanke is simple: “It’s time to take away the punch bowl”.

  The inflation in the stock market is just as evident as it is in the price of gold, oil or real estate. Economist and author Henry Liu demonstrates  this in his article “Liquidity Boom and the Looming Crisis”:

   “The conventional value paradigm is unable to explain why the market capitalization of all US stocks grew from $5.3 trillion at the end of 1994 to $17.7 trillion at the end of 1999 to $35 trillion at the end of 2006, generating a geometric increase in price earnings ratios and the like. Liquidity analysis provides a ready answer.” (Asia Times)

   “Market capitalization zoomed from $5.3 trillion to $35 trillion in 12 years?!?

Why?

Was it due to growth in market-share, business expansion or productivity?

No. It was because there were more dollars chasing the same number of securities; hence, inflation.  

If that is the case, then we can expect the stock market to fall sharply before it reaches a sustainable level.  As Liu says, “It is not possible to preserve the abnormal market prices of assets driven up by a liquidity boom if normal liquidity is to be restored.” Eventually, stock prices will return to a normal range.

  Bernanke should not even be contemplating a rate cut. The market needs more discipline not less. And workers need a stable dollar so they can live within their means. Besides, another rate cut would further jeopardize the greenback’s position as the world’s “reserve currency”. That could destabilize the global economy by rapidly unwinding the US massive current account deficit.  
  
The International Herald Tribune summed up the dollar’s problems in a recent article,” Dollar's Retreat Raises Fear of Collapse”:      

  “Finance ministers and central bankers have long fretted that at some point, the rest of the world would lose its willingness to finance the United States' proclivity to consume far more than it produces - and that a potentially disastrous free-fall in the dollar's value would result.

  The latest turmoil in mortgage markets has, in a single stroke, shaken faith in the resilience of American finance to a greater degree than even the bursting of the technology bubble in 2000 or the terror attacks of Sept. 11, 2001, analysts said. It has also raised prospect of a recession in the wider economy.

This is all pointing to a greatly increased risk of a fast unwinding of the U.S. current account deficit and a serious decline of the dollar.”  

  Other experts and currency traders have expressed similar sentiments. The dollar is at historic lows in relation to the basket of currencies against which it is weighted. Bernanke can’t take a chance that his effort to rescue the markets will cause a sudden sell-off of the dollar.

The Fed chief’s hands are tied. Bernanke simply doesn’t have the tools to fix the problems before him. Insolvency cannot be fixed with liquidity injections nor can the deeply-rooted “systemic” problems in “structured finance” be corrected by slashing interest rates. These require fiscal solutions, congressional involvement, and fundamental economic policy changes.

Rate cuts won’t help to rekindle the spending spree in the housing market either. That charade is over. The banks have already tightened lending standards and inventory is larger than anytime since they began keeping records. The slowdown in housing is irreversible as is the steady decline in real estate prices. Trillions in market capitalization will be wiped out. (thanks to Greenspan) Home equity is already shrinking as is consumer spending connected to home-equity withdrawals.

The bubble has popped regardless of what Bernanke does. The same is true in the clogged Commercial Paper market where hundreds of billions of dollars in short-term debt is due to expire in the next few weeks. The banks and corporate borrowers are expected to struggle to refinance their debts but, of course, much of the debt will not roll over. There will be substantial losses and, very likely, more defaults.  

Bernanke can either be a statesman---and tell the country the truth about our dysfunctional financial system which is breaking down from years of corruption, deregulation and manipulation---or he can take the cowards-route and “buy some time” by flooding the system with liquidity, stimulating more destructive consumerism, and condemning the nation to an avoidable cycle of double-digit inflation.

We’ll know his decision on Tuesday.







RE: LaRouche - moeenyaseen - 09-23-2007

FIRST RUN ON A BRITISH BANK SINCE 1866
http://larouchepac.com/news/2007/09/19/first-run-british-bank-1866.html


"These are historic times," says Martin Wolf in an oped in today's Financial Times, amidst general debate in that paper as to whether the Bank of England should not have been more liberal in its refinancing of mortgage-backed debt, supposedly to avoid such bankruptcies. "Financial panic has hit both the public and the politicians of the U.K. over the past week, to deliver two remarkable results," says Wolf - "the first run on a British bank since the collapse of Overend and Gurney in 1866; and the transformation of bank deposits into public debt at the stroke of a pen." Wolf claims it was necessary for the Bank of England to guarantee the deposits of Northern Rock, citing the danger of "contagion" as a main reason. "On Monday [Sept. 17], the shares of institutions dedicated to lending for house purchases collapsed. Northern Rock may not have been a systemically important institution. But its implosion became a systemically important event." The conclusion however is worse insanity, i.e. that in the future, "normal insolvency procedures should not apply to banks."




RE: LaRouche - moeenyaseen - 09-23-2007

STRESS TESTING BoE and FSA SYSTEM 10 YEARS POST 1997 AS CREDIT CRISIS WINDS 140 YEARS BACK
ATCA

Upon closer examination, complete trust in the decisions of the independent Old Lady of Threadneedle Street -- The Bank of England -- would appear to be the biggest casualty of the Northern Rock financial turmoil in the UK. The hourly television bulletins reinforced the image of a bank run via the queues which formed outside Northern Rock, up and down the country's fifth-biggest mortgage lend er. This represented the first bank run in Britain since the 1860s, which was nearly one and a half centuries ago !

Most citizens in Western democracies have limited trust in politicians at the best of times. Regulators can sometimes be feared in open and despised behind-closed-doors. Central banks are held in high esteem; which is why the Bank of England (BoE), would appear to be the past week's main victim. There is a palpable sense of loss of credibility in regard to the role of the BoE -- and the FSA to some extent -- amongst many at the Palace of Westminster and across the country. Central banking without the perception of serious credibility can itself be a moral hazard to a fiat currency. Notice the falling value of Sterling against many major currencies including the Euro and Swiss Franc since the Northern Rock tremors.

Going back just one week, the panic was prompted by the announcement initially designed to achieve the exact opposite. Only when the B oE said that it would stand by the stricken Northern Rock last Thursday night did depositors start to run for the exit on Friday. Attempts by Alistair Darling, the Chancellor of the Exchequer -- the UK Finance Minister -- to reassure savers served only to lengthen the queues of people outside branches demanding their money. The run did not stop until Mr Darling gave a taxpayer-backed guarantee on Monday, 17th September, that for the moment all the existing deposits at Northern Rock were safe.

No sooner had the queues disappeared than the House of Commons ', the UK Lower Chamber of Parliament's, inquest began. This was the first big test of Britain's new monetary and regulatory system introduced in 1997, when New Labour came to power and Gordon Brown, then Chancellor of the Exchequer, fundamentally altered the financial chess board by giving The Bank of England operational independence to set interest rates and handing banking supervision to the newly created Financial Services Authority (FSA). HM Treasury, the central bank and the FSA reached a new understanding about how they should run the system together. However, the new system was not really stress tested by the markets in the last ten years until September 2007.

Until the high LIBOR rates' differential of 100+ basis points with the base rate began to rear its uncertain head in August, as pointed out on ATCA, Mr Brown's much vaunted reforms of the UK financial system seemed to be working rather elegantly.

The Bank of England enjoyed huge credibility for keeping inflation close to the government's target -- notwithstanding Governor King's one letter to the Chancellor earlier this year in regard to an inflation overshoot -- whilst ensuring steady growth of the UK economy. The FSA won global praise for its capabilities, especially in regulating complex financial businesses, which have helped strengthen London's image as an international centre of excellence, overtaking New York in many key areas. In just a few days a financial hurricane of "category five" has blown a hole in the hard-won reputations of the regulator and the central bank, as the new system of split responsibility between the BoE and the FSA has failed its first big stress test since its inception 10 years ago.

Moral Hazard

Whilst left with no choice, the Chancellor of the Exchequer -- UK Finance Minister -- Mr Darling's guarantee sets a dangerous precedent: it threatens to encourage savers to put their money in high-rate accounts in shaky banks and shareholders to invest in "extreme" non-bank banks, comfortable in the knowledge that the government will be there for them when the going gets tough.

On the one hand, it would be fair to note that by the time the Chancellor acted, he had little choice but to save Northern Rock or risk a disastrous run on other British banks whose share price was coming under excessive pressure. On the other hand, Northern Rock deserves condemnation for its dangerous non-bank banking business model. The Newcastle-based mortgage lender had grown too fast on the back of short term money markets rather than branch deposits. Clearly, this left it utterly defenceless against a shortfall in funding when easy credit dried up in August and September. Fault for that does lie first-and-foremost with Northern Rock's management , but it also looks as if the FSA was caught off guard. Sir Callum McCarthy, Chairman of the FSA, said this week that Northern Rock's business model was "extreme." Referring to Andrew Hunt's ATCA submission, "The UK's Non-Bank Banks and High LIBOR," we would humbly suggest that the problems in the UK banking system have arisen because many banks in the UK -- not just Northern Rock -- have, in effect, been behaving in the same "extreme" way as though they were non-banks. So, Northern Rock is not unique and therefore "extreme" could be defined as mainstream within certain boundary conditions .

Central bankers across the world had been warning about the likelihood of credit tightening for a while . The FSA ought to have paid close attention and discouraged Northern Rock and other UK non-bank banks from pursuing their risky business models . The FSA's vigilance is essential , because it is the guardian of the public scheme of deposit insurance. Last year, it said this scheme was working just fine. But when stress- tested in September 2007, in the extreme case of the Northern Rock bank run, the scheme failed: depositors neither understood nor trusted it at all. And w hy should they have done so ?

Trust in Financial System 's Regulation

The FSA, BoE and HM Treasury are all likely to come out poorly from the Northern Rock episode. At the outset, the BoE, talked tough and wanted to teach financiers a lesson that they should not expect the central bank to bail them out if they took on too much business risk. Unlike the European and American central banks, which injected copious liquidity repeatedly into the money markets, the BoE held back from pumping cash with a clear justification for its stated policy. When it did intervene, it did so rather modestly, insisting on high quality collateral. The BoE argued that central-bank money could do little to save the three-month LIBOR money market, which had reached a fever of a 100+ basis points differential with the base rate.

In the end, t he BoE's tough line turned out to be unworkable, and events forced the BoE to change its declared policy. On September 19th, the day after the run on Northern Rock ended, the BoE performed a U-turn. It announced that over the next few weeks it would be providing extra liquidity to try to sort out the three-month LIBOR market's high differential. Furthermore, it said that it would lend against riskier collateral, including mortgages, which is precisely what other reputable c entral banks have been doing since the credit crunch emerged in early August.

