July 4, 2008
Elaine Meinel Supkis
Oh, day of revolutionary frevor! The USA is now a reactionary nation. Even talking about revolution can get one in serious trouble with the internationalist imperial mob that runs things today. Thanks to Bloomberg News, the notion that talking about war with Iran all the time is destroying us, talk about war with Iran has virtually vanished or is being strongly denied. Goodie gum drops! But the banking collapse which began in 1929, was put off by WWII, continues to destroy the fundamental basis of capitalist economies. So we go back yet again to the past, to the months when Nixon and Burns suddenly and AUTOCRATICALLY destroyed the dollar by killing the gold/dollar peg.
European Banks May Need EU90 Billion, Goldman Says
(Bloomberg) -- European banks may need to raise as much as 90 billion euros ($141 billion) to keep their financial ratios at current levels amid a decline in credit markets, according to Goldman Sachs Group Inc.``Regulatory pressures and a sharp turn in the European credit cycle are the two main causes for concern,'' Goldman analysts led by Christoffer Malmer said in a note to clients today. Banks could need to raise between 60 billion euros and 90 billion euros, the analysts said.
The London-based analysts cut their recommendations on Carnegie & Co. and Swedbank AB of Sweden to ``sell'' from ``neutral.'' Banco Santander SA, Spain's largest bank, was downgraded to ``neutral'' from ``buy.''
Securities firms and banks have reported more than $400 billion of writedowns and credit losses, and raised about $322 billion to replenish reserves since the start of last year, data compiled by Bloomberg show. Anshu Jain, head of global markets at Deutsche Bank AG, said this week that the contagion sparked by the U.S. subprime mortgage collapse has erased more than a fifth of the banking industry's value and is ``by no means over.''
As banks see their 'value' vanish, they 'replenish reserves'. This is, as is usual these days, fancy talk that hides reality. What banks are doing is BORROWING MONEY FROM SOMEONE. Who has 'money'? As yesterday's story about Scrooge McDuck tells us in the opening song about the history of money, 'We all want more MONEY!' The cartoon also makes it clear, anything can be 'money'. For 'money' is a human affectation. It is a stand in for 'wealth'. Wealth, as always, is valuable things such as slaves, the ability to tax, harvest surpluses, gold, tools, domesticated animals, weapons, etc. To trade these things and especially to tax all these things, something has to be a stand-in for the accumulated value of these things.
When money was invented to perform this function, the first thing the taxmen discovered was, tax payers and debt payers always want to have more money. And this desire is greatest with the TAXMEN THEMSELVES. They want more money! To buy weapons, to bribe other taxmen in other kingdoms, to build pyramids and palaces. So everyone is united in one regard: they all want more money circulating. All except for one entity: savers. There is a 20% part of the population that is very strongly inclined towards saving money. We recognize these people because they save string, old rubber bands, etc. These people are the ones who make the entire concept of 'banking' possible.
On banking spread sheets, these people are called 'liabilities' because the bank owes THEM money, not the reverse! And bankers need these people who are the ones who 'replenish reserves.' And they have to be kept happy or they bury their money in the ground or buy a big safe and squirrel it away there. The Disney cartoon begs such people to please give money for investment so it can 'grow'. But as I showed, this 1967 cartoon was made on the eve of a terrible banking failure: the US money system suddenly up and died! Big time! And inflation took off with a roar. Destroying the value of these savings.
LBO Defaults May Rise as About $500 Billion Comes Due
(Bloomberg) -- Leveraged-buyout loan defaults may be ``significantly higher'' than ratings companies' estimates as about $500 billion of debt used to fund the takeovers comes due, the Bank for International Settlements said.Companies bought by private-equity firms worldwide must repay the high-risk, high-yield loans and bonds by 2010, the Basel, Switzerland-based bank said in a report today, citing Fitch Ratings data. They may find it hard to raise the cash because of a slump in demand for collateralized debt obligations that pool the loans, BIS said.
And the bankers need 'money' because they gave out these stupid 'loans' to 'leverage' purchases of companies that are now totally crippled by massive, utterly unnecessary debts. These debts now must be discharged by accumulations of capital going towards the banks and not towards SAVINGS. How simple this is! Instead of putting capitalist profits in bank vaults where they are 'LIABILITIES' instead, this money flows into the positive side of bank ledgers! In the 'ASSET' side! So the banks profit! Isn't that very clever of them?
