Volume 26, No. 28 - July 12, 2012
Glass-Steagall Turn-about in London:
“The Once-in-a-Lifetime Option”
“It seemed sudden, that an important faction in England should have chosen [the Fourth of July 2012] as the occasion to have presented an urgent proposal whose effect might well become a rescue from the nick-of-death of the entire trans-Atlantic community (and more) from the worst economic break-down crisis in all modern European history.”
The above quote is taken from a statement put out by Lyndon LaRouche on July 5. He is referring to the intense debate in Great Britain over how to survive the unraveling of the banking system, and in particular to the editorial published in the City of London’s July 4 Financial Times calling for a total separation of retail and investment banking on “formal Glass-Steagall lines”.
What is now clear, the FT editors write, “is that the hard-charging, revenue-seeking investment banking culture predominates when they are pushed together. The more herbivorous retail banking ethos -- with its emphasis on patient stewardship -- is marginalised. This seems to lead ineluctably to the proliferation of socially questionable trading activities and abuses such as the Libor scandal.”
Although the FT had previously supported the conclusions of the Vickers banking commission for “an internal split rather than a total separation on the basis that the diversity of assets within a universal bank could be a source of strength at times of financial stress... we are now ready to go further. For all the diversification benefits, the cultural tensions between investment and retail banking can only be resolved by totally separating the two, on formal Glass-Steagall-style lines.”
This dramatic turnaround is a result of the accelerating disintegration of the Eurozone within the hyperinflationary collapse of the entire trans-Atlantic financial and banking systems, and the ensuing panic in political and financial institutions over the past months. The more immediate trigger came with the revelations on the deliberate manipulation of the London Interbank Offered Rate (LIBOR – cf. below).
Lyndon LaRouche immediately seized on the opening coming from those in London who want to survive the coming debacle. He stressed, in the above-quoted statement, that action must be taken immediately, but “with precise design as to who does what in which sequence.” While LaRouche himself has proven, unique qualifications in the matter, what most economists and other monetarists propose would be “a disaster for humanity”.
Therefore, he stressed, “the practice of monetarism must be suspended, and a system of physical-productive values must be substituted” as the controlling standard of market values.
In a subsequent statement, LaRouche noted that different British advocates of a reform have proposed to cooperate with the United States in bringing that about. He recommended that the U.S. government immediately accept the offer, provided the cooperation is based on a “commitment to sharing the benefits of a common good.”
An Economic Miracle Is Possible!
In a joint four-hour international webcast with Jacques Cheminade from Berlin on July 8, Helga Zepp-LaRouche began by calling on all listeners, be they in Europe, Africa, the Americas, or elsewhere not to remain passive, but “to join with us in a plan of action.” Everybody, she said, now knows, or at least senses, that this crisis “is unprecedented in human history,” and unless we change paradigms, “it may lead to the complete destruction of civilization.”
Zepp-LaRouche announced that, while she would go through the international situation in detail, the single primary purpose of the webcast was to “make clear to the world, to politically responsible people, and to the masses of the population at large, that there is no reason to despair, that there is an alternative, and all that is required is the political will to implement it.”
In the second part of her presentation, Zepp-LaRouche described the various infrastructure projects for Southern Europe, the Mideast and Africa, presented in EIR’s latest report, and the ramifications they would have worldwide. Such an approach, she stressed, would not only guarantee a decent standard of living for everyone, but is the very best conflict and war-avoidance strategy, because it brings people to cooperate on projects that are beneficial to all.
Jacques Cheminade followed with a presentation on how to actually realize an “economic miracle”, which must begin with the intention of changing for the better our society, and ourselves. Then, the needed changes can be made in terms of cleaning up the banking system and issuing real productive credit.
A more extensive report will be published next week. In the meantime, our readers are urged to watch the videos on the websites.
LIBOR Scandal: a Foot in the Door for a Pecora Commission Investigation
Investigation of the rigging of the LIBOR (London Interbank Offered Rate), which started with the U.S. Commodities Futures Trading Commission, and covers at least the period 2005-2009, could have far-reaching consequences.
How did the manipulation work? The rates are set by 18
EIR STRATEGIC ALERT
°28 / 2012
megabank members of the British Banking Association, which simply report, every day, what interest rate they claim they would pay if they were borrowing interbank money that day. If they do borrow, they can submit documentation of that; but if they don’t do so, their statement is accepted at face value, as long as it’s not too far out of line with the other statements.
