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Where to Is the Financial Crisis Drifting?

by : Professor Dr Eberhard Hamer
Tuesday August 24, 2010 - 00:36

Where to Is the Financial Crisis Drifting?

by Professor Dr Eberhard Hamer

According to the presentation in the media, the focus of the financial crisis seems to have shifted from the U.S .to Europe. Everyone is talking about the Greek and the Euro crisis. The input is getting to be ever more hectic and ever more short-sighted. Science seems clueless, in any case it does not give any convincing orientation. Financial policy decision-makers and the agents of the financial markets react more than they act. They are being driven by forces and developments that they have neither foreseen, nor seen through, nor understood. Their practical results fall correspondingly short.

That is why a finance expert has an obligation to provide sober analysis, critical assessment, careful prognosis, and realistic proposals for solutions.

The emergence of the financial crisis

If you want to assess and solve an exceptional situation, it is always correct to precisely clarify its cause in advance.

The situation that is now presenting itself to us as a financial crisis is the popping both of a financial bubble that has been inflated through decades and of an illusory monetary bloom with all the consequences resulting from these mistakes.

By losing the gold standard, state liability, and all the corresponding commitments concerning the volume of money in circulation in 1971, the Federal Reserve Bank (FED) enabled its private owners to multiply the money supply by a factor of forty, while the amount of goods grew only by a factor of four. In this way, the FED swamped the US and the world with ever more and ever more valueless dollars accounting for ever bigger and ever more valueless financial products, bought and treated by banks all over the world as a seemingly safe store of value since it was given topmost financial standing by those same perpetrators. Thus the leading financial groups were able, with continuously newly created money, to accumulate natural resources and industrial capacities all over the world and to receive ever growing profits. Thus the US were able to finance their expensive wars and their growing foreign trade deficits. And with the private and bankers’ banks accumulated stocks of virtually valueless dollars getting bigger and bigger, the growing money supply with ostensibly rising wealth sent the world into raptures. During this illusory boom, all states were able to heftily raise taxes and therefore grant ever higher social benefits and raise social standards. The growing supply of money masked rising national as well as private debts. The resulting global finance bubble could not be inflated further forever, it had to be corrected sometime, or burst. One cannot fly on drafts and bills forever.

Development of the financial crisis

The financial bubble was first punctured in the US housing market, when house prices began to fall and payments on mortgage loans, which had been granted up to 120% of purchase prices, could no longer be handled. According to the rules of the market, the financial bubble should have been deflated when the first high street bank, Lehman Brothers, collapsed in the US. Had not the state intervened on this occasion, market forces would have seen to it • that rotten financial products would have been recognized as such, • so that financial institutes that issued or owned false rotten financial products would have had to suffer major losses and partly even to declare themselves bankrupt, • that many private investors in such products of financial “toxic waste” would also have had to realize great losses • and that such a deflation of the financial bubble to its true state would also have led to withdrawals of credits and cases of illiquidity in the real economy. The crash, predicted by the author eight years in advance and even delineated in a book (“Was passiert, wenn der Crash kommt” – What will happen in case of a crash), hit the exuberant banking industry fully and unexpectedly, and certainly also struck state finances offhand. In this situation, the US Treasury Secretary Paulson (earlier on in his capacity as Goldman-Sachs CEO one of the main perpetrators) wanted to spare his bankster-colleagues’ losses by tying up the biggest package of state assistance in the US to date. In this way he socialized the venture banks’ losses and made the American tax payer liable. He took over the rectification of the private sector, which would have been necessary from a market economy perspective, and made it the state’s and the tax payers’ problem. In due time, he also enforced identical action all over the American territory. In Europe, the satellite states also had to implement the hugest assumption of liability actions so as to prop up the international gambler banks at the expense of the tax payers. This way the private financial crisis has definitely become a global public finances crisis.

Crisis situation

Because of this unbridled assumption of bank debts as state debts, confidence in the dollar began to totter notably. The largest dollar creditors – the Chinese – had to be placated by a large US government delegation, and they had to be given silver guarantees to keep them from throwing their worthless dollars on the market. Above all, the US and notably US high finance had to fight the waning of confidence in the dollar, since the US was in need of more than a billion dollars per day from abroad just to keep up payments for their wars and their imports. As Russia and other countries now began to reject the rotten dollars, and private dollar creditors changed over to more reliable currencies – most notably the Euro –, US high finance and US administration were alarmed, since now problems of insolvency threatened the US.