Origins of the leveraged buyouts
The first leveraged buyout may have been the purchase by McLean Industries, Inc. of Pan-Atlantic Steamship Company in January 1955 and Waterman Steamship Corporation in May 1955[2] Under the terms of that transaction, McLean borrowed $42 million and raised an additional $7 million through an issue of preferred stock. When the deal closed, $20 million of Waterman cash and assets were used to retire $20 million of the loan debt.[3] Similar to the approach employed in the McLean transaction, the use of publicly traded holding companies as investment vehicles to acquire portfolios of investments in corporate assets was a relatively new trend in the 1960s popularized by the likes of Warren Buffett (Berkshire Hathaway) and Victor Posner (DWG Corporation) and later adopted by Nelson Peltz (Triarc), Saul Steinberg (Reliance Insurance) and Gerry Schwartz (Onex Corporation).
*snip*
The tax shield of the acquisition debt, according to the Modigliani-Miller theorem with taxes, increases the value of the firm. This enables the private equity sponsor to pay a higher price than would otherwise be possible. Because income flowing through to equity is taxed, while interest payments to debt are not, the capitalized value of cash flowing to debt is greater than the same cash stream flowing to equity.
In other words, at the very dawn of the collapse of the US capitalist/banking system, this ugly little business reared its head! It has morphed into other creatures like the Derivatives Beast. Now only does piling on debts 'increase the value' of companies that are now running in the red, this is due entirely to the TAXMAN. Tax laws designed to assist growth by protecting the interest charged by the bankers means that SAVERS ARE TAXED while BORROWERS ARE FREE! So the impulse to be in debt is great. Paying off the debt means you get taxed viciously! While this seemingly creates a growing economy, what grows is not the 'economy' but 'DEBT'. And since debt is money growth, it causes INFLATION. Ever since the tax laws for the income tax was passed along with the creation of the Federal Reserve, this provision to push DEBT has meant that our aggregate debt accumulation has grown at tremendous speed. And every 20 years, it bulges suddenly into hyper-debt creation which then becomes a hyper-inflation bubble.
The end of the Bretton Woods system
By the early 1970s, as the Vietnam War accelerated inflation, the United States was running not just a balance of payments deficit but also a trade deficit (for the first time in the twentieth century). The crucial turning point was 1970, which saw U.S. gold coverage of the paper dollar deteriorate from 55% to 22%. This, in the view of neoclassical economists, represented the point where holders of the dollar had lost faith in the U.S. ability to cut its budget and trade deficits.
In 1971, more and more dollars were printed and then sent overseas, to pay for the nation's military expenditures and private investments. In the first six months of 1971, assets for $22 billion fled the United States.Because of the excessive printing of paper dollars, and the negative balance of U.S. trade, other nations were increasingly demanding fulfillment of America's "promise to pay". That is, they were demanding gold from the U.S. in exchange for paper dollars. France, in particular, made heavy and repeated demands and acquired large amounts of gold in that manner.
In response, on August 15, 1971, Nixon unilaterally imposed 90-day wage and price controls, a 10% import surcharge, and most importantly "closed the gold window," making the dollar inconvertible to gold directly, except on the open market. Unusually, this decision was made without consulting members of the international monetary system or even with his own State Department, and was soon dubbed the Nixon shock.
The surcharge was dropped in December 1971 as part of a general revaluation of major currencies, which were henceforth allowed 2.25 percent devaluations from the agreed exchange rate. But even the more flexible official rates could not be defended against the speculators. By March 1976, all the world's major currencies were floating—in other words, exchange rates were no longer the principal target used by governments to administer monetary policy.
Just before Roosevelt in 1933 closed the gold window, the French were busy transferring gold from us to their deep vault in Paris. They have done this more than once in 100 years. Each time, Germany invades and steals the gold. The 1970 cycle didn't end up with Germany invading. A novel thing happened: the world's biggest empire suddenly and without warning, in total contravention to everything said previously, simply dropped the notion that any rare metals were needed to create currencies. Money was magic.
