WORLD FINANCIAL CRISIS EXPLAINED…
By now there will be few people in Australia who have not been touched by the "Financial Crisis". For some it has had extremely serious consequences such as the loss of their job, in many cases their savings and for others their homes. In some cases all three have gone and the resulting devastation can only be imagined. Only those who have suffered these impacts can appreciate the circumstance.
It is up to the rest of us to use our resources to assist our friends where we can and make known the causes of this present malaise. In this way we may get a level of awareness in both the government and the community. That the people are not happy should be manifestly obvious and further more, with the enormous resources that we give our government we expect them to develop permanent "fixes" which we know are and certainly have been available for quite some time.
By "permanent fixes" is meant initially as addressing the problem, to ascertain the cause of the failure and then directing responses, not to mask the effects of the failure but to actually correct the failure. While Governments treat the symptoms rather than the disease thing will only appear to get better. Right now the people need the problem fixed totally. Half measures will get less than half public support.
The present crisis is of course a construct, something designed and implemented rather than a random act or something that happened by chance. Similarly were the earlier big "Financial Crises" of 1908, 1913 and 1929-1932, the one known as 'The Great Depression'.
It is hard not to suspect that each of the major events has had an undisclosed purpose, or more properly described an ulterior motive. All move in the same direction which is the concentration and centralisation of financial and political power. If in achieving this goal there is "collateral damage" like the wrecking of peoples lives and the inequitable transfer of assets, then so be it. So far as the organisers of the crisis are concerned [and they are real people], the level of this damage, and the hurt it reflects throughout western society is of little consequence.
To relay our present day circumstances to these previous events would be too long a haul, so in order to keep current we will stay within the 21st century, a century, and millennium, that was ushered in on the back of one of the greatest hoaxes of all time, the Y2K scam. That particular activity came, served its purpose, deposited its costs with the consumers and moved on into the obscurity that it should have had at and from conception.
From the year 2000 the good times started to flow with the "dot com" bubble. At that time companies were floated with no defined objective, but rather that they could "get into the market" and make handsome profits… shades of the South Sea Bubble and the Tulip Crash. Numerous people and certainly investment funds, invested in these companies, as in fact they did with those companies that did have a financial and business objective in the information highway. In all cases expectations were ramped up, and were for some time met, or at least partially so.
Then came the reality. Some companies turned out to be nothing but "ponzi schemes", others bordered on fraud and misrepresentation. Their share market value went from prices of over $US100 /share to next to zero over a very short period of time.
As with all "ponzi schemes", including those receiving publicity today, they were in effect asset stripping schemes and while some people were affected that should have known better, many small, optimistic, and possibly greedy investors transferred their funds to the scheme organisers, never to see those funds again. This is not only the major characteristic of all such schemes but has been recurrent down through the years, irrespective of the level of regulation in place.
Following the worldwide Great Depression in 1933 financial regulations in the USA were tightened. Prior to that regulation was all but non existent. Since market speculation, if not market manipulation was then identified as a major cause of The Great Depression regulation of banking activities had to be undertaken. The Glass Stegal Act [named after the two lawmakers who introduced it] came into effect to separate the functions of regular retail and lending banks from the underwriting of securities and other brokerage related activities. The Glass Stegal Act was designed to separate these functions forever.
While the Glass Stegal regulation was publically popular it was obviously an encumbrance as far as the financial services industries were concerned. In 1933 the German Wiemar Government failed and Europe and the USA commenced gearing up both domestically and militarily for the coming World War II. This gearing up probably filled the investment capacity of the banks for a period but its effect was never going to be enough long term. The industry seemed to be developing ways to circumvent the new regulations from the beginning and the keen regulators were aware of this move. The public continued to support the regulators.
In 1956 moves were made to further regulate the finance industry with the Bank Holding Company Act being passed. The purpose of this Act was to prevent banks operating covert brokerage activities through wholly owned subsidiary companies. After World War II the financial industry was eager to get into the them booming and highly profitable reconstruction finance business and that the Bank Holding Company Act needed to be passed is sufficient evidence of this. It was at this time also that the Bretton Woods system came into effect so the stage was set for the refinancing of the latter half of the 20th century.
By the 1960's and 70's and after World War II the memories of the Depression began to wane and the pressure was again applied by the finance industry to break down the Glass Stegal Act. To this end the pressure was successful as some larger banks were permitted to offer money market type accounts with associated services in certain circumstances. In effect this put Glass Stegal on a roller coaster ride which we were still on when the whole financial sector hit the wall in 2008. Following this change once again some major banks were able to carry on brokerage related activities in house.