In this situation, suddenly the Euro went soft, too, – as a relief? – when Greece, which had been supplied with loans and advised on its cheating concerning the Euro by the dubious US bank Goldman-Sachs, was downgraded by the US rating agencies and became a problem, as well.

According to the laws of the market Greece would have had to declare state bankruptcy at this point. But this would have meant losses of around 300 billion to banks owned by the leading high finance group. It would also have led to Greece being excluded from the Euro. No wonder that US high finance once again requisitioned tax payer liability for the imminent losses. And the European Commission saw the unique chance for a power expansion by usurping the last sovereign right remaining to the European member states – the budget law – by means of controlling rights against all EU-treaties. This meant seizing the last and highest of the European member states’ sovereign rights. Both power groups united to blackmail the German Chancellor – and probably also the German Federal President into compliance. This way, not only the originally private financial banking crisis was socialized by state guarantees, but in a next step to a European “solidarity of liability” the national finances crisis of a member state was socialized to become a comprehensive problem of all the other European member states, as they were converted into a fund-transfer union. So now we face the situation that not only international speculating banks stay unreliable, because they have not been able to write off even half of their toxic-waste-products, but also financial markets remain swamped by dubious financial products. The financial bubble has in no way been sufficiently corrected, but the private financial crisis has in the meantime spread from one country to all states of Europe by acceptance of liability. The private financial market remains in need of correction, and so do the state finances not only in the US but all over Europe, as well.

Consequences of the crisis

Since the FED’s unbridled augmentation of the money supply indisputably led to the glut of dollars and their devaluation and also to an unhealthy augmentation of money supply in the Western World, not only the relation between money supply and amount of goods has to be corrected in the Western World, but the private as well as the public financial sector also have to be restructured by freezing the unreliable credits and financial products in the private financial sector and reducing the excessive accumulation of debts in the public financial sector

Theoretical alternatives of solution

Both market and administration economy offer alternative solutions:

• Market-based solutions When banks are highly indebted or hold unreliable or rotten papers they have to devaluate, according to the laws of the market, charge off, and, if necessary, file for bankruptcy. In these cases the losses remain with the banks’ owners, and in addition also with its creditors.

This is exactly why the international high street banks were not allowed to be handled and liquidated according to market procedure: The owners behind them (high finance) did not want to bear the losses, and on the other hand they had such great political power via the governments they controlled, that they were able to enforce a solution to the expense of others.

However, the reorganization of the international speculation banks is not finished. We still have to dispose of about half of their toxic waste products – some of them have been parked in bad banks –, so that according to the laws of the market they would still have considerable need of writing off – that means losses – in the next decade.

When states are highly indebted and cannot obtain more credits, they have to declare themselves bankrupt according to the laws of the market. The state will then cease to amortize its debts, either going on a long-term repayment freeze or force creditors to write off large parts of their credits, so that the state will be solvent again with only the remaining debts and the lowered interest on them. That is why state bankruptcy always means a loss to the state’s creditors. This was exactly the reason why Greece was not allowed to declare state bankruptcy. Its creditors were again those same international speculation banks (namely Goldman-Sachs), which had already been able to shift their losses onto the taxpayers’ shoulders during the first private banking crisis. Now in the Greek debt crisis they politically arranged things in a way that it was not them, the creditor banks, who had to bear the losses. Instead the European governments are purportedly saving Greece, feigning “European solidarity” – but in reality they are again saving the banks and take over their losses. Merkel struggled desperately, but she gave in to the pressure of the Brussels politbureau and after a phone call from the American president. The Federal President was forced to sign the packet of debts without scrutiny in a matter of hours, and resigned afterwards, possibly because of shame.

• Solutions based on administrative eco nomy If the private sector is not to bleed, then the public sector must bleed, the battle against the crisis must be based on administrative economy. In the case of the first banking crisis, state intervention was at least able to prevent a short term crash, so the notion that state guarantees could at least spread market-based adjustments over a longer time, and thus win time, proved right. In the course of about two years, around half of the rotten financial products have been destroyed by private and public devaluations, and this way, the correcting power of the market has worked slowly, but it worked. It is a matter of argument whether it was responsible and, in the long run financially worthwhile, to save international banks like for example the HRE (Hypo Real Estate Bank) at the public’s expense in order to minimize their owners’ – US high finance – losses and to gain time for restructuring. The final answer to this will depend on the further progression of the second phase of the crisis.

