Global Financial Meltdown
by Michel Chossudovsky
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Global Research,
September 18, 2008
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Bloody Monday September 15, 2008
Bloody Monday, September 15, 2008. The Dow Jones
industrial average (DJIA) declined by 504 points (4.4%), its largest
drop since Sept. 17, 2001, when trading resumed after the 9/11 attacks.
The financial slide proceeded unabated, leading to
an 800 point decline of the Dow Jones in less than a week. The World's
stock markets are interconnected "around the clock" through instant
computer link-up. Volatile trading on Wall Street immediately "spills
over" into the European and Asian stock markets thereby rapidly
permeating the entire financial system.
The Most Serious Financial Crisis since the 1929 Wall Street Crash
When viewed in a global context, taking into account
the instability generated by speculative trade, the implications of this
crisis are far-reaching.
The crisis, however, has by no means reached its
climax. It could potentially disrupt the very foundations of the
international monetary system. The repercussions on people's lives in
America and around the world are dramatic.
The crisis is not limited to the meltdown of
financial markets, the real economy at the national and international
levels, its institutions, its productive structures are also in
jeopardy.
As stock values collapse, lifelong household savings
are eroded, not to mention pension funds.
The financial meltdown inevitably backlashes on
consumer markets, the housing market, and more broadly on the process of
investment in the production of goods and services.
War and the Economic Crisis
What is of utmost significance is that this plunge in
stock market values occurs at the crossroads of a major military
adventure. The global financial crisis is intimately related to the
war.
A spiraling defense budget backlashes on the civilian
sectors of economic activity. The war economy has a direct bearing on
fiscal and monetary policy. Defense expenditure is in excess of $500
billion. A separate $70 billion is earmarked "to cover war costs into
the early months of a new administration. Those amounts combined would
represent the highest level of military spending since the end of World
War II (adjusted for inflation)." (Csmonitor.com
February 06, 2008).
"War is Good for Business": The powerful financial
groups which routinely manipulate stock markets, currency and commodity
markets, are also promoting the continuation and escalation of the
Middle East war. The financial crisis is related to the structure of US
public investment in the war economy versus the funding, through tax
dollars, of civilian social programs. "More broadly, this also raises
the issue of the role of the US Treasury and the US monetary system, in
relentlessly financing the military industrial complex and the Middle
East war at the expense of most sectors of civilian economic activity."
(See Michel Chossudovsky,
The
Democrats endorse the "Global War on Terrorism": Obama "goes after"
Osama, Global Research, August 29, 2008)
The war is profit driven, financed through the
massive Worldwide expansion of dollar denominated debt. War and
Globalization go hand in hand. Wall Street, the oil companies and the
defense contractors have concurrent and overlapping interests. The oil
companies are behind the speculative surge in crude oil prices on the
London energy market.
In turn, resulting from the military agenda, the US
civilian economy is in crisis as the nation's resources including tax
dollars are diverted into funding a multibillion Middle East war.
The Speculative Onslaught
The Worldwide scramble to appropriate wealth through
"financial manipulation" is the driving force behind this crisis. It is
the source of economic turmoil and social devastation.
What are the underlying causes? What prevails is a
totally deregulated financial environment characterized by extensive
speculative trade.
The history of deregulation goes back to the
beginnings of the Reagan administration.
In the wake of the 1987 stock market meltdown, the US
Treasury was advised by Wall Street not to meddle in financial markets.
Free of government encroachment, the New York and Chicago exchanges were
invited to establish their own regulatory procedures.
The authority to regulate the market no longer rests
with the State but with stock market officials who directly serve the
interests of the institutional speculators.
The crisis on Wall Street is part of a process of
financial warfare.
Since the 1987 crisis, a new era of intense financial
rivalry has unfolded.
Financial deregulation in the US has created an
environment which favors an unprecedented concentration of global
financial power.
What we are dealing with is a major clash between competing financial
conglomerates.
The financial meltdown is intimately related to the
unregulated growth of highly leveraged speculative operations.
The Hedge Funds
The hedge funds play a key role in this process of restructuring. These
speculative transactions (the panoply of derivatives, options, futures,
index funds, etc) often transacted through hedge funds overshadow the
workings of stock market transactions, and their relationship to real
economic activity.