Nixon not only autocratically made gold vanish totally, he also decreed that he had the powers to regulate prices autocratically! This is why he imposed 'wage/price controls'. I remember vividly this time frame. Due to work I was doing, I was scheduled for a nice pay raise. I was productive! Very! Then suddenly, I was denied this much-needed pay raise. This ticked me off, greatly. I steamed while watching the news as Americans supported this Sovietizing of our economy! 'And what, pray tell, is this stupid Cold War all about, anyway?' I fumed. Trust a right winger to pull us all into a command economy! Wage/price freezes always fail and certainly this one failed miserably. Few people know that the wage/price freeze was supposed to be temporary just as the dropping of the gold peg was said to be temporary 37 years ago. This Long Emergency is getting very long. And has completely collapsed. So it is time to go backwards in time to see what our goofy rulers said back when Nixon despotically destroyed capitalism and pushed us all totally off the debt cliff:
September 27, 1971
This Committee will recall that the System*s authority to purchase agency issues was broadened in 1966. Up to that time we were authorized to purchase obligations "which are direct obligations of the United States or which are fully guaranteed by the United States" This authority covered some, but not all, agency issues. The principal issues in terms of aggregate size and market activity were ineligible for purchase by the System.These ineligible issues included Federal Intermediate Credit Bank debentures, Federal Home Loan Bank notes and bonds, Federal Land Bank bonds, Bank for Cooperatives debentures, and Federal National Mortgage Association debentures and certificates of participation.
*snip*
Accordingly, the Congress added to section 14(b) of the Federal Reserve Act authority for the System's buy and sell in the open market, under the direction and regulations of the Federal Open Market Committee, any obligation which is a direct obligation of, or fully guaranteed as to principal and interest of any agency of the United States.
*snip*
We plan to buy only taxable securities for which there is an active secondary market. The requirement of an active secondary market will help to insure that the System's portfolio remains liquid; it will also encourage issuing agencies and underwriters to develop secondary markets in their securities.
This speech was delivered a month after Nixon and Burns secretly ran their coup against a 'good as gold' currency, the now dead dollar. Roosevelt set the stage with an equally autocratic move to make private gold hoards illegal. Note how, in the Disney cartoon about Scrooge McDuck, he has a private vault filled with gold. This was impossible unless he was living in Switzerland. I suppose the stories were more believable in Germany because of this. One of the most salient features of the collection of Federal Reserve speeches is how often the Chairman lies. Or says one thing and then is forced to do the exact opposite. Martin Jr, for example, just two years early hotly defended the gold peg and told Europe it would NEVER be eliminated or removed! He said, the US government would balance the budget and keep trade balanced so the gold would not flow to France. Instead, the opposite happened.
In this case, at the beginning of the 'Floating Currency' regime, the Chairman loudly said the Fed would NEVER take in housing debts! HAHAHA. Like they did this year! Why is this?
It is INFLATIONARY. So when the Fed conspired with Nixon to kill the gold restrictions, they had to lie about things and assure everyone, they would not use this as an opportunity to support wild real estate lending. The first Bank of America launched before the great 1848 panic fell when it allowed member banks to lend money wildly on land speculation in the West as well as the slave trade in the south. During the long, long debate about 'what is money' of the 19th century, the 'inflation is good' people who were the 'silver' faction fought tooth and nail with the grim banker faction which were international trading houses in New York City. They wanted gold because this gave them power when trading overseas. Gold won and the US became increasingly an international export powerhouse.
Now that the Fed, in 1971, no longer protected or bought gold, they had to hold something! So this speech explains the new 'basis of dollar value': TAXABLE securities. Which is fancy talk for....government debts! Since savings is a liability, debts are assets, the Fed Reserve decided to NOT be a 'reserve' at all but instead, become the holder of all DEBTS generated by the government itself! Since this was the new 'wealth' the Fed bank then fed the Fed government who was very anxious to generate debts rather than pay as you go. This new system has a flaw: debts will accumulate and thus, inflation takes off since there is now an active need to create more debt in order to create more wealth! Very simple to understand.
HAHAHA. NOT!!!!! This is due to our natures: we want to believe in Santa Claus, not Scrooge McDuck. Hoarding gold so it can be the basis of value for a currency was a no-go. Spending money we don't have via IOUs was the way to go! The Wimpy wanting loans is the wealth cycle, not the Scrooge McDuck taking his 3% cut and hoarding wealth. With this new system roaring to go, the Fed Chief, Burns, had to assure everyone, this would not cause inflation. HE KNEW BETTER THAN THAT! The intention of both himself and Nixon was to overspend! And thus, cause inflation. This is why Nixon demanded the autocratic right to control prices and wages via fiat. A fiat dollar instantly created a fiat economy. And fiat inflation.
One cannot say with certainty what the results of our experimental transactions in agency issues will be. We hope they will be beneficial in terms of greater flexibility for System open market operations, broader markets for agency securities, and a narrower spread between such securities and Treasury obligations. If the borrowing costs of Federal agencies are reduced, however modestly, that result will be most welcome to the Federal Reserve as well as the issuing agencies and the public they serve.