But once states have covered the losses of the private banks or have run heavily into debts, there is no avoiding their own restructuring. If they do not want to do this in a market-based way (state bankruptcy), they must find a solution based on administrative economy. Theoretically, there are again two methods of doing this:

– Axing national debt by means of balancing the budget. This can be done by increasing state revenue (dues and taxes) or by a policy of austerity.

Theoretically there aren’t many additional means of increasing state revenues, because most states are already burdening their citizens to the limit of their tolerance. But there are many components of public expenditure, where it would theoretically be possible to save money. For instance, you could cut down state responsibilities, e.g. disband tens of thousands of state staff together with their offices, you could even bring about advantages by withdrawing subsidies (e.g. mining subsidies). States have also reduced public salaries. This is also a possible option to put state finances back on their feet. In Greece, even half of all public servants would have to be dismissed, because they have been recruited by the present government, they have no purpose, no position, and no use. Above all, you could cut social benefits. Why do we have to pamper each and every immigrant with social benefits at once, contrary to other democracies? And why do we pay benefits for life, and even to successive generations? If we think back to the time after World War II, then we worked our way up by economizing. So the theoretical possibility exists today, as well. But whether this is socially and politically possible, remains doubtful.

Yet the choice of a recovery by economizing is not without certain consequences. If for example Greece wanted to weather its outrageously high national debt solely by economizing, the country would at once fall into the deepest economic crisis of its history, and moreover pass its depression on to its partners in foreign trade. And above all, this depression would last more than a decade because of the amount of debts – an idea which is difficult to conceive. If even several states had to get out of debt by economizing, this would mean an escalating long-term recession or even depression, e.g. in Europe. This again would mean that large groups of the population would become impoverished and therefore the need to survive would probably result in a civil war. No democratic government can sustain this. A democratic government that economizes, gets the chop. It has always been this way, and therefore democratic governments no longer seriously try this method. The Greek minister of finance has already signalized that he is going to break his vows of economizing and will make no further efforts in this direction.

– So the last remaining fiscal possibility of correcting the relation between escalating money supply and smaller amount of goods is an adjustment by way of devaluation, i.e. inflation or currency reform, to reorganize the state. Inflation has the great advantage of aiding key groups, first of all the state with growing tax yields and the devaluation of old debts. It also helps businesses, as far as they are able to carry through price increases. Earners of income and pensioners only realize belatedly that they are the losers. Yet the main difficulty of inflation lies in the fact that it will not help the countries in the short term which have been excessively encumbered with debts by now, but only in the medium term. You do need inflation in the double-digit range to significantly relieve say the US or the Mediterranean States from their current liabilities. 3, 4, or 5 percent are not sufficient. But this interferes with currency microstructure and partly dissolves it. What’s more, on an international scale inflation means the redirection of commodity flow and of currencies. If the inflation gets higher, it also often is no longer controllable, and develops into a runaway inflation, that will always lead to currency reform. Therefore inflation does not constitute permanent reorganization, as it would have to do in order to definitely solve the problem of indebtedness.

Only a currency reform would serve to permanently reduce the states’ debts in a short time. In most cases after wars or financial mismanagement there were attempts to write off a government’s debt by currency reforms. There is a hundredfold history of currency reforms, so it is an ordinary proceeding. A currency reform would have the theoretical advantage to be immediately effective, to be taxable with winners and losers, and to prevent a recession or depression, because after the devaluation, things immediately go on.

Above all, a currency reform is the last theoretical option for writing off an excessive government debt, when all other options either fail or – are not feasible for political reasons. Practical options for solution

Since all over the world real economy is still working substantially and barely touched by the crisis, concrete solutions solely have to focus on the two sectors of private business and public finances. Both sectors have been inflated by American money-flooding. In both sectors, the financial bubble must be deflated, money supply and amount of goods must be harmonized. For this, the following practical solutions may be envisaged.