Thompson-Reuters, a private firm at the merchant banks’ service, then “calculates” the rate for that day. And that rate in turn is applied to hundreds of trillions of dollars of derivatives the world over on a daily basis. As it turns out, the banks were deliberately lowering the rates reported, thus fueling the securitization bubble. And increasing their profits on derivatives trades by moving the rates slightly to their advantage.
In addition to Barclays Bank, which was already been nailed and three of its top executives forced to resign, the banks which have admitted they are under investigation include Citibank, JPMorgan Chase, HSBC, Royal Bank of Scotland, UBS, and Deutsche Bank[-Morgan Grenfell]. The number will undoubtedly increase, as many other investigations have begun, or soon will, including in Switzerland, Germany and the United Kingdom.
This opens up the potential for setting up an actual Pecora Commission type investigation of the financial abuses of the past decades, as called for by our newsletter for many years now.
In that regard, Corriere della Sera economic columnist Massimo Mucchetti wrote on July 6 that the Libor-fixing cartel is an “organized crime” association and should be prosecuted as such not only in Britain, but internationally. If it comes out that the Libor manipulations also rigged the quotation of financial instruments traded on regulated Italian markets, he wrote, Italian prosecutors should be involved, “even if the crime was committed abroad.”
Mucchetti went on to call for a Glass-Steagall Act, pointing out that “the largest monopoly is called the City of London, and the second largest Wall Street, where 4-5 banks control the entire derivative finance. That is the source of contagion, not Greece. We must defend ourselves from that source.”
to Save the City of London?
Even though it is for self preservation, there is little doubt that a key British and City of London faction has moved to dump the so-called “ring fencing” reform of the Vickers banking commission as totally inadequate, and to support Glass-Steagall legislation to deal with the onrushing financial tsunami. Leading the offensive, the July 4 Financial Times called for total separation of investment and commercial banking (cf. above).
At the same time, members of both Houses of Parliament have rejected the Vickers recommendations and called for Glass-Steagall, including John Thurso, a Liberal Democrat member of the Treasury select committee of the House of Commons. He declared on June 30: “The money that is going in from the high street is going into the City gambling dens instead of being available to be lent to businesses and I think there is no choice now than to, by law, separate investment banking from retail banking.”
Others include Jonathan Edwards, MP for the National Party of Wales, Andrea Leadsom, a Conservative member of the Commons Treasury committee and a former banker at Barclays, and Lord Myners, former Financial Services Secretary in the government of Gordon Brown, and currently on the board of Lord Jacob Rothschild’s RIT Capital Partners PLC. All three find that the Vickers Commission doesn’t go far enough and that Glass Steagall style separation must be implemented.
From the City itself, broker and fund manager Terry Smith wrote in the Guardian: “The UK and the US must enact a Glass-Steagall Act… Ringfencing, as proposed by the Vickers commission, will not work.” He was seconded by Peter Hambro, scion of the old City of London merchant bank Hambros, and now of Petropavlovsk, the second largest private goldminer in Russia, who, in an interview with Britain’s Evening Standard, said that while retail banks should rightly lend to the real economy, and operate with a government-backed guarantee of deposits, merchant bankers should live off their wits and operate only with unlimited liability, so that if they lose money, they are fully liable.
There was also a steady stream of articles, commentaries and letters to the editor, including from Ben Chu, chief economics writer for the Independent under the headline “ Split up the banks – and do it properly” concluding that ring-fencing is not efficient.
The Daily Mail, which is the mouthpiece the British establishement uses to drum up public opinion, called for Glass-Steagall to “save capitalism and the City. They call on the British government to show leadership as had “Franklin D. Roosevelt during the Great Depression”, whose “historic contribution was to rekindle ordinary people’s faith in capitalism…”
Germany at the Center of Resistance to ESM
By now, many legal challenges to the ESM and fiscal pact have been filed at the German Constitutional Court, and the first public hearing on the injunctions attached to some of them will take place on July 10, with a ruling is expected either on the same day, or soon after. A ruling on the merits of the challenges as such may take several weeks, if not months, during which time the euro system will continue to disintegrate, at an accelerating pace, fueling popular discontent.