But that's not all. In 1987 what is now [or perhaps was] Citigroup and J P Morgan again pressured the US Reserve Bank to permit banks to deal in commercial paper and mortgage backed securities [sound familiar]. The Reserve Bank then, under Secretary Volcker, refused the proposal but in 1989 when Alan Greenspan took over the office of Secretary the application was remade and the measure was approved for those banks already operating in the field.
This places Alan Greenspan fairly and squarely at the centre of the deregulation action.
To continue the weakening of the Glass Stegal regulations, in the 1990's all banks were allowed to participate in the financial industry generally to the extent of 25% of their activity. How this was to be regulated can only be guessed at. But the pressure for the full repeal of the Glass Stegal regulation regime continued. Congress then approved the amalgamation of banking enterprises to the point where they could expand to conglomerate size, influence and status thus being "too big to fail".
Then in 1999 came the Financial Services Modernization Act which permitted the development of monoliths like American Insurance Group [AIG] and Bank of America. Certainly the AIG has been a substantial beneficiary of the Bush initiated 2008 'Troubled Assets Relief Program' and many other similar sized financial institutions have either been taken over or have been the recipients of this bailout assistance.
Clearly, if the Glass Stegal Act was still in full effect then today's "Financial Crisis" could never have occurred. But over the years, as shown, it was rendered ineffective and the financial chaos that we have today is the direct result.
If we hark back to the time when the Greenspan Reserve Bank overrode the Volcker Reserve Bank decision and look at the level of authority that the Reserve Bank had over the financial services industry, without recourse to the Congress, one can only be amazed. This raises the question for all western democracies - just who do the elected representatives represent, and how does the Congress and the electorate get to accept this significant delegation of authority without question or control.
In order to market this new deregulation to the public, the financial services industry introduced the concept of the "Chinese Wall". This was a mechanism whereby the banking and brokerage arms of a financial institution were to operate "at arms length" and without cross influence within house. This of course amounted to a form of "in house" Glass Stegal, and if the industry was genuine then the question arises, why did it move to kill Glass Stegal over the years.
As far as the American Congress goes, well the Americans, only half in jest say, "we have the best Congress money can buy" and at times we have to wonder whether they are fooling or not.
During the period of the Greenspan administration of the Federal Reserve the world became awash with money. Many will argue that at the time Greenspan was dropping RBA interest rates following the 'dot com' boom he should have been holding them steady. In any event it was during this period that enormous cash liquidity was built up and both the level of United States public and private debt started its spiral out of control.
Then Secretary Bernarke came to the helm of the Reserve Bank of America. He came to the Reserve Bank with the reputation of having stated that if ever the money supply got short he would drop $100 bills from a helicopter. It's now almost certain he wasn't joking. In effect he did this placing no restraints on the previously generous management system of the Greenspan bank.
He also allowed the aggregating of mortgage securities to continue and develop for bundling and resale, after re-rating and we saw the final development of the sub-prime mortgage crisis, the development of the Credit Default Option system and other cancerous derivative speculations that finally came crashing down to the morass that we presently have.
These now "toxic derivatives" were not a normal expansion of the financial industry but were "artificiallies" specifically created to facilitate expansion and to transfer both debt and assets to other parties, particularly internationally.
But the Congress was not dead even if it did a fair impersonation of being dead. When the system hit the wall the House of Representatives Committee on 'Oversight and Government Reform' came to life and held hearings to find out what went wrong with the financial sector or probably more cynically how can we paint over this, for clearly they, in their heart of hearts must have known what had been happening as certainly many outside the industry did.
The Committees' hearing has been denigrated from within. Rep. John Mica, a Florida Republican said "This is a nice dog and pony show and maybe it's theatre, but people want someone held accountable, they want someone to go to jail." That was but one of many sentiments simply lost in the noise.
Alan Greenspan took the stand and admitted that he was "partially" wrong in trusting that the financial industry would do the right thing. "It's a very difficult problem with respect to supervision and regulation," he said. "We cannot expect perfection in any area where forecasting is required. We have to do our best but cannot expect infallibility or omniscience". Of course no one expected anything like that, just reasonable prudent management and oversight would have been sufficient for everyone.
But can we expect or should we be able to expect reasonable prudence. The Chairman of the Oversight and Government Reform Committee, Henry Waxman stated, "The reasons why we set up your agencies [Treasury and RBA] and gave you budget authority to hire people is so you can see problems developing before they become a crisis," Perhaps Mr. Waxman should have been looking at the Congresses own oversight performance in allowing both Greenspan and Bernarke the license that they did, and previously permitting deregulation.
During the hearing Greenspan stated that in addition to being "partially" wrong "Those of us who have looked to the self-interest of lending institutions to protect shareholder's equity -- myself especially -- are in a state of shocked disbelief,"
Not nearly as much it would seem as most citizens of the world who were clients of the industry and now perhaps victims. He went on to say that "this crisis, however, has turned out to be much broader than anything I could have imagined," more or less admitting that the history and consequences of the Great Depression could not have been foremost in his mind.