The charge against the BoE appears to be that its pretence turned the credit crisis into a farce. If the BoE had acted more promptly to provide a redressal for the high LIBOR rate, Northern Rock might have survived. Who knows and what good is speculation at this stage ? The 180 degrees turn in the BoE's policy looks either as if the Old Lady of Threadneedle Street made a mistake, or as if the Lady cannot stand up for her strongly held principles and values . Neither characteristic is endearing in central banking.

As the Governor of the BoE, Mr King pointed out, defending his performance in front of a House of Commons committee on Thursday, 20th September, English law prevents the BoE either from staging a covert rescue operation or from engineering a swift takeover; and clear flaws in the protection of depositors mean that, once an overt rescue operation is under way, depositors are likely to flee -- as became the case with Northern Rock. The Governon defended the separation of powers between the Treasury, the BoE and the FSA, but this may not be a solid line of defence . The split power has exacerbated the system's flaws: nobody was in charge of the operation when there was a desperate need for one leader to run the show . Northern Rock fell in the wide cracks that appeared.

This debacle not only holds key lessons for the system which regulates UK financial institutions but also for the way in which the Euro-zone national financial institutions are regulated: with the European Central Bank (ECB) at one end of the spectrum and old national central banks and finance ministries at the other end . What of the chasm of poor de facto regulation in no-man's land which has opened up, post the ECB's creation and the Euro's inception in 1999? When has the Euro-zone financial institutions' regulatory environment been stress tested by the markets in the last decade? How sound is it under extreme pressure? Is the Euro-zone regulatory system 's stress testing going to begin soon as the global credit crunch continues? What are the recent sub-prime linked banking insolvencies in Germany and elsewhere in the Euro-zone suggesting ? Watch the Euro-zone carefully for unfolding answers to these key questions over the coming weeks and months.




RE: LaRouche - Admin - 09-30-2007

THE BANKERS KNOW: SOMETHING CATASTROPHIC THIS WAY COMES
John Hoefle
http://larouchepub.com/other/2007/3438bankers_catastrophic.html

By now, most people are aware that former Federal Reserve chairman Alan Greenspan is on a "not my fault" tour, proclaiming to everyone who will listen that he is not to blame for the collapse of the financial system. By saying he "didn't really get it," Sir Alan is choosing to cloak himself in the mantle of incompetence, in the hope that he won't go down in history as the worst central banker of all time. Greenspan, to protect himself, is blaming President Bush, who is admittedly an easy target, while riding to Bush's defense is Vice President Dick Cheney, who wrote an op-ed in the Sept. 19 Wall Street Journal claiming that Greenspan was "off the mark."

Cheney insisted Bush's (and therefore his) record was "superb," adding that "no other president has spent more time or political capital trying to avert a fiscal disaster that everyone knows is coming."

At the same time, both Fed chairman Ben Bernanke and Bank of England governor Mervyn King are being criticized for flip-flopping in their handling of the financial crisis, with King in particular catching flack over the run at Britain's Northern Rock bank.

Why are such senior figures suddenly so concerned about their reputations? What do they see coming that causes them to go into a very public "not my fault" mode?

These comments are de facto admissions that the global financial system is bankrupt, and that the efforts of the central bankers to contain the collapse have failed. Something catastrophic this way comes, and the bankers know it.

Runs on the Banks
Northern Rock, a $230 billion British mortgage bank based in Newcastle, is emblematic of the problems facing financial institutions at this point. The bank ran into serious trouble in mid-September when it could not borrow the money to make new loans, and had to turn to the Bank of England for emergency funds. As word of the bank's problems spread, anxious depositors descended on the bank to withdraw their funds, sparking a panic. Few things scare bankers more than runs, which can easily spread as panic sets in. Even healthy banks can be destroyed by runs, and there are few, if any, major banks that are healthy these days.

The Bank of England, despite its recent assurances that it would not bail out faltering institutions, threw all its promises out the window to stop the runs from spreading. The Bank stepped in as lender of last resort, and the British government, through Chancellor of the Exchequer Alistair Darling, guaranteed the Northern Rock depositors that their money was safe. Subsequently, the Bank agreed to accept mortgages as collateral for loans. This move, like the decision of the Fed to buy mortgage-backed securities and accept asset-backed commercial paper as collateral for loans to the banks, reflects the desperation of the central banks to stop the collapse. Thus far, the Fed, the European Central Bank, the Bank of England, and other central banks have pumped hundreds of billions of dollars into the system in a vain attempt to control its collapse.

The run on Northern Rock in September followed a similar run against Countryside Bank in California in August, amid fears that its mortgage-lending parent Countrywide Financial would collapse. This run occurred in spite of the fact that the bank deposits were insured by the FDIC. Countrywide subsequently borrowed $11 billion from a line of credit set up before the crisis struck, and later received a $2 billion injection from Bank of America.

While the bankers have tried to portray these runs as isolated cases, they actually represent an important inflection point in the disintegration of the system. We have gone from denial, in which the problem was presented as too minor for serious concern, to attempts to dismiss it as a mere "subprime" crisis, to treating it as a larger but still manageable "credit crunch," to the point where panic is openly setting in, and the central banks are openly intervening, and the players are looking for ways to escape the blame for the growing catastrophe.

Gasoline on the Flames
Lyndon LaRouche has compared the central bankers' attempts to pump money into the system to keep it from seizing up as the equivalent of trying to put out a fire by pouring cold gasoline on the flames. By treating the crisis as a "credit crunch" which can be solved by lowering interest rates and providing liquidity for borrowing, the central banks are only making matters worse. The problem here is not a lack of credit, but far, far too much debt, which the central bank actions exacerbate.

The only rational approach to a debt crisis of this magnitude, is to address the economic policies which created it. The U.S. economy has been operating below breakeven for some four decades, during which period the productive side of our economy has been systematically dismantled and replaced with casino-like speculation and Information Age paper-pushing. As a substitute for the wealth formerly generated by the productive sector, we have gone ever deeper into debt, to the point that we now have an increase in debt of nearly $5 for each $1 increase in GDP. The level of debt is crushing what remains of our economy, and adding more debt will not help.

What is needed is to return to a productive economy, led by manufacturing and supported by scientific and technological breakthroughs, investment in infrastructure and essential public services such as education and health care. The first step in that direction is to put the financial system through bankruptcy, while erecting firewalls to protect the welfare of ordinary citizens. Freeze the debt, stop foreclosures, protect the essential functions including banking; save the people and the economy, and let the speculators take their losses.

The alternative is a hyperinflationary blowout of the financial system, coupled with a savage deflation of living standards, and a descent into corporativist fascism.

Deregulation Is Sabotage
Deregulation has been an unmitigated disaster which has destroyed our economy. Our deregulated transportation system is a nightmare, from our cattle-car airlines to the disappearing rail grid, to the overloaded trucks tearing up our highways, and the decline of our inland waterways. Electricity deregulation, far from lowering prices, has raised them, in some cases to obscene levels. Health care, once the province of doctors, is now largely run by corporate bureaucrats under orders to protect profits, not patients. Financial deregulation, coupled with changes in tax policy designed to promote speculation at the expense of production, has turned our economy from an industrial powerhouse into a bankrupt casino.

Deregulation, to put it simply, was intended to destroy our economy, and we are now seeing the fruits of that effort. At every downward racheting of the system, we are told that further deregulation is required to deal with the problems. Hand in hand with this goes globalization. To make our companies more competitive, we are told, we must outsource our manufacturing to places where wages are lower. The result is that the Midwest, formerly the center of the industrial world, is now a rust-bucket. Our family farms are dying, our food supply increasingly imported by giant agri-business cartels. We are more dependent than ever before on these corporate cartels, which are increasingly global in scope and controlled by the international bankers.

Where we are headed, is a combination of a return to the feudalist/looting model of the British East India Company, paired with the surveillance and control capability of George Orwell's Big Brother.

Complete BS
Virtually everything we are told about the world situation today, is complete bullshit. What we are witnessing is a power grab by the British-centered international financial oligarchy, which wants to put the genie of human progress back in the bottle as a way of maintaining its miserable power over world affairs. The men of the empire have no intention of allowing the United States to fulfill its founding mission of leading the world out of colonialism, and have no intention of allowing the nations of Ibero-America, Africa, and Asia of developing into sovereign nation-states which put the welfare of their people ahead of the demands of the imperial parasites.

Globalization is a euphemism for imperialism, and deregulation is a euphemism for destroying the ability of a nation to protect itself from the empire. The target of the police-state measures put into place by the Bush Administration is not the oft-mentioned amorphous terrorists, but the American people. The war against Iraq was sold to the American establishment as a Malthusian move to secure our oil supplies, and to the public as a move to protect us from an imminent attack from Saddam's weapons of mass destruction, but the real reason was to destroy us as a nation. The beating of the war drums against Iran, and others, is more of the same.

Forget the financial system—it's gone. What we must defend is the concept of national sovereignty and the public welfare, as epitomized by the Declaration of Independence and the Constitution. This is a crisis of civilization itself, and we are the battleground. Save civilization, not speculation.






RE: LaRouche - Admin - 09-30-2007

THIS PRESENT WORLD FINANCIAL CRISIS:CREDIT vs MONETARIST USURY
Lyndon H. LaRouche, Jr
http://larouchepub.com/lar/2007/3438keynote_kiedrich_conf.html


The task I have to perform here today, is unusual, and it's not necessarily by my choice. The choice has been made for us: We've now come to the point that civilization as a whole is in danger of collapse. We're not faced with merely a depression; we're far past that. We're at the point where a chain reaction, a collapse of the dollar value, which has already collapsed significantly in recent months, but a further, sudden collapse of the dollar, would ruin China, damage India inconceivably, and blow out Europe; that Europe, China, India and other countries could not survive a sudden collapse of the dollar, of the type which is about to take place. It is already in process of taking place.

So therefore, this is an unusual time. We're looking, not at the threat of a depression: We're looking at the threat of a global, prolonged, new dark age of humanity.

And the question before us is, can we overcome this threat at this stage. It should have been done before, but sometimes in the course of history, necessary decisions come very late. Only when conditions are absolutely impossible, will people give up the foolishness which they have contributed to causing the crisis to occur.

Now, in such a state, you do not go back and say, "We are going to reaffirm our traditions." Because, as I emphasize today, the tradition we have in the world today, is best understood by people about my age, or older, like Amelia [Boynton Robinson]. We were there when the change came. And the change, as I experienced it, started when I was in military service overseas. And I was in India for a time, at the close of my service there, when President Roosevelt died. And on that occasion, some soldiers came to me, and said, "Can we meet with you later tonight?" They did not say what the subject was, but I had a sneaking suspicion what it might be. And the question was put to me: "What, in your opinion, is our fate, now, with the death of Franklin Roosevelt? What's going to happen to us, now, that Roosevelt is dead?" And I told them, off-hand, I said, "Well, I can say that we have lived and fought war, under a great United States President. We are now left in the hands of a very little man—and I'm afraid for us."