The hedge funds are private investment funds, which
manage the pooled funds of wealthy investors. While they are often
linked to major financial institutions, they are totally unregulated.
They operate with a large pool of money capital, which is used to
undertake highly leveraged speculative transactions. The latter have the
characteristic that profits can be reaped when the market goes up, but
also when the market goes down.
Short Selling
A stock market meltdown can be highly profitable operation. With
foreknowledge and inside information, a collapse in market values
constitutes (through short-selling) a lucrative and money-spinning
opportunity, for a select category of powerful speculators who have the
ability to manipulate the market in the appropriate direction at the
appropriate time.
There are indications of a carefully engineered conspiracy to trigger
the collapse of several major financial institutions through outright
manipulation.
"Short selling" as well as the spreading of false rumors were used as a
strategy to trigger the collapse of selected stocks on Wall Street
including Lehman, Morgan Stanley and Goldman Sachs.
"Short sellers aim to profit from share declines, usually by
borrowing a stock, selling it and buying it back after its price has
decreased. In abusive “naked” short selling, the seller does not borrow
the stock and fails to deliver it to the buyer.
Some market participants say abusive short sellers have
contributed to the fall of companies such as Lehman Brothers by forcing
down share prices
John Mack, chief executive of Morgan Stanley, told employees in an
internal memo Wednesday: “What’s happening out there? It’s very clear to
me – we’re in the midst of a market controlled by fear and rumours, and
short sellers are driving our stock down.”' (Financial
Times, September 17, 2008)
Regulators have acknowledged that the collapse of Bear Stearns
last March was attributable to short selling. "Regulators have been
looking into a combination of short-sales and false rumors are part of
the problem." (Wall
Street Journal, September 18, 2008)
Merrill Lynch is bought, Lehman Brothers is pushed into
bankruptcy. These are not haphazard occurrences. They are the result of
manipulation by powerful rival financial institutions, using highly
leveraged speculative operations to achieve their objective, which
consists in either displacing or acquiring control over a rival
financial institution.
.
The current financial meltdown has nothing to do with market forces: it
is characterized by financial warfare between competing institutional
speculators.
The Market for
Crude Oil
Leveraged speculative trade has pushed the price of crude oil to
exceedingly high levels, reaching a peak in July 2008. A turning point
was reached and the direction of speculative trade was rapidly
reversed, leading to a dramatic plunge in prices of crude oil (See
Chart below)
Those financial institutions and/or investors who have the ability to
manipulate the movement of crude oil prices, and had prior knowledge
and the ability to determine the timeline of the speculative surge and
subsequent collapse, were able to reap large money profits both during
the upward and downward movement of the price of crude oil.
"The movement in global prices on the New York and Chicago
mercantile exchanges bears no relationship to the costs of producing
oil. The spiraling price of crude oil is not the result of a shortage of
oil. It is estimated that the cost of a barrel of oil in the Middle East
does not exceed 15 dollars. The costs of a barrel of oil extracted from
the tar sands of Alberta, Canada, is of the order of $30." (For
further details see,
Michel Chossudovsky, The Global Crisis: Food, Water and Fuel. Three
Fundamental Necessities of Life in Jeopardy, Global Research, July
2008)
Global Economic Restructuring
This economic crisis is the outcome of a process of
macroeconomic and financial restructuring initiated in the early 1980s.
It is the result of a policy framework: trade and financial sector
reforms under WTO auspices not to mention the imposition of the IMF
deadly macroeconomic reforms, commonly referred to as the structural
adjustment program. It is accompanied by the concurrent impoverishment
of large sectors of the world population.
The debt crisis of the early 1980s unleashed a wave
of corporate mergers, buy-outs and bankruptcies. These changes in turn
paved the way for the consolidation of a new generation of financiers
clustered around the large merchant banks, the institutional investors,
stock brokerage firms, large insurance companies, etc. In this process,
commercial banking functions have coalesced with those of the investment
banks and stock brokers leading to the consolidation of a handful of
global financial conglomerates.