It is interesting to note at this point, that given the power of the Reserve Bank to totally control the financial industry and consequently the economic management of any country in which it operates, and its total abrogation of that responsibility, it is all the more amazing that western leaders, in developing "bailout systems" have done anything but mention this as a root cause of all the woes… let alone address it. It's well past the time that they did both.
If all "Financial Crises" have an undisclosed objective, what is the objective of this one. The British Government is always a good bellwether in this regard as over the last 100 years it has played a significant roll in the development and some would say destruction of the west.
The most recent advices from the now British Prime Minister, and previously Chancellor of the Exchequer Gordon Brown, suggest that out of this crisis will come a new financial order. One widespread interpretation of this is that the financial system of the western world would be irrevocably centralised. In other words there would be an "International Reserve Bank" fashioned on the Reserve Banks we now know.
Each western nation presently has "its own" reserve bank, but all the Reserve Banks are owned and controlled substantially by the same "international financial" interests. These western nations can, at least theoretically, take over the ownership and control of their Reserve Banks and consequently their banking systems. This is a present and real threat to the controlling interests. Right now there is before the American Congress, a Bill to take over the Reserve Bank of the United States but understandably enough the Bill has been bogged down in the committee stages.
Part of the reason for the British proposal to internationalise to a Reserve Bank style system would be to just make it one degree of difficulty harder for any Government to unilaterally attempt nationalisation. Britain seems to have had an enduring collusive relationship with international finance so Britain would be the logical place for the scheme to be floated. Nationalisation of the Reserves, were it undertaken, would spell death to the globalisation concept.
To achieve this international banking control, as is apparently being suggested by Gordon Brown, there would have to be support from the western governments generally and for the western governments to do this there would have to be a substantial level of public support. To get that public support governments would initially need the public to realise that there was a serious problem, and secondly that the only way to overcome the problem would be to accept the action the government proposed.
To ensure that the public gets this message "in spades" the "Financial Crisis" has to become progressively more serious for the message to get the support it requires.
When the lesson is well and truly learned the promised rearrangement and relief will be delivered, but not before then, and the western world will enter into a new and enhanced system of financial control. Enhanced that is for the owners and operators of international banks not the people who gave the resolution their desperate and reluctant support. At this point in time it is comforting to believe that the major target is restricted to the western world as it seems unlikely that China or Russia, or for that matter India or the Middle East, would be prepared to come on board. If this is the case it will shorten the duration of the crisis considerably.
Even so this present "Financial Crisis" would seem to have a considerable way to go.
At this time the only rumblings of a permanent long term solution is coming from the Prime Minister of Great Britain as already mentioned. Other leaders are presently in "bailout mode" which means supporting large industry so that they can maintain employment. The need for employment to continue goes without saying but there may be other ways out, though not without a fight and possible excommunication.
Bailouts of the kind we are seeing have great potential to transfer liability from big enterprises to the taxpayer but there is no enduring benefit for the taxpayer or for that matter the country with this methodology.
If only one western government were to take over the ownership and control of its own banking system, and its economic management, and make finance available to the present banks against government issued bonds, then perhaps the lending crisis would evaporate. Finance houses would be allowed to burn off the consequences of their excessive practices of the past few years over a period of time and those within our community who have suffered the full and unforeseen vengeance of withheld finance to their investment houses would be given a second chance. They may not recover 100% but at least they wouldn't go down 100% as some of them already have.
The same applies to our insurance and superannuation industries that are now totally at the mercy of international interests.
Being realistic, there is really very little chance of this ever coming to pass as things stand now but at this time it is sufficient for the public to know that there are options and if the present political parties do not at least consider these options then the consequences could become apparent at the ballot box.
Australia, as is the case with most if not all western societies, has a one philosophy government with basically two party factions. While this prevails, voter choice will be limited, representation will be poor and our democratic values depreciated.
If this "Financial Crisis" could be weathered and overcome without the hidden agenda coming into effect, then we will have made a great step forward, however slow and painful.
There are methodologies that could be applied other than the British Prime Ministers suggestion for international control, but all of these would certainly be unacceptable to the financial industry of the western world. The financial industry now operates from a position of overwhelming strength while most western governments have been subservient for so long that they understand nothing else.
If they do elect to once more represent their people and re-regulate the financial industry, as Mr. Rudd is suggesting, then they had better move quickly, decisively and effectively.
It is a great personal attribute to be able to turn adversity to gain, and perhaps this is what our political leaders must do… but don't hold your breath.