On July 2, Wilhelm Hankel and Karl Albrecht Schachtschneider, two of the “4 anti-euro professors”, elaborated at a press conference in Berlin the legal complaint they have filed at the Constitutional Court together with the Free Voters party, and attacked the bailout policy in harsh words. Hankel called the ESM a monster, unprecedented in the world, whose capital base is 140 times larger than that of the ECB, 80 times larger than that of the Bundesbank, and 50 times larger than that of Europe’s biggest bank, Deutsche Bank. That will absorb all available capital for the bailouts, leaving nothing for public sector loans, the municipalities, the creation of youth jobs, or firms.
In addition to bleeding Europe’s real economy, this is also an attack on democratic rule, as the ESM is explicitly placed above and beyond the democratic institutions of Europe. Hankel mentioned IMF director Christine Lagarde as an example of leading leaders’ disregard of constitutionality: at a recent meeting in Washington, she said if she heard the German Constitutional Court mentioned again, she would leave the room right away.
Then, on July 5, 172 German economists put out a public declaration denouncing the ESM and calling on citizens to mobilize nationwide. Initiated by Prof. Hans-Werner Sinn, president of the Munich ifo-institute, the appeal has been signed by numerous “heavyweights” in the world of economics, such as Prof. Klaus Zimmermann, former head of the German Institute for Economic Research (DIW), Freiburg economist Prof. Bernd Raffelhüschen, and Dortmund Statistics Prof. Walter Krämer.
Crafted in remarkably non-academic language in order to have a broad public impact, the appeal asserts that the planned European banking union will only “help Wall Street, the City of London – as well as some investors in Germany – and a bunch
EIR STRATEGIC ALERT
°28 / 2012
of domestic and foreign banks... They thus can continue their business at the expense of citizens in other countries, who have little to do with this.” A banking union, the professors correctly point out, means “collective liability for the debts of the euro system,” adding that “bank debts are almost three times as large as the sovereign debt and, in the five crisis countries, lie in the range of several trillion euros.” Taxpayers, pensioners and savers of the still solid countries “cannot be held liable for covering these losses,” the declaration states, demanding that “banks must be allowed to fail. If the debtors cannot pay back, there is only one group, which should take on the burden and is able to do so: the creditors themselves, since they entered the investment risk consciously and they are the only ones who have the needed wealth.”
The appeal falls short of calling for Glass-Steagall legislation, but it does have the potential to build into it.
Moreover, on July 8, German President Joachim Gauck said in a nationally-televised interview that he thought the Chancellor had “a duty to explain in a very detailed way what the policies designed to save the single currency meant for the average person, and what they mean fiscally.” Referring to the Constitutional Court’s June 19 ruling (cf. SAS 26/12), Gauck added that Merkel has the duty to inform the Bundestag in detail on what was really decided at the June 28, EU summit. He also said he was “pleased” that the highest court would soon consider challenges to the ESM and fiscal pact.
Finland and Netherlands Defecting
from ESM, Opposition Building in Austria
The ESM is facing new hurdles in Finland and the Netherlands, where the governments, after signing the bailout packages, have come under massive pressure at home, in the Dutch case with early elections now set for September. On July 3, a Finnish government spokesman announced that his country would not approve ESM purchases of European government bonds on the secondary market (a scheme for massive liquidity pumping) without imposing highly restrictive conditions. A spokesmen for the Dutch government said the same day they would only approve such purchases on a case-by-case basis, if at all. Indeed, the new Dutch government voted in in the autumn may not be willing to honor the ESM agreements signed by the outgoing government.
While the Austrian parliament ratified the ESM Treaty with a two-thirds majority on July 5, that has not deterred the opponents. Legal challenges will be filed at the country’s Consitutional Court by the Freedom Party (FPOE), and a mobilization for a national referendum to annul the parliamentary vote will begin. During the July 5 parliamentary session, the chairman of the Freedom Party (FPOE), Heinz Christian Strache, denounced the bailout fund as a “coup against the Austrian constitution and state,” a “financial dictatorship,” and a “sado-maso treaty, forcing us Austrians to pay without being allowed to have a say.”
The ESM would not save the euro nor Europe, but instead cause an unprecedented economic, social and political catastrophe, a “Euroshima,” Strache said.
Note that the FPOE, in its anti-ESM campaign, notably at the July 5 Vienna press conference by Strache after the vote, has made prominent use of the Bueso’s video material and other documentation against the bailout policy.
Obama’s “Recovery” Is a Fraud
The Obama re-election campaign team is betting that it can convince a majority of voters that his policies have produced a slow, but steady economic recovery, and that his re-election is necessary to insure that the country does not return to the “bad old days” of George W. Bush. During his recent bus tour of the battleground states of Ohio and Pennsylvania, Obama acknowledged that “it’s still tough out there,” referring to unemployment, but insisted that the latest economic figures are “a step in the right direction.”