Then, I came back out of Burma—I had been stationed in northern Burma in the closing period of the war—and came back, and at that point, what I had feared earlier with the death of Roosevelt, was already taking place. The United States, under Franklin Roosevelt, had a very unsteady alliance with the British Empire. The British Empire was the agency which put Hitler into power in Germany. Not just the kingdom, but the British Empire, typified by the Bank of England, and by the correlation of elements, financial elements which are the British Empire. The British Empire is modelled upon ancient Venice, medieval Venice, in which a group of bankers, like a cluster of parasites, forms an empire. And finds instruments of government to do its bidding.

Roosevelt vs. the British Empire
What happened is, Roosevelt had been committed to eliminating that. But, in order to defeat Hitler, he had to get into an alliance with Britain. And he had to force them into that alliance, because they didn't want to do it! They liked Hitler! They invented him! They created him! They put in him into power, with the help of some people in the United States: the Harriman bank, for example, known for its racist policies in an earlier period. It was the grandfather of the present President of the United States, Prescott Bush, who was general secretary for the firm of Brown Brothers Harriman, who wrote the check, in effect, the message to a German bank, at a point that the Nazi Party was bankrupt, and saved the Nazi Party! It was the British monarchy, and its representative, Hjalmar Schacht, who put Hitler into power.

We had to get rid of Hitler. We couldn't do it alone. We had an alliance with the Soviet Union on this issue. We had to have the British alliance. And we were dragged down during the war, by the fact that we had an untrustworthy ally, Britain.

I once had met a German general, who had been a colonel in North Africa; a distinguished fellow, a great man in international law. And at my first encounter with him, I said, "Well, General, would you agree with me that Montgomery was the worst commander in World War II?" And he answered me, and said, "Well, you can't say anything bad about Montgomery. He saved my life." He said, "I was commanding the rear guard for Rommel, in the retreat from Egypt, and if he had ever flanked me, I'd be dead!" [laughter]

Well, if you know what Montgomery was, you know what he was in "[Operation] Market Garden": He prolonged the war in Europe, for over a year, by moving a First Army operation through a field where the roads couldn't carry the supporting troops to rescue the parachuters that had jumped in there! And he continued the war for a year! The war would have been over, by the end of 1944, but for Montgomery. And he was stuck in there, not only because he was a very bad general, very incompetent, but he had provided precisely that margin of incompetence that Churchill wanted: Because Churchill took out competent commanders on the British side, for fear they would help to win the war too soon. So, this is the kind of problem we faced.

So, when Roosevelt died, what went into action? Roosevelt's program for the postwar world was something the British were determined would not occur: And that was, to eliminate colonialism, in all its manifestations. That all nations, and Roosevelt's speech in Casablanca, where he confronted Churchill on this, was explicit. He said, "Take this part of Africa! What can we do after the war? What can we do to rebuild this area?" And laid it out: Roosevelt's policy was elimination of the British Empire, elimination of colonialism.

And when I got back to Calcutta, from northern Burma, with Truman as President, rather than Roosevelt, I saw it in action. I saw it through Southeast Asia: The Japanese troops had surrendered to the forces of Ho Chi Minh, who had been a U.S. ally under Roosevelt. And the British ordered the Japanese troops to be taken out of the internment camps, given back their weapons, and reoccupy Indo-China. And you remember that history? What that led to? The wars of France in Indo-China, the other wars?

How about the Dutch, what the damned Dutch did in Indonesia, in the same way? A long war, to suppress where there should have been development. The promotion of the split, the civil war, in India. And all through Africa! Africa is the worst of all cases! What the British have done in Africa, is one of the worst crimes against humanity ever imagined. And that started back with Kitchener, not with someone later—Kitchener, in 1898.

So, what we have is that.

The UN Mission: To Liberate Colonial Nations
Now, Roosevelt's conception and alliance were based on a number of things, for the postwar period: The first thing was, bringing Russia and China—even though China was a shattered nation in part at that time—into a bloc to create the United Nations. And the United Nations was supposed to be a forum, for the liberation of areas which had been victims of colonialism, or similar kinds of things. To build up new nations, and to assist them in their development as new nations. And to build a community of sovereign nation-states on this planet, of perfect sovereignty of each nation-state, but bound together by an understanding of the lessons of the recent war: What we had to do, to live with one another, and to achieve the common aims of mankind—different cultures, but the result desired is the same: the common aims of mankind, from the top. To create a community of nations, which, as a force, would prevent anything contrary to that ever happening.

And under a British policy, dictated to the United States, by treasonous elements in New York City and elsewhere, we adopted the opposite policy.

Now, the first thing we did, under Churchill's prompting, was to virtually declare war on the Soviet Union. And Bertrand Russell, a great Liberal, proposed—actually earlier than he published it, but proposed it earlier—a preventive nuclear attack on the Soviet Union, even though the United States no longer had the weapons to do that, because we had used up our last two nuclear weapons as prototypes on Hiroshima and Nagasaki; a totally unnecessary attack. Japan was already defeated; and the terms of surrender had been negotiated through the Vatican, with Hirohito. But under Churchill's and British pressure, the Truman government did not accept the surrender of Japan. All they had to do, was what was negotiated with the Vatican office of special affairs—the man who later became Pope Paul VI [Cardinal Giovanni Montini]—all they had to do, the one condition in the agreement, was to negotiate the surrender with the office of the Emperor of Japan, the Mikado. That's all they had to do. Because, the Mikado otherwise would not have the authority to tell his own troops to stop the fighting.

Japan was hopelessly defeated! The main island of Japan was completely blockaded. U.S. air power and naval forces had them bottled up—they weren't going anywhere! Either out of there, or in there. Supplies weren't coming in; resources didn't exist; it was a defeated and crushed nation, with one island, with a fragile control there. And we prolonged the war unnecessarily, because the British wanted us to do it!

And then, in the process, we went ahead with this attack on the Soviet Union, because it was believed, that the Soviet Union didn't have the capability of developing nuclear weapons in time to counter the British. Once they discovered, about 1948, that the Soviet Union was developing weapons which could do that—then they changed their mind somewhat. And that was the end of Truman.

The United States Becomes a Great Power
But the rest of the policy was a return to the British Empire! And the British Empire was founded, actually, at the Treaty of Paris, the Peace of Paris, of 1763—the same Treaty of Paris which caused the patriots in the United States to realize they were going to have to fight to free themselves from the new British Empire, which led to the American Revolution. And only the traitors and scoundrels in our country still felt loyal to the British. The world has been living under a British empire! We threatened that British Empire, as a nation, as the United States, with a defeat of Britain's agents inside our own country: the Confederacy! The Confederacy was created by the British Empire, by Lord Palmerston.

We defeated that, and we developed a continental nation, which had been our policy always: to accept the Canadian border, accept the Mexican border, and have a border at the Atlantic and Pacific Oceans. We would develop ourselves as a continental, sovereign nation-state.

And we did it. We did it with the transcontinental railroads and other things. We did it with immigration from Europe and elsewhere. We took whole areas of land, brought Germans from various parts of Germany, and brought them into the United States, into the Dakotas and elsewhere, Nebraska. They were farmers. We gave them tracts of land, we gave them assistance. We built a supporting system. We became the most powerful nation of any individual nation-state on this planet—under the conditions of civil war!

What this did in Europe, this unleashed in Europe a desire for freedom from the British Empire. It occurred after the fall of Napoleon III in France, developments there. It occurred in Germany in a very significant way: Bismarck responded to the American success, and challenged the British Empire—not seeking war, but challenging it in terms of economic development. Mendeleyev, the great scientist, attended the 1876 Convention in Philadelphia, and went back and convinced the Czar to build the transcontinental railroad. Germany decided to build railroads from Berlin to Baghdad. Great railroad building occurred. Great changes in the laws occurred in Germany, the Bismarck reforms, 1877-79, were done directly in consultation with the United States, by leading circles in the United States—the Lincoln tradition.

And the British Empire didn't like it. Because, if the nations of Europe, the nations of Eurasia, were to develop their own land-area with railroads, especially of the type we had built as transcontinental railroads in the United States, then, by means of railroads, you could develop more economically efficient methods of transporting goods, over long distances, than you could by water, by sea! This was the issue. If you have internal control over your own territory, efficient internal control, and modern technology, and modern science, you do not use inefficient methods of transporting goods, which is by sea, because you can transport by land. And every inch of movement, on land, in mass transport, well organized, increases the productive power of the nation's economy! Movement by sea, does not, as a movement by sea, contribute anything to the economy. The geopolitical fraud.

And we've now entered a time, with magnetic levitation, and with the kinds of projects that Helga [Zepp-LaRouche] was reporting on earlier, we've reached the point, where we can develop systems to take what has been previously considered the undevelopable or undesirable areas of the world, where development is potential. We now have the means, on this planet as a whole, to transform the planet, to increase the productive powers of labor, the ability to survive, to earn a decent living, as never before in human history! With new forms of mass transit on land; with emphasis on nuclear power, on higher forms than nuclear fission, in terms of developing isotopes, and things like that; to open up the unreachable areas, where raw materials lie on this planet, with vast populations in China, India, and elsewhere, in great need of these kinds of technologies, these kinds of materials; we can now proceed to assure the provision of those materials for the development of people, even in the poorest areas of the world. We now have that potential. It lies before us.

What this represents: This represents a threat to Empire. The United States, which was the most powerful nation that ever existed in 1945, is now a piece of wreckage. And except for nuclear weapons, it does not have much power in the world. Ruined. The issue is, all the way, especially since 1648, since the Treaty of Westphalia, the issue has been the development of sovereign nation-states, according to the Peace of Westphalia, throughout the world. We have demonstrated in Europe, in the United States, and elsewhere, that that can be done. The thing is, to continue the job.

But! What that represents, the very objective of bringing about that kind of world, is a threat to the existence of empire in any form. And therefore, what the United States represented on the day that Roosevelt died, was the greatest threat the British Empire had ever faced. And everything bad, of importance, that's happened to the world, since Roosevelt died, has been the result of forces centered in the Anglo-Dutch Liberals of Europe, but with treasonous elements in my own country. Treasonous elements, like some of our past Presidents—and idiots like one of our present ones.