HAHAHA. Typical! No one ever knows what will happen next at the Federal Reserve! Like Justice, they are blind. Well, back then, plenty of people knew what would happen next. They were ignored. The 'pro-gold' guys were all old geezers like Scrooge McDuck. I am certain, the real McDuck would have flown off his handle if Burns burned him in this way. Except the Scrooge McDucks were all using Switzerland to squirrel away gold they got from Fort Knox. They transfered their wealth from the US to Europe. Like France. My own family had to open a Swiss bank account back then for international travel purposes because the dollar was so insecure and vapid. Gold was freed from government controls.
In 1969-1970, Nixon and Burns both hotly defended the gold peg. They even told Europeans demanding that gold be doubled in value again like it was under Roosevelt. The President and the Fed Chair refused. They said they would control inflation, not devalue the dollar. Then, as per usual, they devalued the dollar! Only unlike in the past, they didn't rejigger the gold standard. Instead, they opted to follow Keynes who supervised the death of the British pound as a 'good as gold' trade currency. Now, both the victorious British and the victorious US empires were running inflationary monetary regimes based entirely and ONLY on DEBTS! This set the stage for the still-evolving global banking and international trade collapse we are entering today.
Let me say, at the outset, that the most urgent economic task facing our nation is to make a success of the stabilization program initiated by the President on August 15. The current price and wage freeze is a major step in breaking the hold of inflation on our country. The freeze must be followed by effective restraints on the upward movement of wages and prices, so that a solid foundation may be laid for the early restoration of general price stability under free market conditions.
This high objective will require unreserved, continuing support of business, laborp and the population as a whole. It will require the support of sound fiscal and monetary measures, and it will entail the extension and amendment of the Economic stabilization Act to assure continuity of the new policy.If this early success is sustained, which I consider likely, confidence will grow that full prosperity can be attained without inflation. Under those conditions, we can expect business and consumer spending to continue to increase; we can expect wage demands lo moderate; and we can expect further reduction of the inflation premium built into interest rates.
The stupid, expensive Vietnam War roared onwards. The draft was killed but the killing in Vietnam entered a new, much more expensive phase. We were bombing from the air, nonstop. Bombing peasants working in rice paddies is very expensive and utterly futile. Nixon needed money for this. Turning gold into debts generated by wars was a nifty trick. It give the illusion of wealth while being totally destructive. Wage/price controls during wars is a form of rationing. It rations currencies. So the government can print up paper money to its heart's content to pay for the war while not seeing it reappear on the streets in the form of inflation. Back in 1971, I denounced this 'prosperity through price controls during an unpopular war' scheme. I knew it would simply shove much worse inflation into the future. And this is what happened.
If a 20 year old girl can figure this all out back then, you can bet Nixon and Burns knew perfectly well, what they were creating. Both were very, very clever men and understood money. In WWII, Nixon's job as all about money and war at the lower levels.
January, 2003: The Nixon Shadow that Hovers Over the Bush White House
By John Dean
Indeed, Cheney has all but admitted the point. "In thirty-four years, I have repeatedly seen an erosion of the powers and the ability of the president of the United States to do his job," Cheney told ABC's "This Week" in January 2002.His reference to "thirty-four years" is quite clear. About thirty-four years ago, in 1969, Dick Cheney joined the Nixon Administration - serving in a number of positions at the Cost of Living Council, and later the Office of Economic Opportunity. When Nixon was forced from office, Cheney helped Vice President Ford make the transition to the Oval Office and in 1975, Cheney became President Ford's White House chief of staff.
John Dean was one of the architects of all this silliness. He then denounced it all and has striven to tell the truth as best he may. It is very significant that Dick Cheney, the Soviet Union czar of price controls, would take over our nation in 2000 and repeat all his previous mistakes or make things far, far, far worse. He was Chief of Staff during the 'Whip Inflation Now!' years. This incompetent booby has again, driven us all into an economic ditch. Yet he is very popular with the Bilderberg gang. And the Bohemian Grove naked drunks club. And the Skull and Bones [his father being once a very active member]. And other covens and crazed conspiratorial organizations that operate in the realm of the occult.
Note this interview: 34 years of the US government chomping at the bit, desiring to make wealth grow via government overspending! The power to go into eternal debt was one he wanted badly and got. Via 9/11. Note that the government rang up more debt under Dubya and Dick than our entire collective history since the Revolution. And of course, this is all tremendously inflationary.
