<<

. 31
( 85 .)



>>

More than $60 billion were poured into the 1992 onslaught against
European currencies, and this money was largely borrowed from giant
international banks. A 1997 report by an IMF research team confirmed
that to fuel a speculative attack, hedge funds needed the backing of
the banks, since few private parties were willing or able to make those
very large and very risky investments.14 By 1997, hedge funds had an
estimated $100 billion in assets, which could be leveraged five to ten
times, giving them up to a trillion dollars in battering power. An article
in The Economist observed:
That may sound a lot, particularly if hedge funds leverage their
capital. But consider that the assets of rich-country institutional
investors exceed $20 trillion. Hedge funds are bit players compared
with banks, mutual or pension funds, many of which engage in exactly
the same types of speculation.15
George Soros raised this defense himself, when his giant hedge
fund was blamed for the Asian currency crisis of 1997-98. In The
Crisis of Global Capitalism, he wrote:
There has . . . been much discussion of the role of hedge funds in
destabilizing the financial system . . . I believe the discussion is
misdirected. Hedge funds are not the only ones to use leverage;
the proprietary trading desks of commercial and investment banks
are the main players in derivatives and swaps. . . . [H]edge funds as
a group did not equal in size the proprietary trading desks of banks
and brokers . . . . 16
196
Web of Debt

Between 1996 and 2005, the number of hedge funds more than
doubled, and their capital grew from $200 billion to over $1 trillion.
Between 1987 and 2005, derivatives betting on international interest
rate and currencies grew from $865 billion to $201.4 trillion. This
explosion in derivative bets was matched on the downside by an
explosion in risk. When a mega-corporation or a debtor nation goes
bankrupt, the banks that are derivatively hedging its bets can go
bankrupt too. When Russia defaulted on its debts, LTCM went
bankrupt and threatened to take the banks with interlocking
investments down with it. A November 2005 Bloomberg report
warned:
The $12.4 trillion market for credit derivatives is dominated by
too few banks, making it vulnerable to a crisis if one of them
fails to pay on contracts that insure creditors from companies
defaulting . . . . JPMorgan Chase & Co., Deutsche Bank AG,
Goldman Sachs Group Inc. and Morgan Stanley are the most
frequent traders in a market where the top 10 firms account for
more than two-thirds of the debt-insurance contracts bought
and sold.17
John Hoefle warns that the dog has already run out of blood. He
writes:
We are on the verge of the biggest financial blowout in centuries,
bigger than the Great Depression, bigger than the South Sea
bubble, bigger than the Tulip bubble. The derivatives bubble, in
which Citicorp, Morgan, and the other big New York banks are
unsalvageably overexposed, is about to pop. The currency
warfare operations of the Fed, George Soros, and Citicorp have
generated billions of dollars in profits, but have destroyed the
financial system in the process. The fleas have killed the dog, and
thus they have killed themselves.18

How Can a Bank Go Bankrupt?

But, you may ask, how can these banks go bankrupt? Don™t they
have the power to create money out of thin air? Why doesn™t a bank
with bad loans on its books just write them off and carry on?
British economist Michael Rowbotham explains that under the
accountancy rules of commercial banks, all banks are obliged to balance
their books, making their assets equal their liabilities. They can create