And therefore, the geopolitical issue remains the same. It's not geopolitics of land-area against sea. It's the fact that the time has come, the long period of time when power lay with maritime power, as opposed to land power—that has ended, technologically. We've now reached the point that we can provide, by land, in development of land-area, a much greater power, much greater efficiency, in economy, than we could by sea. Oh, we'll use the ocean! The ocean has a lot of minerals in it, we have to manage that. We'll use it in many other ways. But the basic power, of productive power, lies in that. And the productive power lies, not just in people; the productive power lies in the development of people: the development of their technologies, their freedom to invent, the power of discovery, the rejoicing in improvement.

And therefore, that's what the fight is.

And that has been the issue of wars! Ever since the Renaissance, the 15th-Century Renaissance: The issue of all major European wars has been that issue! Stop this system of imperialism—whether it's ancient Persian imperialism; whether it's the imperialism of the Roman Empire, or the Byzantine Empire, or the medieval Crusader/Venetian system, or the British Empire. The challenge to humanity is to become human: We must get rid of this factor of empire.

We must create a system of sovereign nation-states, which is based on using the culture of a people, and the development of that culture, to enable people to participate with parity, in the work of a community of nations, of sovereign nations, and to develop man as man can be developed.

And that's what this crisis is all about.

Long Wars to No Purpose
It didn't start recently. It didn't start with the death of Roosevelt. It was there, already. It was the great, long-sweeping crisis of humanity, from as far back as we know the inside of the history of any part of the world; back to about 700 B.C., for Europe.

So, what happened is, the crisis we're facing today, started as the Cold War. Now, the United States continued to prosper, with some ups and downs, until the assassination of John F. Kennedy; we continued to progress, but the evidence is all there. We don't need to discuss that. But the beginning of the so-called "Cold War," the war of recolonization, and the seeking of a war with the Soviet Union, for which there was no reason. Not on Stalin's side—only on the British side.

That is the beginning of the crisis, because, the geopolitical issue was the motive of both London, and also of those forces centered in New York City, which we associate with the financier oligarchy, the people who were behind Hitler, and the people who were behind this. At that point, it was impossible to shut down the United States, as what it had become under Roosevelt, because we had a great productive potential. The world had been shattered by war; Europe needed us to rebuild, the Soviet Union needed us to rebuild, China needed us to build, and so forth.

So therefore, we went along with fits and starts, until the assassination of John F. Kennedy. And that was not an Oswald mistake, nor was that a mistake of any side. It was intentional. The intention was to destroy the United States. John Kennedy, unlike his father, had come into the Presidency, under association with Franklin Roosevelt's tradition. He campaigned for the revival of the Roosevelt initiative.

So you have a phase which is from 1945 to 1964, the assassination of Kennedy and so forth—'63 and what happened afterward—you have a period in which the United States' economy is still powerful, and it's still growing; the standard of living of people is still increasing. Then something starts—and this is where the crisis begins. The crisis we're living through today, begins actually with the assassination of President John F. Kennedy. The roots of the crisis already existed. The roots of the crisis were the conflict between the United States and the British Empire, essentially since the time of Lincoln's victory over the British puppet called the Confederacy. But the ability to wreck the U.S. economy, wreck the U.S. system, began with the assassination of Kennedy.

What happened was, of course, as you know, we got into the war in Indo-China. There was never any damn good reason for getting into that war in Indo-China—none! We had the wrong policy, and we tried to shove the wrong policy down the throat of Ho Chi Minh. Ho Chi Minh was a man who was very favorably disposed toward the United States. He had been an ally of the United States, when Roosevelt was President! Any decent treatment of [Ho Chi Minh] by the United States would have been respected. It might have been difficult—but, diplomacy is always supposed to deal with difficulties. The fact that it's difficult is no reason to avoid it.

So, with this war, we did something which is the same thing that was done by the Persian Empire to Athens, when Athens committed a war crime against the people of Melos. And this led, through the introduction of sophistry by the Persian Empire; the Persian Empire had been defeated on the sea, it was outflanked, and therefore was defeated by land. But it conquered through the Cult of Delphi, through the corruption of the Sophistry, which destroyed the morality of Athens, and induced Athens to commit crimes against its neighbors and allies! Which continued as the Peloponnesian War. And Athens has not come back since then!

Over the history of mankind, since the rise of European civilization, from about 700 B.C., centered on Greece and Cyrenaica, as an ally of Egypt, and allied with the Ionians, and allied with the Etruscans, since that period of the birth of what is a distinctly European civilization—which is unique; there were traces of it from earlier times, but it was unique: This civilization has been constantly destroyed, in itself, by these kinds of methods.

The method that is most frequent is long wars, like the Peloponnesian War, a war with no purpose; that is, with no moral purpose; with no objective, with no strategic objective. A war, you get into with great reluctance and promptness, when you must do it: You get through and get out, as quickly as possible. You don't prolong a war. You don't want your nation fighting a war for two, three years. You want it short, snappy, and out! And the major weapon in warfare today, is, good diplomacy. There's no condition or conflict on this planet, that can not generally be handled with diplomacy, or aided by good diplomacy, including the whole mess in Southwest Asia.

All right, so we had that war.

The Destruction of the United States
Then, we had the 68ers—and this is something that's a very sensitive subject in Europe, as well as in the United States. What were the 68ers? Go back to the early 1950s and the middle of the 1950s; you take two books, which were rather popular in that period: One was called White Collar—the earlier one; the second was called The Organization Man. The U.S. population of my generation had children—they had children whom they taught a certain ideology, which they were conditioned to teach—which became known as the Baby-Boomer generation. It was not a biological generation, it was a cultural generation; or, I used to call it a cultural de-generation.

So, this generation has a peculiarity, strategically, which you will not find in history otherwise—not to my knowledge, not in the history of the United States since my first ancestor landed there in the early part of the 17th Century. Every cultural tradition in the United States, as generally in Europe, has been, the individual person thinks of themselves as an adult, as being an adult generation which is going to produce a generation of children, which are in turn going to produce a generation of grandchildren. So the normal sense of self-interest of a healthy person in a healthy culture: They know they're going to die; and therefore—obviously, the purpose of living is not to die—it's a contingency of life; it's not a purpose of life. The purpose of life is to use what you have, as a life, in your development, in your self-development, in what you think is good, in what you are going to contribute, to at least your children and grandchildren. That's elementary morality in virtually any part of the world, where there is morality.

The Baby-Boomer generation did not have morality. And that is not a biological generation; that is the so-called "white-collar generation" of a group of people who were educated in the same way that Sophistry was produced in Pericles' Athens. By a corruption, a cultural corruption, introduced—an existentialist corruption, of the type typified by Hannah Arendt and Theodor Adorno, and so forth in Germany; and also Bertholt Brecht. This corruption, this Dionysian, Nietzschean corruption of the culture, was induced as a method of education and family culture, in the United States. This was associated with a period of a reign of terror, which some people think of as the name "McCarthyism": That if you wanted to have a secure position, and gain an advantage, well, you had to get through a university, you had to get employed in a place where you could get a security clearance; otherwise, you could not get the kind of household you wanted. But as a condition of keeping your security clearance, on various levels, both formally and otherwise, you had to behave in a certain way. And the main thing was to instruct the children not to do anything that would get their parents, and their fathers' income, into trouble. Because all this juicy middle-class income would vanish!

This generation then went through the shock effect, as children—they were born largely between 1945 and 1958, because it was in the earlier period that the adult members of the family of the so-called white-collar class, developed this idea that "they had made it." They were not like the blue-collar people whom they treated as inferior—farmers, blue-collar workers, so forth, "Oh, they're inferior. We are the golden generation. We have the jobs in the corporations, where we're white collar. We're engineers, we're this, we're that! We've made it! We're the Golden Generation!" And they imbued this idea in their children's generation as an ideal standard of dynamics.

And so, thus, this thing came to an end, because the '57-'58 depression spoiled the party for the parents of the Baby-Boomer generation.

And we had the explosion in Europe, as in the United States, for the same general reasons: the so-called 68er explosion. The 68er explosion was pre-orchestrated, it was pre-orchestrated from the beginning of the postwar period, as an operation to destroy culture. As in the Paris Review, for example, which is one of the abominations which typifies this systemic destruction of culture, by people who remain my enemies today, like John Train, and his crowd there.

So, we were destroyed. Now, this is the generation which hated blue collar! The youth, the 68ers, they hated blue collar! They hated industry. They hated technology. They hated Classical culture. And from 1968 on, they did two things: They destroyed the Democratic Party inside the United States, because the division between blue collar and white collar inside the Democratic Party on the issue of the Vietnam War and so forth, that destroyed the Democratic Party! That brought us Nixon and the Nixon Administration. And the Nixon Administration was a vehicle to proceed with the actual destruction of the U.S. economy. From the day that Nixon entered office, virtually, and said that he was a man of Adam Smith, that was the beginning, that was the signal. And from there on, we went through this.

So, we went through several periods, and I'll go through this, identifying this. Remember, this is against the background of the prolonged Indo-China War, 1964-1975, approximately, this period, '72-'75. The Indo-China War was the marker which produced the Hate Generation, called the Baby-Boomer Generation. And that generation said, no nuclear power, no technology, no more investment in infrastructure. "We wanna smoke our pot, and take our LSD. We want our crazy sex life. We invented new sexes—we're going to try them all out."

So, what we went through, with the floating of the dollar, we broke up the Bretton Woods system, and we started a process of liberalization which is the root of the destruction of the economy and financial system of the world today, especially the United States and Europe. We went through a second phase, the destruction of the economy, the Trilateral Commission thing, of that crowd. What we did is, then we destroyed the structure of the economy: The first thing they did, they orchestrated Three Mile Island, and that was an orchestrated operation, and that was to get rid of nuclear power. That's how they did that.

They also destroyed every method of stabilization which had been set up by Roosevelt for the internal economy. They unleashed a reign of usury. They wiped off the books, all anti-usury laws in the United States. They destroyed the mortgage system, under which housing had been developed in the postwar period. And the banking system, the kind of banking, real estate banks which were associated with the promotion of the housing industry, and continued to loot it.

So, by 1981, we'd gone through two phases. We had destroyed the international monetary system on which our lives depended, and we had destroyed the internal integument of the political-economic culture of the United States.

In comes Reagan: And for peculiar reasons, you had a lot of Democrats who had left the Democratic Party and went over to Reagan, because they hated the Democratic Party so much, in what it had done in destroying the economy, and destroying the social life of the country.

So, this led into a period of continued collapse of the U.S. economy, over the period 1981 to 1987. In October of 1987, in the first two weeks of October, we had a 1929 depression, in terms of the markets. The collapse was that deep, just as deep as had occurred under Hoover. But what happened? A decision was made. Paul Volcker at that time was chairman of the Federal Reserve Board, and Paul was uncertain about what to do. But Alan Greenspan, who had been nominated to take the position, said, "Hold everything, I'm going to fix everything. I'm coming in." So we went through a monetary lunacy period, of 1988 to 2007, and to the present day, in which we have destroyed much of the world's economy.