Even on the surface, it is difficult to see how he could assert that the June unemployment figures represent a move “in the right direction.” The official Bureau of Labor Statistics (BLS) report showed a total of 80,000 net jobs produced in June. Of these, 25,000 were temporary jobs, i.e., low-paying and short-term, while the official unemployment rate remained at 8.2%.
But these “official” figures tell only part of the story, as even the BLS admits. The latter produces several sets of figures, but the ones which are more accurate are usually not released to the public. They, however, show that the really disastrous state of the U.S. workforce is evident.
For example, take what is called the U-6 rate. Unlike the “official” rate, which only counts as unemployed those still looking for work, and collecting unemployment funds, the U-6 rate adds those who would like full-time work, but can only find part-time, and those who have stopped looking, that is, the long-term unemployed, who have exhausted their unemployment benefits. While the official rate reports 12.7 million unemployed (8.2%), the U-6 rate counts 22.8 million Americans as unemployed, or 14.5% of the workforce.
Even the U-6 rate undercounts the unemployed, as it does not include those youth who have ended their studies, but have never worked, or those who remain students, because there are no jobs. According to Leo Hindry of the New America Foundation – a former top supporter of Pres. Obama – there are actually 28.1 million unemployed, a total of 17.3%.
What we can conclude, including from EIR figures, is that the U.S. has an incredibly shrinking workforce! Today, only 58.6% of American adults earn paychecks. There are five million fewer jobs in the U.S. today than in 2008, the year Obama was elected, including 590,000 fewer in manufacturing, and a whopping 1,049,000 fewer in construction. The June 2012 figures just released showed a further decline in manufacturing, and paltry gains in construction.
Youth are particularly hard hit, as the unemployment rate in urban areas for young people ranges from 35 to 50%. And the June figures show that the unemployment rate for African-Americans jumped, from an official 13.6%, to 14.4%.
And yet Obama brags, on the campaign trail, that we are moving in the “right direction”? And that the problems which remain are still the fault of George W. Bush?
This explains, in part, why so many elected Democrats are abandoning Obama. But that in itself will solve nothing, as Mitt Romney is backed by many of the same Wall Street types who put Obama in office.
Instead, Lyndon LaRouche insists that now is the time for a bipartisan move to restore Glass Steagall, and provide national credit for building the North American Water and Power Alliance, NAWAPA, which would create six million productive jobs.
That would be a step in the right direction!
Private Banks in Argentina Ordered
to Lend for Productive Investment
Under a national plan announced by Argentine President Cristina Fernandez de Kirchner on July 4, it will henceforth be mandatory for the country’s private banks holding 1% or more of total national deposits to extend loans for productive investment, at a fixed interest rate of no higher than 15%, (well
EIR STRATEGIC ALERT
4 WEEKLY NEWSLETTER
° 28 / 2012
below the 25% usual today), and with a minimum of a three-year grace period According to Central Bank officials, some 25 to 30 banks are concerned, and the bigger the bank, the higher the percentage of the deposits it will be forced to lend, 50% of which must go to small and medium-sized businesses.
In explaining the decision, Fernandez said it is no longer acceptable for the state-owned Banco de la Nacion to continue to shoulder the responsibility for providing credit for productive investment, while private banks make money in the country, but only offer loans that ensure them high profits, for consumption or foreign trade.
The announcement of this dirigist policy was met with horror in London and on Wall Street. The Wall Street Journal nervously pointed out that the new lending rules will affect the Argentine subsidiaries of some of the biggest global financial players: Banco Santander, HSBC Holdings, Citigroup, and BBVA, among others. Private consultants fear that the government’s policy could augur a state takeover of banks that don’t comply. To counterattack, they claim that the Argentine economy is slowing down, not because of the global financial crisis, but because of Fernandez’ own protectionist policies.
President Fernandez told the private bankers they should have as much confidence in Argentine businesses as the state does. She made clear that if the banks propose reasonable conditions and rates for loans, there will certainly be takers, contrary to what the banks now claim. Therefore, “the Central Bank will tell you what the conditions are for launching this credit for production.”