197
Chapter 20 - Hedge Funds and Derivatives

all the money they can find borrowers for, but if the money isn™t paid
back, the banks have to record a loss; and when they cancel or write
off debt, their total assets fall. To balance their books by making their
assets equal their liabilities, they have to take the money either from
profits or from funds invested by the bank™s owners; and if the loss is
more than the bank or its owners can profitably sustain, the bank will
have to close its doors.19 Note that the bank™s owners are not those
multi-million dollar CEOs who control the company and pay
themselves generous bonuses when they generate big new loans and
fees, or the interlocking directorships that shower financial favors on
their cronies. The owners are the shareholders. Like with the recent
exploitation of the bankrupt energy giant Enron, the profiteers plunging
ahead with reckless risk-taking are the management, who can take
their winnings and walk away, leaving the shareholders and the
employees holding the bag.
Individual profiteering aside, however, banks are clearly taking a
risk when they extend credit. Bankers will therefore argue that they
deserve the interest they get on these loans, even if they did conjure
the money out of thin air. Somebody has to create the national money
supply. Why not the bankers?
One problem with the current system is that the government itself
has been seduced into borrowing money created out of nothing and
paying interest on it, when the government could have created the
funds itself, debt- and interest-free. In the case of government loans,
the banks take virtually no risk, since the government is always good
for the interest; and the taxpayers get saddled with a crippling debt
that could have been avoided.
Another problem with the fractional reserve system is simply in
the math. Since all money except coins comes into existence as a debt
to private banks, and the banks create only the principal when they
make loans, there is never enough money in the economy to repay
principal plus interest on the nation™s collective debt. When the money
supply was tethered to gold, this problem was resolved through
periodic waves of depression and default that wiped the slate clean
and started the cycle all over again. Although it was a brutal system
for the farmers and laborers who got wiped out, and it allowed a
financier class to get progressively richer while the actual producers
got poorer, it did succeed in lending a certain stability to the money
supply. Today, however, the Fed has taken on the task of preventing
depressions, something it does by pumping more and more credit-


198
Web of Debt

money into the economy by funding a massive federal debt that no
one ever expects to have to repay; and all this credit-money is advanced
at interest. At some point, the interest bill alone must exceed the
taxpayers™ ability to pay it; and according to U.S. Comptroller General
David Walker, that day of reckoning is only a few years away.20 We
have reached the end of the line on the debt-money train and will
have to consider some sort of paradigm shift if the economy is to
survive.
A third problem with the current system is that giant interna-
tional banks are now major players in global markets, not just as lend-
ers but as investors. Banks have a grossly unfair advantage in this
game, because they have access to so much money that they can influ-
ence the outcome of their bets. If you the individual investor sell a
stock short, your modest investment won™t do much to influence the
stock™s price; but a mega-bank and its affiliates can short so much
stock that the value plunges. If the bank is one of those lucky institu-
tions considered “too big to fail,” it can rest easy even if its bet does go
wrong, since the FDIC and the taxpayers will bail it out from its folly.
In the case of international loans, the International Monetary Fund
will bail it out. In Sean Corrigan™s descriptive prose:
[W]hen financiers and traders get paid enough to make Croesus
kvetch for taking wholly asymmetric risks with phantom capital
“ risks underwritten by government institutions like the Fed and
the FDIC . . . . “ this is not exactly a fair card game.21
For every winner in this game played with phantom capital, there
is a loser; and the biggest losers are those Third World countries that
have been seduced into opening their financial markets to currency
manipulation, allowing them to be targeted in powerful speculative
raids that can and have destroyed their currencies and their econo-
mies. Lincoln™s economist Henry Carey said that the twin weapons
used by the British empire to colonize the world were the “gold stan-
dard” and “free trade.” The gold standard has now become the
petrodollar standard, as we™ll see in the next chapter; but the game is
still basically the same: crack open foreign markets in the name of
“free trade,” take down the local currency, and put the nation™s assets
on the block at fire sale prices. The first step in this process is to induce
the country to accept foreign loans and investment. The loan money
gets dissipated but the loans must be repaid. In the poignant words of
Brazilian President Luiz Inacio Lula da Silva:


199
Chapter 20 - Hedge Funds and Derivatives

The Third World War has already started. . . . The war is tearing
down Brazil, Latin America, and practically all the Third World.
Instead of soldiers dying, there are children. It is a war over the
Third World debt, one which has as its main weapon, interest, a
weapon more deadly than the atom bomb, more shattering than
a laser beam.22
The Third World is fighting back, in a war it thinks was started by
the First World; but the governments of the First World are actually
victims as well. As Dr. Quigley revealed, the secret of the international
bankers™ success is that they have managed to control national money
systems while letting them appear to be controlled by governments.23
The U.S. government itself is the puppet of invisible puppeteers . . . .