Correction of the financial markets: Chief culprit for the explosion of money supply is the private Federal Reserve Bank, which shows that a private bankers’ bank with the power of monetary issue is too susceptible to malpractice to keep monetary value stable. Therefore the FED must be nationalized, must become a neutral organization only committed to the value of the money it emits, as – in former decades – was the German Central Bank in an exemplary manner.

Actually, the European Central Bank should stay as stable and committed to money value as the German Central Bank was independently of political wishes. Its independence is being threatened at the moment – due to American pressure – by the France-Connection (Trichy/Sarkozy), who subordinate their decisions about bank policy to their politics and who – with the aid of the Greek crisis – want to abolish the Eurobank’s independence by loans (750 billion) and by the ECB’s buying 40 billions “worth” of worthless Greece bonds. By rights, a vociferous protest to stop this development should spread all over Europe.

Americans and Europeans have different ways of solving public debts: The Americans continue to uninhibitedly increase money supply, the Europeans want to restore their state budgets by economizing. Yet the American Treasury Secretary has angrily demanded an end of European economizing from Schäuble. Europe is to swing into money supply increase, i.e. inflation, so as not to keep the Euro more stable than the dollar. It will be interesting to see if the Europeans will again obey the superpower or if they will dare to go their own – better – way.

Yet it remains doubtful how far public saving will be possible at all. Up to now all democratic governments seriously willing to save have been voted out of office. Also the Greek minister of finance has – after the protests of the population – announced the end of his austerity programme. Thus the essentially correct way of restoring state budgets to decrease money supply is only a theoretical option, in practice it can hardly be politically realized.

Were inflation to break out immediately, interest would have to be increased sharply and would strangulate many state budgets because of the interest they have to pay. That is why we will have to reckon that state banks will continue creating cheap money with low interest rates for the time so as to be further able to finance government expenditure.

But cheap money means more money, and more money always means inflation. In any case we will have to reckon with inflation, very soon in the US and somewhat later in Europe. The Americans (Stiglitz) have been recommending this option for a long time, since the US have already grown out of debt crises by means of inflation twice, after two world wars. By contrast, we Europeans fear inflation because of its redistribution effects (from monetary assets to material assets) and because it can, if it rises, so easily turn into a monetary reform. And yet we will have to reckon with rising inflation also in Europe because of the established money supply malpractice and under pressure from the US. All politicians agree that our governments and states have been blackmailed by the financial industry, notably US high finance. Now it can be seen how right Brzezinski was, when he suggested that the US administration should be kept on the leading strings by the high finance, and that the US administration in turn had to direct its vassal states according to the high finance’s instructions. So by now, because of the growing financial crisis we have a reversal of the traditional power set-up: It is not politics that dominates economy, but the financial industry and transnational corporations that dominate politics. It is necessary to reverse this disastrous change of system. Politics must again lay down the rules for the financial industry, take over control, and be able to prevent financial excesses.

Almost everyone agrees on this account, but Americans and Europeans are arguing about the ways to achieve this: Our minister of finance wants a toll on financial transactions, in order to set up a slush fund at all times to refinance sick collapses and cases of malpractice. The German Minister for Economic Affairs, Brüderle, rightly points out that his financial colleague’s plan would again burden the consumer (as in the case of the added value tax) and that financial business would only be relocated, unless all the important countries in the world opted for the same plan. So as long as the American government, controlled by its financial industry, is not allowed to participate, this is no option.

At any rate, Germany has rightly forbidden trade with derivatives and short selling. But US finance is torpedoing even this measure, since it does not allow its own government to issue a similar ban. It was finally suggested that banks had to strengthen their capital resources and to pay into a fund that would be able to provide assistance in emergency cases instead of the state. A similar scheme is being introduced by the US government. But it is not a short-term solution, since it has no short term effect, but a long term one, at best.

Financial research suggests that future debt or liquidity problems of banks should lead to insolvency of takeover by the state. In this way, shareholders would not remain escape unscathed, as they did in the first banking crisis, but they would be the first to bear the damage. But it remains doubtful whether such a measure, which is in itself correct, can be enforced against the world power of the US high finance. After all, former employees of this high finance (US Treasury Secretary Paulson) were able to spare the shareholders’ losses and saddle the tax payers with them, already in the first crisis. The trick with the state aid for Greece was the same thing – bank losses were rolled over onto the taxpayers’ backs. Thus there are many practical options for solving the current financial crisis in private or public financial management, but regrettably they can not all be enforced – politically or against the power of high finance. Therefore the enforceable, practical solutions are reduced to only a few.