The unregulated use of complex speculative
instruments has provided Wall Street with the means to extend its global
financial empire. The main thrust of this process does not consist in
overseeing the stock market per se. Rather it resides in controlling the
lucrative markets for speculative instruments --derivatives, options,
futures, hedges, etc.-- where the scope for manipulation and insider
trade is far greater.
Wall Street's financial dominance was to be achieved
through its institutional control over the channels of speculative
trade. This control also provided, as in the case of the Asian crisis,
the basis for weakening the role of central banks, taking control over
the reigns of monetary policy, stock markets and currency markets. In
the 1997 Asian crisis alone, more than 100 billion dollars were
confiscated in a matter of months from the vaults of Asia's central
banks; similar speculative assaults were carried out in Russia in 1998
and in Brazil in 1999.
These events were followed by the dramatic bubble and
bust of the dot.com stocks, when the NASDAQ Composite index peaked at
more than 5,000 in March 2000 and subsequently collapsed, triggering a
chain of panic selling. (see below)
NASDAQ (1994-2008). Dot.com peak in
March 2000
The 1999 Financial Services Modernization Act.
[1]
In 1999,
The Financial Services Modernization Act (Gramm-Leach Bliley Act),
was adopted by the US Congress. In the wake of lengthy negotiations,
all regulatory restraints on Wall Street's powerful banking
conglomerates were revoked "with a stroke of the pen".
Under the new rules ratified by the US Senate and
approved by President Clinton, commercial banks, brokerage firms,
institutional investors and insurance companies could freely invest in
each others businesses as well as fully integrate their financial
operations. The legislation repealed the Glass-Steagall Act of 1933, a
pillar of President Roosevelt's "New Deal" which was put in place in
response to the climate of corruption, financial manipulation and
"insider trading" which resulted in more than 5,000 bank failures in the
years following the 1929 Wall Street crash. (See Martin McLaughlin,
Clinton Republicans agree to deregulation of US banking system, World
Socialist Website, 1 November 1999).
The Merger Frenzy
Several mammoth bank mergers (including
NationalBank Corp with Bank America and Citibank with Travelers
Group) were carried out and approved by the Federal Reserve Board
(in blatant violation of the existing legislation) prior to the
passage of the 1999 Financial Modernization Act..
In the years prior to the inauguration of the
Bush administration, a process of intense financial rivalry had
unfolded. The New World Order largely under the dominion of
American finance capital was intent on dwarfing rival banking
conglomerates in Western Europe and Japan as well as sealing
strategic alliances with a "select club" of German and British
banking giants.
The Shape of Things to Come
The bank mergers (carried out prior to the 1999
legislation in violation of the Glass Steagall Act) were but "the
tip of the iceberg", the shape of things to come. The repeal of
the Glass-Steagall Act had created an environment which favored an
unprecedented concentration of global financial power.
Effective control over the entire US financial
services industry had been transferred to a handful of financial
conglomerates.
What prevails today is a de facto system
of private regulation. The evolving "global financial
supermarket" is to be overseen by the Wall Street giants. State
level banks across America were displaced or swallowed up by the
financial giants, leading to a deadly string of bank failures.
In turn, the supervisory powers of the Federal
Reserve Board, increasingly under the direct dominion of Wall
Street, were significantly weakened. The financial giants have the
ability to strangle local level businesses in the US and
overshadow the real economy. In fact, due to the lack of
competition, the 1999 legislation, which was an initiative of
Senator Phil Gramm, also entitled the financial services giants
(bypassing the Federal Reserve Board and acting in tacit collusion
with one another) to set the structure of interest rates as they
please:
"Despite impending danger signals, the 1999
legislation seems to totally disregard the history of stock
market failures since the onset of the "Asian crisis" in
mid-1997. The economic and social repercussions in an integrated
Worldwide financial system, --not to mention the risks of a
global financial meltdown resulting from the absence of
financial regulation-- are far more serious today [1999] than
during the years following the 1929 Wall Street crash. (Michel
Chossudovsky, unpublished notes on the 1999 Financial Services
Modernization Act, Legislation, November 1999).
