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Destroying The Planet To Protect The Banks

Destroying The Planet To Protect The Banks: The 78th Annual Report of the Bank for International Settlements

By Lowell Manning

The Bank for International Settlements (BIS) has just released its annual report for 2008. “So what of it?” you might say. Few have ever heard of BIS and even fewer know anything about it. That lack of awareness needs to change at about the speed of light.

BIS is possibly the most powerful organization in the world, more powerful in some ways than the United States government. Whereas the goal of US policy is to achieve full spectrum dominance of the physical world as promoted by The Project for the New American Century (Google PNAC), BIS aims to maintain the full spectrum dominance it already has of the world’s finance and money.

From its headquarters in Basel Switzerland this rather shadowy group of bankers from the 55 Central Banks that make up its membership has just given the world an implicit ultimatum:

We will maintain dominance of world finance and money even if it means repeatedly pushing the world economy to the point of collapse.

That is not hyperbole or madness on my part. I wish it was, but I know a little about BIS and its history, so I chose to read all 149 pages of the report.

BIS is dominated by its original membership that included US, Britain, France, and a few others. It was established in 1929-30 to channel German (WW I) war reparations into hard currencies. Hence the name Bank for International Settlements. One of its most influential players was Hjalmar Schacht who had a significant role in bringing Hitler to power and became Hitler’s chief banker. He headed the German Central Bank until Hitler imprisoned him about 1943. By 1944, the Bank’s reputation was so bad the Western allies agreed to wind it up under Article 5 of the Bretton Woods Agreement. Bretton Woods established the post war world II financial architecture still broadly in use today. Despite Article 5, BIS was never wound up. The power base it provided the US Federal Reserve Banks and a handful of others was too tempting to let go. BIS is often referred to as the Central Bankers’ Central Bank.

For the umpteenth time, its members have fouled their own nest through their own greed. For the umpteenth time BIS has encouraged ever more suicidal lending practices and financial manipulation through ever more deregulation. Time and time again when the only sensible course has been to strictly re-regulate and reform the banking system BIS has used its power to do the opposite and force the public to pick up the cost of its mistakes.

In one sense it acknowledges those mistakes. “A powerful interaction between financial market innovation, lax internal and external governance and easy global monetary conditions over many years has led us to today’s predicament” (report p137). BIS is in charge of oversight and hasn’t done its job.

Then, referring to prudential oversight of the deluge of off-balance sheet entities the report asks (p138 ) “How, for example, could a huge shadow banking system emerge without provoking clear statements of official concern?” BIS has sought from beginning to end to deregulate banking because a wild west of banking offered the prospect of enormous profits while dumping risk onto other less fortunate institutions and the public at large.

This time it has gone too far by raising the spectre of a financial collapse as bad as that of 1873; a collapse worse than the Great Depression of the 1930’s when (after beginning in Europe), financial panic spread to the US. The New York stock exchange closed for 10 days following the collapse of Jay Cooke & Co, America’s leading investment bank at the time.

Whoops, we’ve really done it this time guys, (I’m not aware of any women on the BIS board). This will need a massive dose of financial chemotherapy.

The remedy is unique to BIS and its surrogates at the World Bank and International Monetary Fund. At a time when the world is already reeling from losses and slowdowns resulting from a mountain of dubious lending and the sale of even more dubious debt derivatives, BIS is really using the report to tell the world to increase interest rates! No matter few can afford to service their existing debt. No matter that countless millions around the world will go bust or that negative growth could turn into outright depression. No matter that millions will die from hunger and disease. They propose to do this even when they appear to have little idea of what is going on:

Against this background [of unprecedented debt growth, new market instruments and new players] it is simply implausible that traditional forecasting models would continue to work well, if indeed they ever did” (report p 139).

Apparently the world is being wrecked on the whim of a small group of people in Basel. If they are unsure about what they are doing they only need ask me and I would gladly take them through the whole story step by step including every stage of the business cycle. They probably won’t ask me because they won’t like the truth and almost certainly don’t want the world to know it. They don’t want us to know how simple it really is to fix the whole system because doing that will leave them without a stick to whip the world’s people into economic servitude.

I would show them why the financial structure requires new debt to grow faster than the economy as measured by Gross Domestic Product (GDP) so the banks’ share of GDP, by way of ever increasing profits, is destined to keep rising. I would show them how the power of the banking sector and its shareholders, other things being equal, must continue to expand; though I’m pretty sure they already know that.

Instead we are told, (report p 143) that the “excessive and imprudent” credit growth ‘always threatened two unwelcome outcomes [inflation and debt-related imbalances in the financial and real economy], although it was never clear which would emerge first.” So surprise, surprise we have both! But: “Not leaning vigorously against inflation pressures …. threatens an increase in inflation expectations that might prove very costly to rein in.”