From WGBH TV: Nixon Tries Price Controls
Excerpt from The Commanding Heights by Daniel Yergin and Joseph Stanislaw, 1997 ed., pp. 60-64.
The administration remained overtly dedicated to markets. But there were those in it who believed that the "market" was more an idyll of the past than an accurate description of how the current economy functioned. To them, the economy was like the question that Lenin had expressed -- Kto kvo? -- Who could do what to whom? That is, they saw the economy "as organized by relations of power, status, rivalry and emulation." Government intervention was required to bring some greater balance to the struggles for power between strong corporations and strong unions that would drive the wage-price spiral upward.A critical push toward an income policy came from Arthur Burns, whom Nixon had appointed to be chairman of the Federal Reserve. Burns was a well-known conservative economist; Nixon paid special attention to Burns because he had warned Nixon in 1960 that the Federal Reserve's tight monetary policy would accentuate the economic downturn and thus threaten Nixon's chances in the race against Kennedy -- which is exactly what had happened. Now, a decade later, in May 1970, Burns stood up and declared that he had changed his mind about economic policy. The economy was no longer operating as it used to, owing to the now much more powerful position of corporations and labor unions, which together were driving up both wages and prices. The now-traditional fiscal and monetary policies were seen as inadequate. His solution: a wage-price review board, composed of distinguished citizens, who would pass judgment on major wage and price increases. Their power, in Burns's new lexicon, would be limited to persuasion, friendly and otherwise.
Further reinforcement of the pressures toward control came with the recruitment of former Texas Democratic governor John Connally to fill the critical slot of Treasury secretary. The forceful Connally had no philosophical aversion to controls. Indeed he did not seem to have strong feelings one way or the other on economic policy. "I can play it round or I can play it flat," he would say. "Just tell me how to play it." What Connally did like was the dramatic gesture, the big play; and grabbing inflation by the neck and shaking it out of the system would be such a move.
This book is a good read. But of course, the notion that a bunch of boozing, occultist lunatics who love to wage wars, could 'grab inflation by the neck and shake it out', is pure lunacy. They WERE the inflation! The wars were the inflation and today are the cause of much of our inflation. Government overspending is our inflation. Once the gold peg was dropped, wild government spending increased. Not decreased. Connally, like many Texans, was a 'silver' person. He wanted cheap lending so he and his buddies could have fun without the bother of saving any money at any time. Price controls are great if one is a spender! Hey! No inflation even as they create Funny Money™! Instead of attracting savings by offering a realistic return on this, they could ignore savers and collect only debts and use this to make loans. This is again, our fundamental problem. Loans are only valuable IF THEY ARE PAID OFF. And not via more debt.
We all went very deep into debt because of the Cold War. So look at today's news from Russia:
U.S. is in no shape to give advice, Medvedev says
Medvedev made his comments on Tuesday in a meeting with a small group of foreign journalists a day after the American treasury secretary, Henry Paulson Jr., appealed in Moscow for Russian investment in the United States. The symbolism of the visit resonated here, in that only a decade had passed since the Russian economy was in shambles and the country was desperate for Western aid.
*snip*
"The Group of 8 exists not because someone likes or dislikes it, but because objectively, they are the biggest world economies and the most serious players from the foreign policy point of view," Medvedev said. "Any attempts to put restrictions on anyone in this capacity will damage the entire world order."He added, "I am sure that any administration of the United States of America, if it wishes to succeed, among other things, in overcoming essentially a depression that exists in the American economic market, must conduct a pragmatic policy inside the country and abroad."
HAHAHA. America's goofy, stupid, hideous Bilderberger brainiacs are begging Russia to INVEST in the dying US economy! As the song in the Scrooge McDuck cartoon cries out, 'We need MONEY!' Medvedev pulls our leash while lashing out about the New World Order and its failures. China is doing this, too. As is OPEC. He lectures us about the need for a 'pragmatic policy inside the country and abroad.' As I keep talking about, too! HAHAHA. Gads.