Forecasting the development of the crisis

So far and even in the first world financial crisis, the attempts at a solution of the world financial bubble have not been sufficient to eliminate the crisis potential. More than half of the toxic waste products and the public debts, notably in the US, remain unsolved and are still to be corrected. So we have to reckon with a second stage of the crisis (“double dip”).

A next drastic correction of the dollar is overdue. Confidence in the dollar has been shaken due to the mass manipulation by the FED and the American high street banks. Presently the dollar is only accepted because the Americans have brought about a Euro-crisis and so shaken confidence in the Euro as well. But this diversionary tactic will not help for long. The US are not only overly indebted but also threatened with insolvency. Because of their international war and import obligations the US need, after all, more than 360 billion dollars inflow from all over the world or glut of money from the FED to just stay solvent. If this inflow comes to a standstill, insolvency and probably currency reforms are due. Indeed, the US have already twice been able to utilize mega-crises of their country for economic recovery by means of their participation in world wars, by selling the output of their military production and by afterwards commandeering the spoils of war (German gold, German patents, occupation costs). This could inveigle the current government to try the same method again. After all, war preparations against Iran are already made, only an 9/11 is still missing.

So a currency reform, which is in itself necessary, could be deferred by war for a while, but afterwards it would be all the stronger.

In Europe we got off lightly – though not at all cheaply – in the first banking crisis and might have been well on track for correction, had not the Greek crisis inveigled politicians for a second time to assume bank debts to be paid by their tax payers and to assume mutual liability for ailing states in the EU (transfer union).These extremely irresponsible schemes of fiscal policy have taken place in the last months. In one country, we have postponed and replaced state bankruptcy, but by doing this we have brought other countries to a level of indebtedness, that might no longer be manageable by public saving or inflation.

Now it appears that the alleged “European Solidarity” is being misused by the lazy, the unreliable and the criminal elements to exploit the hardworking, the reliable and the upright people. The euro zone might break apart partly or wholly because of this, maybe even the European Union.

Had Greece been allowed to unwind by means of insolvency (state bankruptcy), this would have been the more solid, the simpler, and the cheaper way. Our politicians’ bustle has not solved the problem; it has only passed on the damage from the banks to the tax payers – mostly the German ones. Thus in the next two years we will witness dramatic financial conflicts in Europe, possibly also a Euro-currency reform together with or followed by the US. Yet maybe a short and painful operation like a currency reform is still better and cheaper than a longer crisis period. A currency reform might even spare us recession or even depression which will otherwise be sure to come.•


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by : David R. Hoffman, Legal Editor of Pravda.Ru
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Imagine, if you will, that the United States government passes a law banning advertisers from sponsoring commercials on Rush Limbaugh’s radio show or Rupert Murdoch’s Fox (Faux) “News” Network. On one hand, there would be two decided advantages to this ban: The National IQ would undoubtedly increase several percentage points, and manipulative pseudo-journalists would no longer be able to appeal to the basest instincts in human nature for ratings and profit while (...)
Thursday 7 June
by : David R. Hoffman, Pravda.Ru Legal Editor
LIVE, from the State that brought you Senator Joseph McCarthy, Wisconsin voters now proudly present, fresh from his recall election victory, Governor Scott Walker! At first glance, it is almost unfathomable that anyone with a modicum of intelligence would have voted to retain Scott Walker as Wisconsin’s governor. This, after all, is a man who openly declared he is trying to destroy the rights of workers through a “divide and conquer” strategy; who received 61% of the (...)
Tuesday 13 March
by : David R. Hoffman, Legal Editor of Pravda.Ru
A question I’ve frequently been asked since I began writing for Pravda.Ru in 2003 is, “Why did you become disillusioned with the practice of law?” This question is understandable, particularly since, in most people’s minds, being an attorney is synonymous with wealth and political power. I’ve always been reluctant to answer this question for fear it will discourage conscientious and ethical people from pursuing careers in the legal profession—a (...)