Global Financial Architecture
The Financial Services Modernization Act should
not be viewed in isolation as a domestic procedure, limited to the
US financial landscape.
The impacts of the legislation extended well
beyond the borders of the US financial system. The institutional
changes which it brought about, including the concentration and
centralization of power in the hands of a small number of
financial giants, largely contributed to Wall Street's unswerving
quest for global financial domination.
The Worldwide scramble to appropriate wealth
through "financial manipulation" was the driving force behind this
restructuring of the global financial architecture of which the
1999 US legislation was an integral part, setting the pattern of
financial reform in different parts of the World.
While the 1999 Legislation does not in itself
break down the barriers to capital movements, in practice it
empowers Wall Street's key players to enter the financial services
markets of developing countries and consolidate a hegemonic
position in global banking, overshadowing and ultimately
destabilizing financial systems in Asia, Latin America and Eastern
Europe...
The International Monetary Fund (IMF) and
The World Trade Organization (WTO).
Financial deregulation in the US exerted a
decisive influence in "setting the pace" of global financial
reform under the auspices of the IMF and the World Trade
Organization (WTO). The 1999 Legislation was part of a global
financial agenda, consisting in deregulating capital movements,
liberalizing domestic banking and capital markets Worldwide under
WTO auspices and opening up national financial services markets to
the global financial conglomerates
The legislation was implemented alongside the
concurrent reshaping of the global trade and financial
architecture under the WTO agenda. Under the GATS, developing
countries have committed themselves to full liberalization of
financial services. In other words, national governments, which
are already controlled by their external creditors, would be
unable to deflect the Wall Street giants from entering and
swallowing up national banks and financial institutions. .
In conjunction with the provisions of the
Financial Services Agreement and the GATS, the 1999 banking
legislation adopted in the US empowered a handful of banking
conglomerates with the ability of destabilizing the domestic
financial landscape of developing countries.
The sweeping deregulation of US banking
imparted unprecedented powers to Wall Street's financial
conglomerates to acquire and take over banking institutions all
over the World.
The tendency was towards a Worldwide financial
supermarket controlled by a handful of global financial
institutions which penetrate and permeate the fabric of national
economies.
Two major agreements (negotiated under the WTO)
contributed to "entrenching the rights" of the global banks" in
international law, tantamount (according to critics) to granting
"fundamental rights" to the banks which override those contained
in national constitutions. The provisions of both the General
Agreement on Trade in Services (GATS) and the Financial Services
Agreement (FTA) formally break down remaining impediments to the
movement of capital meaning that Bank of America or Citigroup can
go wherever they please, triggering the bankruptcy of national
banks and financial institutions.
Moreover, with the support of the IMF, the Wall
Street conglomerates and their European and Japanese partners
reinforced and consolidated their role as the World's major
creditor institutions, routinely underwriting the public debt,
overseeing the conduct of State budgetary policy, issuing
syndicated loans to troubled industrial corporations, overseeing
the privatization of State corporations which have been put on the
auction block in the context of an IMF bailout agreement, etc.
Financial Warfare: The Powers of Deception
The weapons used on Wall Street are prior
knowledge and inside information, the ability to
manipulate with the capacity to predict results, the spreading of
misleading or false information on economic occurrences and market
trends. These various procedures are best described as the
"powers of deception", which financial institutions routinely
use to mislead investors.
The art of deception is also directed against
their banking competitors, who are betting in the derivatives and
futures markets, in stocks, currencies and commodities.
Those who have access to privileged information
(political, intelligence, military, scientific, etc.) will
invariably have the upper hand in the conduct of these highly
leveraged speculative transactions, which are the source of
tremendous financial gains. The CIA has its own financial
institutions on Wall Street.
In turn the corridors of private banking and
offshore banking, enable financial institutions to transfer their
profits at ease, from one location to another. This procedure is
also used as a safety net which protects the interests of key
financial actors including CEOs, major shareholders, etc of
troubled financial institutions. Large amounts of money can be
moved out at an opportune moment, prior to the company's demise on
the stock market. (e.g. Lehman, Merrill Lynch and AIG).