200
Section III
ENSLAVED BY DEBT:
THE BANKERS™ NET SPREADS
OVER THE GLOBE

“If I cannot harness you,” said the Witch to the Lion, speaking
through the bars of the gate, “I can starve you. You shall have nothing
to eat until you do as I wish.”
“ The Wonderful Wizard of Oz,
“The Search for the Wicked Witch”
Chapter 21 - Goodbye Yellow Brick Road




202
Web of Debt




Chapter 21
GOODBYE YELLOW BRICK ROAD:
FROM GOLD RESERVES
TO PETRODOLLARS


“Once,” began the leader, “we were a free people, living happily
in the great forest, flying from tree to tree, eating nuts and fruit, and
doing just as we pleased without calling anybody master. . . . [Now]
we are three times the slaves of the owner of the Golden Cap, whosoever
he may be.”
“ The Wonderful Wizard of Oz,
“The Winged Monkeys”




T he Golden Cap suggested the gold that was used
by international financiers to colonize indigenous populations
in the nineteenth century. The gold standard was a necessary step in
giving the bankers™ “fractional reserve” lending scheme legitimacy,
but the ruse could not be sustained indefinitely. Eleazar Lord put his
finger on the problem in the 1860s. When gold left the country to pay
foreign debts, the multiples of banknotes ostensibly “backed” by it
had to be withdrawn from circulation as well. The result was money
contraction and depression. “The currency for the time is annihi-
lated,” said Lord, “prices fall, business is suspended, debts remain
unpaid, panic and distress ensue, men in active business fail, bank-
ruptcy, ruin, and disgrace reign.” Roosevelt was faced with this sort
of implosion of the money supply in the Great Depression, forcing
him to take the dollar off the gold standard to keep the economy from
collapsing. In 1971, President Nixon had to do the same thing inter-
nationally, when foreign creditors threatened to exhaust U.S. gold
reserves by cashing in their paper dollars for gold.


203
Chapter 21 - Goodbye Yellow Brick Road

Between those two paradigm-changing events came John F.
Kennedy, who evidently had his own ideas about free trade, the Third
World, and the Wall Street debt game . . . .

Kennedy™s Last Stand

In Battling Wall Street: The Kennedy Presidency, Donald Gibson
contends that Kennedy was the last President to take a real stand
against the entrenched Wall Street business interests. Kennedy was a
Hamiltonian, who opposed the forces of “free trade” and felt that
industry should be harnessed to serve the Commonwealth. He felt
strongly that the country should maintain its independence by
developing cheap sources of energy. The stand pitted him against the
oil/banking cartel, which was bent on raising oil prices to prohibitive
levels in order to entangle the world in debt.
Kennedy has been accused of “reckless militarism” and “obsessive
anti-communism,” but Gibson says his plan for neutralizing the appeal
of Communism was more benign: he would have replaced colonialist
and imperialist economic policies with a development program that
included low-interest loans, foreign aid, nation-to-nation cooperation,
and some measure of government planning. The Wall Street bankers
evidently had other ideas. Gibson quotes George Moore, president of
First National City Bank (now Citibank), who said:
With the dollar leading international currency and the United
States the world™s largest exporter and importer of goods, services
and capital, it is only natural that U.S. banks should gird
themselves to play the same relative role in international finance
that the great British financial institutions played in the
nineteenth century.
The great British financial institutions played the role of subjugating
underdeveloped countries to the position of backward exporters of
raw materials. It was the sort of exploitation Kennedy™s foreign policy
aimed to eliminate. He crossed the banking community and the
International Monetary Fund when he continued to give foreign aid

<<

. 31
( 85 .)



>>