For example, the physical economy of the United States, the industrial economy of the United States depends upon what? It depends upon military-related production: Halliburton, for example. The war in Iraq is a way of making money for firms which are producing military goods, and doing military things, in civilian guise, for that war. What we've done with these things: We have changed the character of the society.

The 'Revolution in Military Affairs'
And there's one thing that's most important through all of this process: Remember, there's a book by Samuel P. Huntington, called The Soldier and the State. And The Soldier and the State is actually an echo of not only the Nazi system, the Nazi SS system, but also, earlier, the Roman legions. This is called, in the United States today, the "Revolution in Military Affairs." This is what's being conducted: is to create private armies, that is, eliminating all military—that's why they're not too unhappy when the U.S. military goes down in Iraq, because they're eliminating every part of the military, except the Air Force, and related systems. Because, the objective, under this regime, if it continues, was to have space-based systems of delivery of weapons, so that you could, on some place on Earth, with a monopoly of weapons based in space, you could push a button and annihilate any part of the human race you chose to eliminate. So they want a space-based system, an international space-based system, which can exert tyranny over the world, in the way the Roman legions tried in the time when they were doing that sort of thing.

The policy of the United States has been, since the time that Dick Cheney was put into the position of Secretary of Defense, in the first Bush Administration, has been this policy: the Revolution in Military Affairs. People like George Shultz, are part of this; Felix Rohatyn, a real fascist little dictator in finance, is part of the same thing: Revolution in Military Affairs.

The other side of this thing, is globalization. A feature of globalization is this so-called global warming hoax, for which there is no competent scientist, who believes in global warming—unless he's a liar. He can't believe in it. It contradicts all science, and there's no evidence to support it. But the green philosophy, just as the green philosophy was used to destroy nuclear power and other things in Germany, this ideology is one of the weapons, together with the Revolution in Military Affairs, which characterizes a change in the cultural characteristics of the population of the United States and other countries.

This is another version of the Apollo-Dionysian cult tradition, which is what we saw with the Paris Review, for example, back in the 1950s, and so forth.

Now, this is what Eisenhower defined, in his last days as President, as a "military-industrial complex." That's the meaning of "military-industrial complex." But what he meant, referred to what had happened under British direction with the death of Franklin Roosevelt and Truman's entry into the office: We have been on that road, toward this "reform in military affairs" to eliminate the citizen army! To eliminate national military forces, as national forces, and to turn more and more of control over military power into private hands, in the hands of supranational agencies. This is true empire! This is the New Empire, the new form of what was proposed to the head of the British operation, Lord Shelburne, by Gibbon in the Decline and Fall of the Roman Empire.

Again, the center of this is the Anglo-Dutch Liberal system, typified by the British Empire. That's where the problem lies.

So, this is not a war among nations. This is not wars among nations. This is not strategic conflicts among nations; this is not what runs this thing. What runs this thing, is a struggle, of the legacy of empire, and the form of empire, from before the time of the great Council of Florence in the 15th Century, to the present. It's the determination to eliminate the sovereign nation-state as an institution from the planet, to establish what's called "globalization."

Maastricht vs. the Nation-State
For example—and I'll get to this, under the next heading here—but, the problem we're facing today, is that Europe, in particular, Western and Central Europe, do not function. Why don't they function? Because Maastricht, in its present implementation, has destroyed the effective sovereignty of the nation-states of Western and Central Europe. Sovereign decisions based on national interest are no longer a right of the people or governments of these nations, as long as this arrangement continues to be the case. The Maastricht Treaty did it. Therefore, the great reform, which I'm coming to now, which we have to make, can not be undertaken, initiated, from anyone in Western or Central Europe, not by any government; it can't be done. They have lost their independence! They've lost their sovereignty! Maastricht took away the sovereignty. Maastricht proposed it as a British proposal—but they didn't join it. It was meant for others' consumption, not theirs, hmm?

Therefore, we depend upon those nations which still have a sense of sovereignty, and power, as a combination, to make those reforms which eliminate everything that went wrong, in general, from the time that Franklin Roosevelt died. That's what the issue is. That's the issue of every struggle on this planet of any significance.

Therefore, we depend upon getting the United States to recognize its own self-interest. And this bill that I've proposed, which is being pushed now, by people in the Congress, on this protection of housing and banks, this is simply the kind of measure that will mobilize the American people to take back their sovereignty, their sense of sovereignty. Under those conditions, conditions in which the President of Russia has been assiduously pursuing some kind of cooperation with the United States, and correctly so—since the time Putin met Bush for the first time, Putin has stuck to that policy, repeatedly. He's continuing it now. There are important parts of the U.S. institutions which are continuing that discussion, with the Putin government. You would be surprised at some of the names involved in that, but it's there.

Only by the United States realizing that potential, and coming to an agreement with Russia, which also has to be in an agreement with China and India, would we have a possibility of an initiative, to change the way things are going now, away from doom, into an immediate change into a new system. That does not mean we're talking about four powers to run the world. It means, we need an initiating force, around which the nations of the world can rally. They need that. They need an initiating force, of authority, around which they can rally to say, "Me, too." Then we can use the United Nations, and what that implies, as a vehicle for what Roosevelt had intended, to create a system of sovereign nation-states, and nothing but sovereign nation-states, on this planet.

So therefore, that's where the problem lies. Go back to the death of Roosevelt: That's the problem! And all the other things are diversions—often caused by people who try to distract our attention from what the real issues are.

Creating a Public Credit System
This involves, now, a special problem. And this is where I become somewhat technical, but it's necessary: There is no way, no conceivable way, in which the existing monetary-financial systems, among nations, or of any nation, could be salvaged. The degree of bankruptcy within the existing financial systems, is so far gone, there is no possible way of refinancing any part of this, within the terms of the system. There's only one thing you can do, and from that flows the only method that can work: What you can do, is put the entire, international monetary-financial system into bankruptcy.

Now, that's easily done, technically. Because these systems are so intertwined with each other, there is no such thing as a national monetary-financial system. The banks of the United States, the banks of Europe, don't own anything! They are controlled by the hedge funds. The hedge funds have been using the banks like toilets; they visit once in a while for comfort! Banks don't have resources in them. It's not a matter of settling how many dimes for a dollar. It's impossible. There are no reforms within the framework of the system that can work! Not only because it can't work on a national basis, and because it can't work for a system as a whole. The monetarists can all be unemployed: We don't need monetarists any more. Matter of fact, we would like to get rid of them!

Because, we're going to have to go to a completely new world system, and it's going to have to go by a certain kind of step. And this is the remedy: What has to be done—and my little proposal for this new legislation, for Federal protection of households, mortgaged households, but households in general, and banks; that is, legitimate banks, banks that actually take deposits and loan money, and conduct that kind of business. We need them, and everybody knows that. You need these banks, because those are the ones on which the community depends, for managing its affairs. Without these banks, communities don't function. So those banks, even if they're bankrupt, are going to be protected under this act.

Secondly: No householder can be put out of their home because of foreclosure. We're going to settle it? No! We're not going to settle anything! We're just going to take all this whole package of mortgage paper, we're going to take it, in one big package, and say it's all frozen. It's all taken in receivership by the Federal government. And it's going to sit there. And we'll arrange that the people who live in those houses will pay something to the relevant bank on that account, every month. But they will stay in their houses! We are not going to try to settle the accounts, because we know that the value of these mortgages is going to collapse to a very small fraction of their present nominal value. So any attempt to write down some of the mortgages, or buy off part of it, is not going to work. Because the intrinsic value of these mortgages—we don't know where it lies, but it lies "way down there," someplace!

And therefore, our problem is, to prevent a disruption of the U.S. economy, in particular. Therefore, how do you prevent a disruption? Well, you freeze it! It's like taking a firm into bankruptcy, into receivership for protection—you freeze it.

It now lies in the Federal government. The Federal government is now responsible, at some time in the future, to clean this mess up. In the meantime, it's frozen. The people will stay in their homes; they will pay a reasonable amount, as the equivalent of rent, into the accounts against these mortgages. But the mortgage will sit there in the banks! We're not going to try to renegotiate them now.

In other words, we're creating a firewall, against a chain reaction, already in process. We will have to do the same thing in other categories. What does that mean? It means that the Federal government—and we recommend this heartily to European and other governments to do the same thing—faced with this situation, you have to realize that you have to eliminate the factor of the present system, from the economic and related life of the people in the nation. And it's only by neutralizing that, by putting it in a cage—like a little squirrel in a cage, let it spin as fast as it wants, but it's going to stay in that cage. Because we're going to a new kind of system.

We're going to get out of a monetary system which is the basis for empires, of the type we've been discussing, and we're going to a public credit system, which is what the United States Constitution prescribes. The U.S. Constitution says, "We're not owned by banks. We're not owned by bankers. We own the bankers." Because, in our Constitution, the printing, or uttering of money, or the uttering of a promise to deliver a created money, is the power of the Federal government. The states have no power to utter money. Only the Federal government has the power to do so, and does so, only with the consent of the House of Representatives.

Now, the uttering of money, under this kind of system, is a credit system, not a monetary system. The government utters the currency, or utters the credit, against an issuable amount of currency, as the Congress has allowed it to do: The Congress votes a bill; the government can now utter so much currency, which will be charged to the debt of the United States. That is the equivalent of money.

What do you do with it? Well, you can do necessary things, but you also do something much more fundamental: You use this money, that you've created, this credit, you use this for large-scale infrastructural development, primarily. Because large-scale infrastructural development—and we're way short of it in the United States and in Europe, right now—it means all the things that are the public sector: power stations, mass-transportation systems, health-care systems, so forth. These are things which are essential to all parts of the population. They have no control over their need for them—hmm? They are facilities on which we depend. So therefore, we issue credit; we issue credit for fixing up infrastructure, maintaining it.

Now, when you start to fix up infrastructure, then you really put the rest of the economy to work, in contributing to this work of building up the infrastructure. So now, you issue credit to people who are doing that. Now, you're into the private sector, and you're bringing in firms which supply this or that facility, this or that job. And now, you are stimulating the business, in the community, through infrastructure for the future. And you're doing it in a way which keeps a balance between the ratio of the public sector and the private sector.

But how is this going to function? Let's take another problem here: We have now a floating condition of currencies. Under floating conditions of currencies, the price for lending is uncontrollable. Because, if the currency that you're dealing with is dropping in value against your currency, what are you going to charge for your interest rate? So, under a floating exchange rate in a declining economy, the tendency is, on the one hand, for a demand for cheap credit, and on the other, a denial of a possibility of generating it through the private sector, or through central banking.