One last thing:
STORY DOES NOT HOLD UP TO SCRUTINY
A quick internet search revealed the same abbreviated "article" -- only one paragraph long, with the exact same introductory statement -- has been posted on 269 other blogs and discussion boards. Most of these discussion boards allow anonymous posts, with no accountability required by the poster or author (such as the Sean Hannity fan site, the Ron Paul discussion board, etc). The story can also be found on Digg and other viral marketing and web ring sites, and I predict that you will probably see this many more times, on discussion boards or in emails, for months or years to come.Most posts also claim that the original story was written in Dutch, and a few even contained a dead link to the alleged original story on Da Telegraaf, a Dutch news submission site. After searching the Da Telegraaf site, I was able to find the original story, which was submitted anonymously. It had no author, it sited no source, it came from no news syndicate (such as Reuters or Associated Press), and it was submitted to no news syndicates.
Normally, I stick to the mainstream media with occasional side trips. This one was a mistake on my part. This is why I seldom link to other blogs. Alas. We must be careful.
As for the information there: 6,000 banks are ALREADY BANKRUPT. Indeed, I hold that the ENTIRE US BANKING SYSTEM from top to bottom, is utterly bankrupt! It is being kept alive via....get this....INFLATION coupled with LOW TO ZERO INTEREST ON SAVINGS. The raiding of savings, the prevention of using savings within the banking system: this is bankruptcy. Debt is keeping the system going and debt is killing the banking system at the same time. This dynamic, launched after WWII, made worse at every turn, this debt-based system is utterly out of control and TOTALLY BANKRUPT.
People should be scared about this! We have no money! So to speak. We need money. The fact that gold has taken off again is a bad sign for our economy. The economic gage of value is showing us that the banking system is deep in the red, in danger of collapse.
1948 Panic?
Posted by: PLovering | July 04, 2008 at 12:43 PM
I'm guessing 1948 was a typo, for 1848 -- although if memory serves, the big panic was in 1837, and it involved the Bank of the United States set up by Nicholas Biddle with Andrew Jackson's blessing as a counterweight to private and international banks (and not the Bank of America, a local San Francisco-area bank that prospered in the city's rebuilding after the 1906 earthquake and fire).
Posted by: mark1147 | July 04, 2008 at 02:33 PM
that early era's big panic, that is
Posted by: mark1147 | July 04, 2008 at 02:34 PM
OOPs. Hit the wrong key! Will fix.
Posted by: Elaine Meinel Supkis | July 04, 2008 at 02:48 PM
We're probably talking about the 2nd Bank of the United States, set up by Congress 1816 and est. in Philadelphia. The U.S. government paid 20% up front, and the bankers used that 20% to pay for their 80% share of the bank. Foreign bankers ended up with 33% of the bank.
President Jackson was determined to close this crooked bank, but Nicholas Biddle fought like crazy to keep it open. In fact, Biddle threatened Jackson with a Depression if the bank's charter was not renewed. And Biddle did call in old loans and refuse to make new ones, causing a recession. In the end, Congress refused to renew the charter, and Biddle lost his bank. Biddle however refused to turn over his books (revealing foreign interests and bribes to Congressmen). Jackson was almost assassinated for this effort to save our banking system. Fortunately, both of the assassin's guns misfired. The assassin later said that foreign interests had promised to protect him.
Lincoln was determined to close down private banking, as well.
Posted by: PLovering | July 04, 2008 at 04:39 PM
Elaine,
Professor Minsky discussed how commercial banks - which were originally intended to take in savings deposits and make loans to businesses and households - transformed themselves completely out of this business.
In order to safely make a bank loan that will pay a profit after the interest on savings deposits is paid, the banker has to conduct face-to-face in-depth loan analysis of every bank loan application. This is what commercial banks used to do. And the only profit made is the difference between the interest the bank pays on savings deposits and the interest it makes on loans - often 2-5%. This can be leveraged, but only up to the limit of the strict reserve requirements applicable to FDIC insured savings deposits.
Once the "New Financial Model" of the Reagan, Clinton, and Bush eras was established, commercial banks and investment banks became the same thing - volume packagers of massive debt gambles (business and mortgage loans bundled into CDOs), and direct gamblers with the money they borrowed. This "casino" banking was done either by using computer models to predict rosy outcomes for all loan applications or by simply approving all loan applications without examining them at all (or requiring any collateral or income); the profit was in loan volume and loan size - little or no time was spent per application, no time was spent montoring the loans made, and the profits become instantaneous and huge, much like a casino in Vegas or Atlantic City.
Particularly after Greenspan's 1998 hedge fund bailout and interest rate drop (in the middle of a stock market "irrational bubble" - as he described it), ever increasing leverage was used to magnify the profits on the money used by the banks to gamble with. This money was borrowed from other banks at the interbank rate which was much lower than the rate the banks would have had to pay holders of savings deposits.