BIS is now proposing to increase interest rates to slow new lending at a time when in many countries there is already little new lending in the real economy. In effect they are threatening to create a crash like that of 1873; to make it a self fulfilling prophecy.
So the attitude is, as the BIS makers might have said over yet another fancy dinner at their 5 star hotel:

Let’s choke off more (bad) lending for the time being by putting our prices up so we can limit our losses from defaults to an amount the government will be prepared to pay.

The painfully obvious better response to the situation we are all in is to reduce the price of money, regulate lending and remove the structural problem of unearned income in the investment sector. That wouldn’t even reduce the banks’ profit margin but would stop them from flooding the world with bad credit every chance they get. Except the banks would then lose their “full spectrum dominance” to fleece the world again when the economy recovers. That would never do.

To maintain their power, the banks are prepared to take large short-term losses on defaults. High interest rates deter new borrowers but put many existing borrowers into default. Defaults mean forced sales of homes and businesses. If the sale price isn’t enough to repay the debt the remainder becomes a loss to the banks or their insurers or anyone else who has been mug enough to get caught up in one of the many insurance derivative scams.

The banks rely on the “too big to fail” con they have used so often before. If the big banks collapse, the whole economic structure will collapse, so governments will bail out the banks’ losses as they have in the past. Of course, the bail out money has to come from the banks themselves! So the public pays and pays and the banks, by and large, survive, with their power base intact.

“However, one reason why governments might have to get involved in this process [of debt restructuring while limiting moral hazard] is that existing private sector workout and liquidation procedures, and their supporting infrastructure, could prove incapable of ensuring speedy and effective resolutions on the scale required” (report p 143). The banks have messed up big time, and have no way of cleaning up their own mess, so everyone else will have to do it for them yet again. The debt derivative game has become so opaque that nobody even knows who is liable for what.

The whole bailout process is a gigantic gamble because it depends on governments still being able to bail the banks out. Of course the “losses should fall heavily on those who incurred them in the beginning: first the borrowers and then those who lent unwisely to them.” (report p146). Not on the banks who had their snouts in the trough all the way through and who sought to profit from profligate lending policies and from on-selling the risks they knew were part and parcel of what they were doing.

The BIS attitude is truly breathtaking. “One response, [to uncomfortably large bank losses] if the regulatory authorities were able to determine that the estimated “fair value” losses were much greater than likely to be realised in the end, might be a temporary degree of regulatory forbearance.” (Report p 147). So not just a bailout, but further deregulation! They are proposing to go on the merry go around yet again with the near certainty, as has happened so often in the past, of making things even worse next time.

On the other hand, a new “macrofinancial stability framework” (whatever that is) would be based on “macroprudential regulatory instruments (whatever they are) as well as monetary tightening to lean against the (economic) upturn….” I think that means almost perpetual high interest rates so the economy can never really get going again. That’s stopping the problem by stopping the world just so the banks don’t face even more embarrassment. Unspecified “policy instruments”…. “would be tightened in the expansionary phase and eased in the downturn “(report p 148). Apparently there will be no business cycle, because there will be little or no business expansion.

Now, I agree business cycles can be eliminated, but that can be done only by reforming the financial structure to remove the physical causes of the instability. It can’t be done by murdering the economy. But BIS apparently now insists “…. the good times should be used to prepare for the bad”, in a completely unjustified effort to apply Keynesian cyclical tax theory to the world’s monetary framework. That’s a tall order when the bank, by and large, doesn’t even support Keynes’ tax theory.

One difficulty with using such a framework is that BIS members don’t all agree that excessive credit growth is the root of the problem. Nor do they all agree that the messes from repeated collapses are becoming too difficult to clean up. Nor do they know when the chemotherapy to be used in the “tightening” should be administered; when it is time “to take away the punch bowl at the party”. (report p 149) .Evidently there isn’t much they agree on .

With such dismal uncertainly one is left wondering whether these people wouldn’t be better off permanently isolated from the rest of us in a quiet bank vault (or similar institution) somewhere so they can’t wreak more havoc on the world.

But no doubt BIS has done its sums. No doubt the report and its associated scare-mongering has appeared now because left too much longer it might be too late and the world financial system really might crash.

The men who drive BIS represent the world’s financial and banking interests, not ours. They are very clever. The world economy is not about to crash, because they will see to it that public treasure, lives and wellbeing are sacrificed yet again to ensure they and the incompetent moneymen they represent remain the true rulers of the world.


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