So therefore, we have the problem, that, for global development, we must have a fixed-exchange-rate system internationally. What does that mean? Essentially, you try, as close as possible, to actually freeze currencies at their present relative values. Freeze them.

And then go to a state public credit system. How do you do the state public credit system? Well, we have China, we have India, we have Russia, we have the United States, and other nations, which all need a lot of things. And these things involve a heavy reliance on trade, trade goods. So therefore, if we're going to have lending and credit issuing across national borders, we must have a fixed-exchange-rate system. Otherwise, how are we going to determine what the rate of interest is going to be, in terms of medium- to long-term loans?

So, now, what do you have to do? You say, what's the basis for an international credit system? Is it a monetary system? No. The monetary system was a bad idea, didn't work out too well. We get rid of that. We're going to have long-term treaty agreements. What do I mean by long term? I mean 25, 50 years, minimum. That governments, of the world, will enter into treaty agreements, long-term treaty agreements, in the form of trade and related agreements, in a fixed-exchange-rate system; and instead of trying to balance the system by letting currencies float, you balance the system, by letting the prices of goods within currency domains, float, within a regulated range.

So, the problem here, is that, on the one hand, we must immediately take this action. We must immediately bring a group of nations—and we're talking about weeks, now, because this thing is blowing! This is finished. There's no bottom to this crisis—none! You either stop it, by the methods I've indicated, or you don't stop it at all! And pretty soon, you have something worse than Germany, 1923.

You have no choice, that is, no rational choice. Do this, or else, the worst'll happen to you.

So, governments will tend to go along with this, only when they perceive, that they have no choice. Some governments are clinically insane, and won't go along. So therefore, we need to have a stable system, created by agreement among a growing number of nations who are joining the list of those who enter this agreement. And, essentially, we will try to reform the United Nations Organization, to perform a function in accord with this type of agreement.

Creating the Firewall
Now, in order to do that, you're making a transition from a monetary system to a credit system. You have to make it turn on a dime. Because a week of chaos, or two weeks of chaos, may destroy your country—you can't have it. So therefore, you have to come in with a firewall. And the housing and banking protection act is a firewall: The Federal government takes this category—the housing market poses a threat, a threat to the banking system; it's a threat to the entire system. Therefore, we must protect those two pivotal elements of the economic system, otherwise, we don't have a chance of surviving!

Are we willing to plug the hole in the bottom of the boat? If we're not, we're not fit to survive. And our elimination will probably help the human race of the future.

So therefore, we need a method of firewalls; now I mentioned two kinds of firewalls. I mentioned this act; it's a firewall. It is a feasible form of firewall under U.S. law. We just need that one piece of legislation, no more complicated than what I've written. That piece of legislation will create a firewall.

Now, we need another firewall: We need a firewall for the transition from the way the U.S. financial system is operating now, to what we are installing. We also need, in that, we need a firewall in the form of treaty agreements among a powerful aggregation of nations. In other words, if the majority of the powerful nations of the world agree that something is going to be protected, it can be protected. Without such an agreement, it can't be protected: That's a firewall. If these nations agree to come to each others' support and defense, on this issue, knowing that it's their interest that's at stake—a firewall, a transition from a system that has failed, the Cold War system, the present system, the globalization system: These systems have failed. We must, with one fell swoop, get rid of them! Well, you can not reform them, piece by piece: You have to create a firewall, to contain the disease.

And you have to have the backing and support for this firewall, from a sufficiently powerful group of firemen, firefighters. Those firefighters are powerful governments, who agree to cooperate with one another to defend each other's interest, their mutual interest: the same thing as the Treaty of Westphalia, the Peace of Westphalia—the interest of the other. The nations know they're going to Hell, if they don't protect one another. Therefore, the interest of that nation, just as the people in the Peace of Westphalia after the Thirty Years War, knew: They had to go to this, to protect themselves! They had to put the interest of the other, first! And that had to make that a firewall, and all decent European civilizations since that time, depended upon that 1648 Treaty of Westphalia. We need the equivalent now: Firewalls!

And we need, above all, to educate people, to understand that there is no alternative. Because there is no alternative! The boat is sinking! Fix the leak, or get off the boat! Don't try to get a better stateroom.

There's a principle involved in this, which is a sticking point: Most systems, economic forecasting systems that are used, the formal ones, the mathematical ones, are junk. A good economist does not depend entirely on figures. A good economist always looks behind the figures, to what the reality is. He does not go by the financial figures—never believe an accountant. Use the accountant, employ the accountant, but never believe what he writes. You need his figures, you need his head, but you're going to have to decide what it really means, not him.

And the problem is, that we operate, as right now—we're in post-industrial economies, not entirely physically, but ideologically. These economies—look at the government, the government of Germany, the government of other countries—they're all, ideologically, post-industrial societies. They have no perception of reality. They don't like reality! It annoys them. It gets in their way. They would ignore reality where it's possible. "If reality comes in the front door, we will defy it!" That's your present population.

Mathematical Formulas Cannot Describe an Economy
The problem is, that—speaking as an economist, looking at reality as I know it—we are in an insane society, on this kind of issue. Let's take the case of Myron Scholes; he's a good target to hit. He was the famous forecaster who was employed as a mathematician in the LTCM case. And he made a mess, and he keeps making a mess! The hedge fund business, all of these fellows are functioning on mathematical formulas. Every one of these mathematical formulas are utterly incompetent! They're wild-eyed. It's traces of John von Neumann—and he was an idiot. He was a mathematician; he was not a scientist, he was a mathematician.

Therefore, they believe that somehow there's a law, somewhere, that dictates what prices must be, by some mathematical formula. There is no such law. No economist believes that. Every competent economist looks at a physical reality, and thinks in terms of the consequences, the physical consequences, of a certain policy, or a certain trend. Not the price movement, as such. Not John von Neumann's crazy system, which is what people are using.

The other aspect of this, where people fail, is on trends. They believe in statistical trends, in terms of Cartesian systems of mathematical systems, mechanical-statistical universe. They think of bodies floating in empty space. And the empty space is their head. And they have these objects, these balls, are floating in there, and they're watching the trajectory of these balls in this empty space, which is inside their head. And they assume that you can predict a future state, within this Cartesian vacuum, on the basis of a statistical current trend, they extrapolate. And what gets people like Myron Scholes and company into trouble—and they haven't given it up even after the lesson of 1998!—is they think they're all going to compete to use the right mathematical formula! But using the right mathematical formula the way they do, is like a bunch of people betting on the same horse, in a horserace. And if they're wrong, which they probably will be, they're going to lose everything.

That's what's happened with the hedge fund business. They're all using this kind of formula, the same kind of formula, the mathematics that Myron Scholes uses. And they're all creating a system, which is collapsing. They're all going to lose. And the whole hedge fund pile-up, is now hopelessly bankrupt. There are no net assets in the hedge fund domain. They're demanding money be given to them, to bail them out, like beggars on the street. And they're all based on projecting something, like the projection of a trajectory of a ball in empty space—a mechanistic-statistical system.

Real economies do not function in that way. They function in terms of physical laws, as we know, if we know production. A gain, through a technology, or a gain in the way you use a technology; the interrelationship of infrastructure to productivity in manufacturing—these kinds of things. Physical factors. And we have a way of dealing with that in science. It was called, in ancient Greek, "dynamics," or dynamis. Since Leibniz, in modern society, we call it "dynamics."

The kind of dynamics you require to understand an economy is Riemannian dynamics: That is, we are in a universe, in which any assumed a priori axioms and postulates, or definitions, are insane. They're wrong. They're arbitrary. We live in a universe, which nonetheless, does have some laws; it does have the equivalent of laws which are universal. Gravitation is an example of that. These laws define a universe, not as a Cartesian universe, not something open-ended, which is stretching out infinitely in all directions without limit. No, but, a universe in which there are certain things that bound the universe! Like the shells that enclose the universe, and which affect every part of the universe, as a shell, like gravitation. Gravitation, as Kepler defined it, as Einstein defined it later, as Riemann defines it. It's a principle of dynamics. Universal principles.

For example, the difference between man and an ape, is a principle. It's a universal principle. Mankind is creative. That is, mankind has the ability to increase the potential population-density of a species, itself! No animal has that. Therefore, there's a principle which separates mankind from any animal! These bound the universe.

When we introduce a power system, or anything else in the form of infrastructure into an economy, we are creating a boundary condition which contains the space in which we're operating.

And therefore, you do not determine value in economy by Cartesian methods, by statistical Cartesian methods. You determine value in an economy, if you want to succeed, according to the principles which confine the economy you're talking about. The way you design an economy, the way you design its operation, the kind of technologies you develop, the way you apply them, this is the action of the universal physical principles of the universe, as you have come to know them; or as things you have done, you have understood what you have done, which now bound the way you behave. And you're able to see where you're getting, because you think like this.

It was why I have had the success as a forecaster that nobody else has had, on precisely this issue. Because, the field of economics is dominated by people who believe in accounting, as a basis for forecasting; believe in Cartesian mechanistic methods of forecasting, as a way of predetermining trends, who will tell you, "We see the fundamentals are sound." Somebody tells you, "The fundamentals are sound." The economy's collapsing! What's sound about this? This is the Titanic, buddy, it's going down!

We Have To Change Our Thinking
And so, therefore, the other problem we have here, is precisely that: That we have to change our thinking, away from what's prevalent today. And to what many people, as economists understood, but they understood it almost as by instinct. You're dealing with a physical economy. You're thinking about the effect of changes in the physical structure of economy, about the way people live physically, that sort of thing. You think about how this affects the future of humanity, not statistically. And then, on the basis of this knowledge, you inspect something, you think about it. And you come up with some answers, which are good approximations. But then you realize, well, a good approximation isn't good enough, so we're going to do some more research, and we'll try to find out what the principle is involved here.

And that's where we are, when you try to function in economics, today. We do not have competent economics as a theory, taught in any university. We have a lot of things we know about economies, from a physical standpoint, of how they affect the economy. We can make some very good medium- to long-term guesses, about what to do. And if we know what we've done, and how we thought about it, and it doesn't work out the way we thought it was going to, we can get in there, and see what corrects our error.

So, we are going by a kind of approach to physical science, with a lot of trial and error, and pure insight goes into it. And because we take care to know what we've done, we make good decisions. If we go as a statistician, and try to forecast everything just by von Neumann's method, and his and Morgenstern's, then you have incompetence. What you have now, is drastic incompetence.