All the banks used this scheme (with the Fed's approval) to create money by lending to each other and inflating the total available to them all. Most of the biggest banks are deeply involved with hedge funds, equity capital firms, and other members of the Shadow Banking System to pass around unbelievable quantities of money for everyone to use at the casino. Savings depositors have become completely irrelevant to such banks.
Since every dollar the banks got their hands on, leveraged (often 20 to 30 times), and churned into quick-turnover loan bundles, brought in obscene profits, banking became the "golden child" of American enterprise - especially after the tech stock bust depressed the stock casino. The Fed kept the interbank interest rates very low, Congress and the Administration greatly lowered taxes on the fabulous salaries that financiers were raking in, bank stocks went up and up, and the financial sector became almost 50% of all U.S. business activity.
The traditional savings-deposit-based bank is an anachronism now, only to be found (extremely rarely) on a minute scale in a few small towns. The "financial crisis" of the big banks that the Fed has spent all its time and energy on is no more than the unravelling of this overleveraged overlending frenzy that was based on no collateral and no income ("Ponzi finance" as Minsky dubbed it).
If the Fed and the Treasury were to succeed in rescuing all big banks who are in the process of collapsing, it would only be for the purpose of propping up the same casino banking model within which they have all spent their entire careers, in which they all fervently believe ideologically, and which has made all of them very rich.
The only guaranteed outcome of this mess is that no officials and no bankers have any intention of returning to the savings deposit model of banking, ever.
Posted by: Michael | July 04, 2008 at 11:16 PM
You are right, Michael. And all of this is part of the floating currency system. And all the old systems were destroyed so the governments could overspend in guns and butter. To keep people happy while spending money on imperial projects of various sorts.
Posted by: Elaine Meinel Supkis | July 05, 2008 at 08:04 AM
The U.S. Federal Reserve Banking System is a private banking system owned by European Central Bankers. The FED was set up for the express purpose of looting the United States economy for the greater good of these European central bankers.
Their looting operations are planned around economic cycles of booms, busts, and wars.
Well, the boom is over. Welcome the Depression.
Posted by: Phil | July 05, 2008 at 10:43 AM
You mean we've been letting some bankers from a distant continent loot us? I'm aghast. This must stop.
In fact, perhaps its time for some ruthless, nearly merciless, ferocious, and justified BOUNCEBACK that hopefully teaches a lesson that will never be forgotten.
Peace,
Ken
Posted by: Buffalo Ken | July 05, 2008 at 11:31 AM
I think the pendulum is already swinging back. Now that it has turned things will happen rapidly. The key is too buffer it on its way back so that it doesn't go too far in the opposite direction and then we just repeat the same old tired back and forth extreme ridiculousness.
You know? Or am I being to vague?
Posted by: Buffalo Ken | July 05, 2008 at 11:35 AM
It is plain stupid for the U.S. Government to pay hundreds of $Billions in interest every year to European Central Bankers, when we could print/issue greenbacks for nothing, pay no interest, and cut taxes into the bargain.
Which is exactly what we did in winning the American Revolutionary War.
Posted by: PLovering | July 05, 2008 at 12:05 PM
Stockcharts.com reports that this last week, aggregate debt, AGG, manifested bearish engulfing: debt is going to deflate; eventually as the 'Liquidation Thesis' relates, debt is going to be liquidated, that is done away with.
You relate an important investment principle: 'loans are only valuable if they are paid off; and not via more debt'; many people know this principle, that is why aggregate debt has gone bearish engulfing and US Government debt bearsih harami: the wise are disinvesting from debt
I believe that consumer good prices as measured by the CPI, manufactured goods prices as measured by the PPI, are going to inflate, because of higher CRB commodity, RJI, oil, USO, industrial metal, JJM, and agricultural products, DBA, that are already in the system.
Having said that, I believe that commodities, RJI, are going to fall lower as they haved moved parabolically higher based on an inflating price of oil; then once having let off some steam, I believe that oil and gold will move higher. With oil being driven higher by speculators who see reduced supply coming from a war on Iran to stop its nuclear ambitions. And with gold rising higher due to an investment demand for gold, $GOLD, and a falling value of the US Dollar, $USD.