The Federal Reserve Bank of New York and its
powerful stakeholders have "inside information" on the conduct of
US monetary policy. They are thereby in a position to predict
outcomes and hedge their bets in highly leveraged operations on
the futures and derivatives markets. They are in an obvious
conflict of interest because their prior knowledge of particular
decisions by the Federal Reserve Board enables them as private
banking institutions to make multibillion dollar profits.
Links to US intelligence, to the CIA, Homeland
Security, to the Pentagon are crucial in the conduct of
speculative trade, since it allows the speculators to predict
events, through prior knowledge of foreign policy and/or national
security decisions which directly affect financial markets. An
example: the put options on airline stocks in the days preceding
the 9/11 attacks.
An internal war within the financial system is
unfolding.
Lehman Bros goes bankrupt, Merrill Lynch is
bought up...
Mortgage giants Fannie Mae and Freddie Mac are
taken over by the government.
Bear Stearns collapses, America's largest
insurance company AIG's share collapse from $22.19 on September 9,
to less than $4.00 at the close of trading on September 16, a
decline of more than 80 percent of its value.
Goldman Sachs together with JP Morgan Chase
are negotiating with the Treasury to arrange for a $85 billion
secured loan to AIG, which would be financed by the Federal
Reserve Bank of New York.
Who picks up the pieces? What lies ahead?
The process of mergers and acquisitions is
likely to proceed to new heights leading to an unprecedented
centralization of financial power, with Bank of America, JP Morgan
Chase and the Federal Reserve Bank of New York playing a dominant
role.
The meltdown will be conducive to the demise
of numerous banking and financial institutions, which will either
be driven out of the financial landscape altogether or acquired by
the financial giants.
Bank of America is slated to purchase Merrill
Lynch, leading to the formation of the world's largest financial
institution, clashing with Citigroup and JP Morgan Chase. It
should be noted that while Citigroup and JP Morgan Chase are
competing institutions, they are nonetheless entwined through
intermarriage between the Rockefeller and Stillman families.
Bank of America in the last two decades has
developed into a financial giant through a series of mergers and
acquisitions. In 2004, Bank of America acquired FleetBoston
Financial, in 2005 it purchases credit card giant MBNA and in
2007 it acquires LaSalle Bank Corporation and Corporate Finance
from the Dutch bank ABN AMRO. And on September 14, 2008, Bank of
America announced its intention to acquire Merrill Lynch for $50
billion.
What we are dealing with is a clash between a
handful of major financial institutions, which have developed
through mergers and acquisitions into Worldwide financial giants.
The financial meltdown on Wall Street largely
benefits Bank of America and JP Morgan Chase, which
is part of the Rockefeller empire, at the expense of Lehman
Brothers, Merrill Lynch, Goldman Sachs and Morgan Stanley. Lehman
Brothers filed for Chapter 11 bankruptcy on Bloody Monday,
September 15. Lehman's assets are of the order of $639 billion.
Potential Losers
Citigroup Inc., declined 15 percent to $15.24 for the
steepest drop since July 2002. [Sept 15]
American Express Co., the biggest U.S. credit card
company by purchases, fell 8.9 percent to $35.48. [Sept 15]
Goldman Sachs fell 12 percent, the
most since April 2000, to $135.50. The decline was the result
of short selling.[Sept 15]
Morgan Stanley, the biggest U.S.
securities firm other than Goldman Sachs, fell 14 percent to
$32.19." The decline was the result of short selling. [Sept
15]
(See Bloomberg, Sept 16, 2008)
In 2000, J.P. Morgan merged with Chase
Manhattan, leading to the integration of J.P. Morgan, Chase,
Chemical and Manufacturers Hanover into a single financial entity.
Bear Stearns was acquired in 2008 by JP Morgan Chase following its
collapse. This banking empire controlled by the Rockefeller family
has assets of more than 1.6 trillion dollars.
With assets of $1.7 trillion, Citigroup's
future remains undecided. It is facing serious financial
difficulties which could lead it into bankruptcy. Citigroup share
prices have in recent months collapsed alongside those of Fannie
Mae. The Lehman debacle has precipitated a further decline of
Citigroup stock prices.