We have to get rid of the idea, that there's any mathematical law in the universe that determines the value of money. There is none. We can construct systems, of designing priorities, long-term investment priorities, management of currencies, regulation of prices, fair-trade regulations, which give us a good approximation. And if we keep somebody on the job, watching this, to make sure it's working as we thought it was going to, we can do a good job. And that's good economics.

But, if you want to understand economy, what you really have to do, is study Bernhard Riemann, and read some people like Vernadsky who have good insights into some very important, new things, and start to apply that kind of thinking to the way our economies work or don't work. And that's what I do.

So, we've come to this point: We have to make a change. Forget all the usual habits which have been accepted as acceptable, as expert. Know that the experts have created this big mistake, this collapse, and don't ask for their opinion about anything, about how do they think they made a mistake. Because everything they've done is obviously a mistake. Every government of the world, has made major mistakes: China is apparently successful, but I know some big mistakes they've made. India's apparently successful, but I know the poverty in India is greater than it was before. They've made some mistakes—the caste system had something to do with that. Europe made mistakes. The United States made mistakes.

So: We are dealing with good, scientific approximations. And science never had the last answer. It gave us better and better closure on the suspect area of principles. And as long as we remember, how we came to certain conclusions, and are prepared to reexamine them, when the evidence suggests it's time for a little fresh look, that works. But we have to get away from all the assumptions that are taught and believed today, in this society, especially the post-industrial society. And make this change.

It requires guts. It requires the same kind of guts as required for command in warfare: You have to make a decision. You have to think about what the consequences are, if you're wrong. But you still have to make the decision. And we're going to have to start thinking that way, right now: If we do not build firewalls, instead of trying to muddle with this thing, if we do not freeze the system, and ensure that we keep functioning on essential things without any change of step, we're not going to make it! And it will be the end of civilization as we know it.

Oh, somebody will come back a few generations down the line, and start to rebuild. But civilization, as our generation knows it, the living generation now knows it, will cease to exist, very, very soon, unless we change our ways. And I can give you some insight at best, on some of the things we have to think about.

LAROUCHE ON DOLLAR COLLAPSE: CREATE A NEW BRETTON WOODS, END POST INDUSTRIAL SOCIETY
As you should know—let me make it clear, if you don't—the present international monetary system is effectively now finished. The date on which the collapse will actually occur, officially, is not yet determined. These things can not be precisely predicted, because there are too many factors. But the situation in the U.S. currency is absolutely hopeless. There's no possibility of a recovery; there's no possibility of a cessation of the present monetary crisis.

If it were to continue without remedy, then you would say, the chain-reaction effect would probably be a general collapse of the international monetary-financial system. However, there are things that could be done to stop the process. I'm the author of one of the proposed pieces of legislation in the United States, which will stop the process. What is required is, to actually set up a new international monetary system, a provisional one, to replace the present world monetary system, to stop the process of foreclosures, to fix and freeze some of the relative values of currencies internationally, until nations can come to an agreement to reestablish a new, emergency fixed-exchange-rate system. It's the only possible way in which a general, chain-reaction collapse of the entire international financial-monetary and economic system could be prevented.

Therefore, the question before us, is, in addition to the importance of understanding that there is no possibility that this present U.S. dollar system will not collapse, and will not take the world system down with it, the only alternative is to introduce a new monetary agreement, which can stop the collapse. What that would involve is this: I have proposed, for example, the legislation which is now being debated in the Congress and in the states, and that is, to establish what we call a "firewall": It is to have a Federal law enacted, which would stop proceedings on all foreclosures on mortgages, and put the system under bankruptcy protection, to stop this foreclosure process, which is going to become worse, in any case; and secondly, to provide Federal protection to certain categories of banks which are nationally chartered banks or state-chartered banks.

'We Must Freeze the System'
We must freeze the system. There is no way in which you can reorganize the system in its present form. You must first freeze it. And the first step, is to stop all action on foreclosures on mortgages. If a mortgage is foreclosed, you stop the proceedings. If a bank is in jeopardy, the bank is protected. And then, there will have to be special laws passed to regulate what will paid and what will not be paid at this time.

The second thing that's required, apart from this, is a change back in the direction of a fixed-exchange-rate system, of the ...


RE: LaRouche - Admin - 09-30-2007

A FED PANIC AND A MASSIVE BAILOUT OF AMERICAN BANKS PAID FOR BY THE ENTIRE WORLD

Prof. Rodrigue Tremblay
http://globalresearch.ca/index.php?context=va&aid=6832


"Manias, panics, and crashes are the consequence of an economic environment that cultivates cupidity, chicanery, and rapaciousness rather than a devout belief in the Golden Rule." –

Peter L. Bernstein, Foreword to Manias, Panics, and Crashes (4th ed.) by C. P. Kindleberger

"In a crisis, discount and discount heavily."

Walter Bagehot (1826-1877), British economist

"The job of the Federal Reserve is to take away the punch bowl just when the party starts getting interesting."

William McChesney Martin (1906-1998), Fed Chairman (1951-1970)

"The dysfunctional state of American politics does not give me great confidence in the short run.''

Alan Greenspan, Fed Chairman (1987-2006)

The mismanagement of money and credit has led to financial explosions over the centuries. The causes, cures and consequences of such financial catastrophes are most often repetitive. Indeed, such financial collapses are usually the result of the unbridled greed and cupidity of financial operators and of the lack of necessary supervision by public institutions designed to protect the public and the common good. For example, after the October/November 1907 financial crisis in the United States, the idea initially advanced by banker Paul Warburg to establish a partially private and partially public Federal Reserve system of banking was finally adopted, in 1913. The Fed thus became the lender of last resort for banks that find themselves in an illiquid position. It is only after the stock market crash of 1929, however, that the Security and Exchange Commission (SEC) was established, in 1934.

But even with institutions and regulations in place, when they are inoperative, corrupt or ill-adapted, financial crises can still occur. And the current financial crisis is there to remind us of this fact.

On September 18 (2007), the Fed showed some panic and announced a larger than expected half percentage point cut in both the Federal funds rate and in the discount rate , and this after having slashed its discount rate by a half point, on August 17, in order to facilitate borrowing by America's largest banks and to facilitate the bailout of their affiliates and other operators, such as hedge-funds, caught in the sub-prime loans crisis. In so doing, the Bernanke Fed is following Bagehot's advice for aggressive discounting in a situation of financial crisis. The only problem is that Bagehot's rule calls for the central bank to lend copiously in times of critical credit stringency ... but at a high rate of interest. By lending to troubled lenders at reduced preferential rates, the Fed is acting as their "government", i.e. subsidizing their risky loans operations and taxing anybody else who holds American dollars. It is not only attempting to make them more "liquid", but also more "solvable" and less likely to fail.

This raises three interesting questions. First, who pays for the bailout of U.S. financial institutions; second, what are the longer-run consequences of the massive bailout undertaken by the Fed; and third, why did the Fed let the financial situation deteriorate to such an extent that an entire sector of the economy is being clobbered and its collapse is threatening the whole economy.

First, we must consider that the U.S. dollar is still a key reserve currency, although loosing ground to the euro, and it is still being held in massive amounts by most central banks in their foreign reserves, and also by private banks, commercial and economic entities and individuals around the world. For example, in early 2007, foreign central banks alone held some two and a quarter trillion in U.S. dollars reserves, which represented about 66 percent of their total official foreign exchange reserves, with a bit more than 25 percent being held in euros.

Since the dollar is loosing its purchasing power, both in absolute and relative terms, central banks and other foreign investors have been "taxed" by the American Fed's policy of benign neglect regarding the dollar. In real terms, the seigneurage tax on foreign holders of the dollar can be measured by taking the difference between the annual rate of depreciation of the dollar vis-à-vis major convertible currencies and the short-term rate of interest on these reserves. For example, if the annual rate of depreciation of the dollar is five percent and the short-term rate of return on U.S. T-bills is four percent, central banks are loosing some $22.5 billion on a yearly basis. Since private foreigners hold more than two trillion in dollar denominated debt, the net annual loss of foreign holders of U.S. dollars can easily reach $50 billion a year. The conclusion is easy to see: Not only have foreigners been heavily financing the large U.S. government's deficits over the last six years, but they are now being called upon to help finance the generous bailout of American financial institutions.

Investors both abroad and in the U.S. know that official inflation figures are tilted on the low side for many people, essentially because they are designed to reduce the weight given in the indexes to goods and services whose prices increase the fastest, but also because housing costs and asset prices are only partly taken into consideration. This could explain why inflation expectations are on the rise, even though official inflation figures do not register an increase in inflation. Too much easy money as experienced over the last few years at first fuel asset inflation, but sooner or later it shows its ugly head in the prices of all commodities and in the prices of all goods and services. With the current drop of the dollar, Americans can be expected to pay more for a lot of items, such as fuel and food. This will translate to a lower standard of living.

Already, the price of gold, the price of oil and the prices of other commodities are on their way up and can serve as inflation bell-weathers. The behavior of long-term interest rates that incorporate inflation expectations is also a good indicator of future inflation. With the Fed printing money and increasing the money supply on a high scale as if it was dropping money from an helicopter, thus the nickname of Fed Chairman Ben "Helicopter" Bernanke, short term interest rates will drop for a while, but long term interest rates will be edging up, unless a deep recession steps in.

Secondly, a massive bailout as the Bernanke Fed has undertaken raises the question of moral hazard present in any massive central bank rescue intervention, after it has failed to properly regulate the risky activities of the banks it supervises. Indeed, by accepting mortgage-backed securities as collateral for huge more or less longer term loans to American banks and brokers, at reduced interest rates, the Fed is in effect rewarding the very institutions which acted the most irresponsibly over the last four or five years, while saving its own face for having failed in its regulatory mission. The message is loud and clear: American financial institutions can indulge in creating "innovative" risky artificial credit instruments, shifting the risks to unsuspecting borrowers and investors while reaping juicy fees and rewards, and when things turn sour, as can be expected, the Fed will come to their rescue and bail them out with cheap and extended loans. That is a good way to carelessly encourage a greedy and out-of-control financial institution to create successive disorderly and disruptive financial crises.

Indeed, the Bernanke Fed is presently taking the pain of the consequences away from financial institutions that acted irresponsibly, and for some, as former Fed Chairman Alan Greenspan has said, which have acted criminally. —This is a clear case of moral hazard.

If old regulations are not implemented or if no new regulations are put into place, such a massive bailout will insure that American financial institutions will continue in the future to pursue the fast buck in creating risky artificial capital, without due regard to the risks involved for small borrowers and small savers, while the Fed will take responsibility for shifting losses partly on itself but mainly to holders of American dollars. In effect, the Fed is suspending market discipline for the big financial players it puts under its protection, while letting market discipline crush small homeowners and small investors who bought now foreclosed houses on shaky mortgages or who invested their savings in fraudulent and risky collateralized debt obligations (CDOs). That is the net result of applying Bagehot's rule only in part.