You also relate: "government overspending is our inflation"; how true that is; and that overspending is going to be reigned in: the global war on terror centered on Iran, and Afganistan, is going to be reduced. What is really going to take a hit is government services and payments, service sector jobs, unfunded retiree benefits; these are going to be drastically and awesomely reduced. Medicare and Medicaid are going to go be cut way down; this nation can no longer make $3,000 monthly payments to the Health Care REITS, such as Health Care REIT Inc, HCN, and Long Term Properties, LTC, to underwrite assisted living care; the publically financed retirement homes, where so many elderly live, are going to stand as tombs to the bygone era of prosperity.
Yes most definitely, the age of 'investment prosperity is over' and the age of 'financial disinvestment and instability', and the age of 'state corporate rule' are rising.
One might ask, "How is state corporate rule rising"?
The leaders have announced two 'framework agreements': the Security and Prosperity Partnership of North America, the SPP, and the Declaration of EU US 2008; these give them authority to address events that threaten economic stability, and which provide for economic competitiveness. The leaders have appointed councils, working groups and stakeholders, who work in global government principles and policies of security and prosperity.
Posted by: Richard | July 05, 2008 at 01:29 PM
Richard, the markets rallied on Wednesday on very bad jobs numbers. The heretofore reliable service sector, read governments and hospitality, only provided 7000 jobs in May. Real jobs got crunched, manufacturing down 60,000 plus. The blathering idiots on bubble TV never could get it through their skulls that the service jobs are foreign debt lines being played out to an uneducated and unproductive workforce.The numbers are ominous if you discount the 150,000 phantom jobs created by the birth death modelof the BLS. I am saddened at the low state of our bureaucracy, the total lack of integrity and reliability. If the bufoons on CNBC can now heckle the BLS, what is there left to say. I doubt greatly that the market would have rallied Wednesday if we had anything more than a third of normal trading volume, making the tape a lightwieght to manipulate. It appears that the PPT is no longer able to support the dollar myth or the myth of the value of the markets. While runaway inflation may push the prices of shares, the inflation of material inputs is even greater, and the offshoring card is not going to work anymore. There is very little left to offshore, even if China and INdia were not in an inflationary spiral. Thus, I doubt that share prices will go up, unless the FEd decides to increase its own credit lines. Welcome to Weimar, which Martin Hennecke of Tyche just about laughed at with glee. The Germans are about to give the Wilsonites a face pounding that they have been saving up for eighty years, gleefully. Should the Fed choose to buy any more new instruments, such as the Dodd/Frank bailout disaster, say goodbye to bonds and the dollar. Stocks will be sacrificed first, in my opinion. However with this bunch of Bozos, nothing will surprise me, any longer.
Posted by: calvino | July 05, 2008 at 03:18 PM
The Henneke interview
http://www.bloomberg.com/avp/avp.htm?clipSRC=mms://media2.bloomberg.com/cache/vVkI8WexWY2M.asf
Posted by: calvino | July 05, 2008 at 03:30 PM
IN order to paste the link. reduce the print size on the screen by hitting CONTROL and the minus key at once, until the print is small enough to see the whole link. It is worth it. Tiny url refuses to do these bloomberg links, for some reason.
Posted by: calvino | July 05, 2008 at 03:37 PM
I just click and drag it, calvino. Apple computers are wonderful!
Will read it.
Bozo is dead, by the way! I always loathed him even when I was a child. I am not the only child who found him to be totally creepy.
Posted by: Elaine Meinel Supkis | July 05, 2008 at 04:39 PM
Calvino,
Well said.
Posted by: Michael | July 05, 2008 at 07:53 PM
Elaine, what do you know about the end-time prophesy and who is promoting it? Is the born-again movement just zionism injected into christianity? Lots of very specific predictions about the future battles in the middle east.
http://prophecyonline.org/pdf/antichrist.pdf
Posted by: GK | July 05, 2008 at 08:22 PM
Argh. Many eons of many battles in that accursed land. Easy as pie to predict them. The first major battles by humans in an organized fashion raged in this region.
Posted by: Elaine Meinel Supkis | July 05, 2008 at 08:53 PM
PLovering -- many thanks for correcting my misimpressions of Jackson, Biddle, and the 2nd Bank of the U.S., which I had exactly backwards.
And of course I'd forgotten about the assassination attempts on Jackson. (It's been over 40 years since I studied that period of American history in any detail. Funny how the mind retains some details but screws up the big picture!)
Posted by: mark1147 | July 06, 2008 at 08:14 PM
And as usual, maybe we should all revisit that interesting time period. Mexican War and all. My ancestors stumbled into California seeking gold, of course.
Posted by: Elaine Meinel Supkis | July 06, 2008 at 08:26 PM