The government is also seeking to improve trade relations with China and Russia. After the Rio+20 Summit in late June, where Argentina firmly rejected the “green economy” as a trap designed by international financial interests to stymie growth in the developing countries, Chinese Premier Wen Jiabao went on to Argentina for a three-day state visit. There, he signed a number of important trade and economic cooperation agreements, in the areas of railroad construction, nuclear energy, and transportation. Another major agreement includes plans for Argentina to increase agricultural exports to China, including beef, wine and corn and fruits.
China is now the largest trade partner of Brazil and Chile and the second largest of Argentina and Peru, as China Daily pointed out. In the past decade, while trade between the U.S. and Ibero-American countries doubled, between China and Latin American countries, it grew 17 times over. Also investment from China is growing at a rapid pace.
Previously, Fernandez had held broad-ranging discussion with Russian President Vladimir Putin at the G-20 meeting in Mexico, during which the two mapped out several strategically important areas in which the two governments want to broaden their cooperation. Hydrocarbons and nuclear energy are high on the list, as well as railroad modernization. Putin would reportedly like Argentina to provide the technology and know-how to help develop Russian agriculture and the beef industry.
Ivanov and Costa: Glass-Steagall Principle
to Fight Drug Trafficking
Both Russian “Anti-Drug Czar” Victor Ivanov and former executive director of the United Nations Office on Drugs and Crime Antonio Costa have called for a reform of the international financial system as a precondition to winning the war on drugs. Ivanov went so far as to call explicitly for separating banks according to a Glass-Steagall standard.
Speaking in front of the Argentinian Council on Foreign Relations on June 27, he charged that the existing world monetary and financial system is the main cause for the spread of drug trafficking on a global scale. There must be, he said, “a change in the current global financial architecture: in particular, a separation between commercial and investment banks for the defense of credit operations against speculative ones, support for stability in the exchange rates of national currencies, and allocation of long-term targeted credits for infrastructure development. In particular, there needs to be a collective appeal from the heads of state of the countries that are suffering from the drug trade, on the necessity of introducing these measures.”
The three-tiered program he laid out for the state is quite remarkable:
1) “The first level is the creation of the infrastructure needed for organizing advanced agriculture, including the formation of stable markets, a low-interest credit system for peasants, technical and technology support for agriculture, a system of teaching and training for agronomists and other agriculture professionals, as well as tough protectionist measures to defend peasants who are growing legal crops.
2)”The second level is the creation of conditions for employment diversification, in order to reduce the portion of families whose welfare directly depends on succeeding in agriculture; in particular, this means forming a national high-technology industrial sector into which the population can be drawn.
3)”The third level is the sovereign development of the state, endowed with financial and credit independence. Nations must have the right to sovereign development. The existing world monetary and financial system, which was built on the ruins of national economies and by sucking their resources, is the main reason for the spread of drug trafficking on a world scale.”
Antonio Costa, speaking at the Royal Institute of International Affairs/Chatham House in London, on July 2, exposed the campaign for drug legalization saying that it would lead to the same result as the only drug legalization in history -- Britain’s Opium Wars against China. Costa repeatedly warned that his evidence “is going to hurt some members of this audience,” and then went on to describe the criminal greed of the British East India Company, and today’s “coalition of bankers, private investors, venture capitalists,” who “in the expectation of drug legalization, are spending huge sums to develop drug brands, just like tobacco companies have done over the years.”
He concluded by pointing to the massive scandal in the U.S. around the hundreds of billions of dollars in cocaine money laundered by Wachovia Bank, noting that “despite the evidence, no indictment, nobody was arrested, nobody went behind bars.” This coverup was orchestrated in 2010 by the Obama Administration, U.S. Attorney General Eric Holder, and his top assistant Lanny Breuer. The massive drug money flow documented in the Wachovia case is the core of the scandal around U.S. government orchestration of otherwise illegal trafficking of weapons to the Mexican cocaine cartels, known as the “Fast and Furious Scandal” (cf. SAS 25, 26, 27/12).
E.I.R. STRATEGIC ALERT www.eir.de
Published by: E.I.R.GmbH, Bahnstr. 9a, 65205 Wiesbaden
Tel.: 0611/73650, Fax: 0611/7365101, Email: firstname.lastname@example.org
Verantwortl. f. d. Inhalt: Dean Andromidas, Claudio Celani
Subscription: EUR 3000/ ISSN 0936-7527
© E.I.R. GmbH Alle Rechte vorbehalten, auch die des Nachdrucks
von Auszügen, derphotomechanischen Wiedergabe und der Übersetzung,
Printed in Germany