It is the trustee "for unsecured creditors who
are owed some $155 billion by Lehman Brothers", but according to
Citgroup statements they "have little or no exposure to the failed
investment bank."
What this means is that the collapse of Lehman
will lead to massive loan default in relation to the portfolios of
Citigroup and NY Mellon clients, namely client banking
institutions as well as individual investors.
Note.
1. This section relied on a series of
unpublished notes, on the 1999 Financial Services Modernization
Act, Legislation, which I wrote in November 1999.
United States' Largest Banks
(in millions of U.S. dollars)
Rank |
Name (city, state) |
Consolidated
assets |
1. |
Citigroup (New York, N.Y.) |
$2,199,848 |
2. |
Bank of America Corp.
(Charlotte, N.C.) |
1,743,478 |
3. |
J. P. Morgan Chase & Company
(Columbus, Ohio) |
1,642,862 |
4. |
Wachovia Corp. (Charlotte,
N.C.) |
808,575 |
5. |
Taunus Corp. (New York, N.Y.) |
750,323 |
6. |
Wells Fargo & Company (San
Fransisco, Calif.) |
595,221 |
7. |
HSBC North America Inc.
(Prospect Heights, Ill.) |
493,010 |
8. |
U.S. Bancorp (Minneapolis,
Minn.) |
241,781 |
9. |
Bank of the New York Mellon
Corp. (New York, N.Y.) |
205,151 |
10. |
Suntrust, Inc. (Atlanta, Ga.) |
178,986 |
11. |
Citizens Financial Group, Inc.
(Providence, R.I.) |
161,759 |
12. |
National City Bank (Cleveland,
Ohio) |
155,046 |
13. |
State Street Corp. (Boston,
MA) |
154,478 |
14. |
Capital One Financial Corp.
(McLean, Va.) |
150,608 |
15. |
Regions Financial Corp.
(Birmingham, Ala.) |
144,251 |
16. |
PNC Financial Services Group,
Inc. (Pittsburg, Pa.) |
140,026 |
17. |
BB&T Corp. (Winston-Salem,
N.C.) |
$136,417 |
18. |
TD Bank North, INC. (Portland,
Maine) |
118,171 |
19. |
Fifth Third Bankcorp (Cincinatti,
Ohio) |
111,396 |
20. |
Keycorp (Cleveland, Ohio) |
101,596 |
21. |
Northern Trust Corp. (Chicago,
Ill.) |
77,480 |
22. |
Bancwest Corp. (Honolulu,
Hawaii) |
74,808 |
23. |
Harris Financial Corp.
(Wilmington, Del.) |
69,172 |
24. |
Comerica Incorporated (Dallas,
Tex.) |
67,167 |
25. |
M&T Bank Corp. (Buffalo, N.Y.) |
66,085 |
26. |
Marshall & Ilsley Corp.
(Milwaukee, Wis.) |
63,432 |
27. |
BBVA USA Bancshares, Inc. (The
Woodlands, Tex.) |
59,953 |
28. |
Unionbancal Corporation (San
Fransisco, Calif.) |
57,933 |
29. |
Huntington Bancshares, Inc.
(Columbus, Ohio) |
55,985 |
30. |
Zions Bancorporation (Salt
Lake City, Utah) |
53,597 |
NOTE: As of May 30, 2008.
Source: Federal Reserve System, National
Information Center.
The Globalization of Poverty and the New World Order
by Michel
Chossudovsky
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In this expanded edition of Chossudovsky’s international
best-seller, the author outlines the contours of a New World Order
which feeds on human poverty and the destruction of the
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ethnic strife and undermines the rights of women. The result as
his detailed examples from all parts of the world show so
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This book is a skilful
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In this new enlarged edition
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Sub-Saharan Africa, the dramatic meltdown of financial markets,
the demise of State social programs and the devastation resulting
from corporate downsizing and trade liberalisation.
Michel
Chossudovsky is Professor of Economics at the
University of Ottawa and Director of the Centre for Research on
Globalization (CRG), which hosts the critically acclaimed website
www.globalresearch.ca . He is a contributor to the
Encyclopedia Britannica. His writings have been translated into
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