The third question is why both the Greenspan and the Bernanke Fed did not remove the punch bowl of easy money and easy credit sooner when things began getting ugly in the sub-prime mortgage market during the 2003-2007 period. Why did they appear paralyzed and do nothing? Former Fed Chairman Alan Greenspan has an easy and self-serving explanation. Before 2003, he was afraid of an onset of deflation and that is why the Fed brought its key lending rate to 1 percent (from June 2003 to June 2004) for only the second time in history. He also says that there were too much "global savings" around the world and that is what pushed interest rates down. This is a slight of hands explanation, because if globalization and global savings kept inflation low and term interest down, short term interest rates and money supply increases were under the Fed control at all times. The Fed had no obligation, after 2003, to keep real short term interest rates so negative for so long. Indeed, as the Bush administration was cutting tax rates to enhance its 2004 reelection prospects and was spending money like a drunken sailor in wars waged in remote lands, the Fed should have taken the contrary route to counterbalance the fiscal impetus this created for the macro economy. In other words, it should have taken the punch bowl away. —It did not.

As a consequence, mortgage debt as a percentage of disposable income in the U.S. is at the highest level it has been in seventy-five years, reaching 100 percent, while consumer debt has risen to its highest level in history. All this makes the economy more vulnerable than it has been since the 1929-39 depression. Another consequence of this binge of easy money has been the frenzy of leveraged buy-outs and industrial concentration that we have observed over the last few years.

Finally, let's put the cherry on the cake. Indeed, there is a most disturbing piece in former Fed Chairman Alan Greenspan's recent Memoirs (The Age of Turbulence) and in the explanations he gave in interviews granted to promote his book, and it is his confession that while he was acting chairman of the Fed he actively lobbied Vice President Dick Cheney for a U.S. attack on Iraq. [If this was the case, it was most inappropriate for a central banker to act this way, especially when he had other things to do than lobbying in favor of an illegal war. Does it mean that Mr. Greenspan was an active member of the pro-Israel Lobby within the U.S. government and joined the Wolfowitz-Feith-Abrams-Perle-Kissinger cabal? It would seem to me that such behavior would call for an investigation.

Indeed, to what extent was the pro-Israel Lobby responsible for the Iraq war and the deficits it generated? Already, polls indicate that forty percent of American voters believe the pro-Israel Lobby has been a key factor in going to war in Iraq and that it is now very active in promoting a new war against Iran. This figure is bound to rise as more and more people confront the facts behind this most disastrous and ill-conceived war. Indeed, how many wars can this lobby be allowed to engineer before being stopped? And, to what extent can the current financial turmoil in U.S. and world markets be traced back to the influence of this most corrosive lobby?




RE: LaRouche - Admin - 10-07-2007

MORTGAGE RESTRUCTURING WON'T WORK WITH THE WHOLE BANKING SYSTEM
http://www.larouchepac.com/news/2007/10/05/larouche-warns-senators-durbin-and-specter-and-fdic-chairman.html


Lyndon LaRouche issued a strong warning this morning to Senators Richard Durbin (D-IL), Arlen Specter (R-PA) and others, not to pursue legislation that would allow for case-by-case home mortgage "work-outs" under revised bankruptcy protection laws. He addressed exactly the same warning to FDIC Chairman Sheila Blair on her proposal today that Congress freeze the rates of adjustable-rate mortgages.

LaRouche's warnings were focused on the fact that the crisis is not merely one of sub-prime mortgage foreclosures, but a general breakdown crisis of the entire banking system and the global dollar-based world monetary architecture. "Don't commit to pricing on mortgages," LaRouche warned. "The whole banking system is undergoing a collapse, and a new system is going to have to be established. To tie mortgage values to the old, bankrupt system, would be a grave mistake." LaRouche added, "What is wrong with just implementing a blanket freeze on mortgage foreclosures, until the whole mess is sorted out? Just set some appropriate interim payments so that there is some flow of funds into the banking system, as homeowners remain in their homes, paying, in effect, rental payments. But don't attempt at this moment to deal with the issues of appropriate property valuations, mortgage rates, etc. It would only make matters worse."

"You have to understand that the system is coming down," he continued. "And trying to tinker within the system is not going to work. You have to put the SYSTEM into suspension. It's like declaring a bankruptcy of the system. And the only honest thing you can do is declare the system bankrupt. Now, then, the system continues to function in the general welfare interest, according to appropriate rules for reorganization of the system. Don't try to negotiate a solution to the conflicting demands within the system! Suspend what you cannot deal with. You must keep the economy functioning; you must keep people employed; you must keep the economy working. We'll sort it out over the next two years. Don't try to find an instant solution,-- there is no instant solution! You're going to go through bankruptcy reorganization of the entire system. The system is bankrupt! And to try to pretend that you've got a solution for a bankrupt system, by tinkering with the values,-- YOU ARE COMMITTING FRAUD!

"The point is," LaRouche concluded, "there is no solution. We're talking about a transition from a present system, which is hopelessly bankrupt, and the main thing we're talking about, is keeping the economy functioning, despite the fact that the system which we're administering, is bankrupt. And we're acting on the basis of the Constitutional obligation to defend the General Welfare. And that, essentially, is what the story is. Nothing more complicated than that. But, people don't want to do that; they want to get the agony over, and hope that they can now renegotiate and lower the price of the mortgage, and somehow, everything will be back to business as usual. The problem is,-- the business-as-usual question, is what the issue is. They want to get back to business as usual. And that's where the failure comes in. There is no business as usual. There can't be. This business is ENDED. What we have to do is keep the economy functioning, while we have a couple of years to reorganize it."




RE: LaRouche - Admin - 10-08-2007

PERILOUS TIMES

Richard C. Cook
http://globalresearch.ca/index.php?context=va&aid=7006

The U.S., as the only so-called superpower, exerts a decisive influence on the fate of the world. Today peace and stability are threatened by three giant problems whose outcome depends a great deal on U.S. decisions. These problems are linked to each other synergistically in ways that increase the overall danger.

The first problem is the peril to the world’s economies from the massive worldwide pyramid of speculation and debt, a.k.a., the financial bubble. Moreover, we have not seen the end of the fallout from the deflation of the U.S. housing bubble of the mid-2000s. The Federal Reserve facilitated this bubble to fill the void left by the bursting of the dot.com bubble of the 1990s. That one followed on the heels of the 1980s buyout-merger-acquisition bubble.

Officials with a vested interest in the status quo claim that the global economy is still fundamentally sound. In the face of the financial crisis of July-August, 2007, the Federal Reserve seemed to succeed, at least temporarily, in using its available tools to reassure the financial markets. This included the interest rate cut that spurred the stock market back into record territory. But when dollars are used to float a bubble, it eventually means a lot of trouble.

The second problem is the U.S. march toward military conquest of the Middle East. Even while the takeover of Iraq seems to hang in the balance, an attack on Iran may be next. U.S. action is obviously connected with hunger for gasoline, oil company profits, and the central role of the petrodollar in international commerce. In a now-famous phrase, former Federal Reserve Chairman Alan Greenspan states in his new book, Age of Turbulence, that the Iraq War is “largely about oil.”

But is Greenspan’s characterization a red herring? Are oil and dollars the full explanation? Would there have been no other way for the U.S. to secure its strategic interests in that part of the world, such as through multilateral cooperation with other powers like Russia and China? Isn’t it a fact that the neocons who control foreign policy within the Bush administration have steered a program of preemptive warfare clearly aligned with the more radical elements of Israel?

The third problem is that global warming seems to be proceeding at a more rapid pace than anyone previously thought. Weather patterns are clearly being affected, with many areas of the continental U.S. now locked in severe drought. Much of the Midwest and West are running dangerously low on water. The possibility that sometime this century sea level could rise up to one meter could be devastating to a nation like the U.S. where fifty percent of GDP is produced along its coasts.

If we began now, major infrastructure investments might help us prepare. But we already have an infrastructure maintenance deficit in the trillions of dollars. New large-scale expenditures are inconceivable for a government whose budget has been trashed by tax cuts for the rich, a trillion dollars spent on “wars of choice,” commodity price inflation, and stagnant tax revenues in the face of a recovery which looks a lot like a recession.

Bad as these three problems are, they are the tip of the iceberg. What really controls the fate of nations is money. And what looms beneath the surface is that we have in the U.S. and elsewhere a monetary system which is fundamentally flawed. It is a system that creates money almost exclusively through debt, one that has the net effect over time of funneling much of the world’s wealth from the hands of those who earn their living in the producing economy of goods and services into the bank accounts and investment funds of those who lend money at interest.

The recent actions of the Federal Reserve have been largely a refinancing of debt. The hope has been to realize the axiom of American billionaire Warren Buffett: “A rolling loan gathers no loss.” And government borrowing to wage war has always been good business for the banks as well.

But refinancing of debt does not change the overall purposes, operation, and outcome of the system. What we need to understand now is that the system itself can and must be changed. This should be done by establishing a more democratic and equitable world financial paradigm. Such a change can only be accomplished through fundamental monetary reform that would make credit-creation less the private property of financiers and more in the nature of a public utility.

The U.S. should start by 1) calling off our military adventures and replacing them with new efforts at multilateral solutions, including a negotiated two-state solution for Israel and Palestine; and 2) rebuilding our public and private infrastructure through low-cost government-provided credit. Individuals carrying unsustainable debt burdens or trapped in the collapsing housing bubble should be given relief. A basic income guarantee, not tied to employment, should be provided to all citizens as advocated by many economists going back to the 1960s. Infrastructure investment should include a massive program to deal with the present and future effects of global warming and climate change. Such a program would also help restore our tax base along with adding to consumer purchasing power.

To accomplish this program would require a shift in the control of monetary policy from the Federal Reserve, which only seems good at inflating and deflating bubbles, to a Congress and Executive Branch with the same degree of determination, vision, and authority we saw during the New Deal. The U.S. economy needs to be rebuilt from the bottom up. This means political leadership, not the monetarist games of technocrats who really work for the financiers.

A change of this order of magnitude requires a revolution at the ballot box in 2008. The Republican Party has fatally compromised itself by playing host to the neocon Trojan horse. The Democratic Party, which has failed to act on the voter demand in the 2006 mid-term elections that we get out of Iraq, doesn’t look much better. In just three months, in Iowa and New Hampshire, something profound and unprecedented must start to happen. If it doesn’t, things figure to get much worse in four more years.