Forwarded message:
FINANCIAL WARFARE TO LEAD TO DEMISE OF CENTRAL BANKING?
By Michel Chossudovsky (professor of economics at the University of Ottawa,
and author of "The Globalisation of Poverty, Impacts of IMF and World Bank
Reforms", Third World Network, Penang and Zed Books, London, 1997.)
_ "Practices of the unscrupulous money changers
_ stand indicted in the court of public opinion,
_ rejected by the hearts and minds of men".
_ (Franklin D. Roosevelt's First Inaugural Address, 1933)
OTTAWA, Canada - Humanity is undergoing in the post-Cold War era an
economic crisis of unprecedented scale leading to the rapid impoverishment
of large sectors of the World population. The plunge of national currencies
in virtually all major regions of the World has contributed to
destabilizing of national economies while precipitating entire countries
into abysmal poverty.
The crisis is not limited to Southeast Asia or the former Soviet Union. The
collapse in the standard of living is taking place abruptly and
simultaneously in a large number of countries. This Worldwide crisis of the
late twentieth century is more devastating than the Great Depression of the
1930s. It has far-reaching geopolitical implications. Economic dislocation
has also been accompanied by the outbreak of regional conflicts, the
fracturing of national societies and in some cases a destruction of entire
countries. This is by far the most serious economic crisis in modern
history.
The existence of a "global financial crisis" is casually denied by the
Western media, its social impacts are downplayed or distorted;
international institutions including the United Nations deny the mounting
tide of World poverty: "the progress in reducing poverty over the [late]
20th century is remarkable and unprecedented..." The "consensus" is that
the Western economy is "healthy," and that "market corrections" on Wall
Street are largely attributable to the "Asian flu" and to Russia's troubled
"transition to a free market economy".
Evolution of the Global Financial Crisis
The plunge of Asia's currency markets (initiated in mid-1997) was followed
in October 1997 by the dramatic meltdown of major stock exchanges
around the
world. In the uncertain wake of Wall Street's temporary recovery in early
1998, largely spurred by panic flight out of Japanese stocks, financial
markets slid back a few months later, reaching a new dramatic turning-point
in August with the spectacular nose-dive of the Russian ruble. The Dow
Jones
plunged by 554 points on August 31st (its second largest decline in he
history of the New York stock exchange), followed in September by a
dramatic meltdown of stock markets around the world. In a matter of a few
weeks (from the Dow's 9,337 peak in mid-July), $2,300 billion of "paper
profits" had evaporated from the U.S. stock market.
The ruble's free-fall had spurred Moscow's largest commercial banks into
bankruptcy, leading to the potential take-over of Russia's financial system
by a handful of Western banks and brokerage houses. In turn, the crisis has
created the danger of massive debt default for Moscow's western creditors,
including the Deutsche and Dresdner banks. Since the outset of Russia's
macro-economic reforms, following the first injection of IMF "shock
therapy" in 1992, some $500 billion-worth of Russian assets --including
plants of the military industrial complex, infrastructure and natural
resources-- have been confiscated (through the privatization programs and
forced bankruptcies), and transferred into the hands of Western
capitalists. In the brutal aftermath of the Cold War, an entire economic
and social system is being dismantled.
"Financial Warfare"
The Worldwide scramble to appropriate wealth through "financial
manipulation" is the driving force behind this crisis. It is also the
source of economic turmoil and social devastation. In the words of renowned
currency speculator and billionaire George Soros (who made $1.6 billion of
speculative gains in the dramatic crash of the British pound in 1992)
"extending the market mechanism to all domains has the potential of
destroying society". This manipulation of market forces by powerful actors
constitutes a form of financial and economic warfare. No need to
re-colonize lost territory or send in invading armies.
In the late twentieth century, the outright "conquest of nations" meaning
the control over productive assets, labor, natural resources and
institutions can be carried out in an impersonal fashion from the corporate
boardroom: commands are dispatched from a computer terminal, or a cell
phone. Relevant data are instantly relayed to major financial markets -
often resulting in immediate disruptions in the functioning of national
economies. "Financial warfare" also applies complex speculative instruments
including the gamut of derivative trade, forward foreign exchange
transactions, currency options, hedge funds, index funds, etc. Speculative
instruments have been used with the ultimate purpose of capturing financial
wealth and acquiring control over productive assets. In the words of
Malaysia's Prime Minister Mahathir Mohamad: "This deliberate devaluation of
the currency of a country by currency traders purely for profit is a
serious denial of the rights of independent nations".
The appropriation of global wealth through this manipulation of market
forces is routinely supported by the IMF's lethal macro-economic
interventions which act almost concurrently in ruthlessly disrupting
national economies all over the World. "Financial warfare" knows no
territorial boundaries; it does not limit its actions to besieging former
enemies of the Cold War era. In Korea, Indonesia and Thailand, the vaults
of the central banks were pillaged by institutional speculators while the
monetary authorities sought in vain to prop up their ailing currencies. In
1997, more than 100 billion dollars of Asia's hard currency reserves had
been confiscated and transferred (in a matter of months) into private
financial hands. In the wake of the currency devaluations, real earnings
and employment plummeted virtually overnight leading to mass poverty in
countries which had in the post-War period registered significant economic
and social progress.
The financial scam in the foreign exchange market had destabilised national
economies, thereby creating the preconditions for the subsequent plunder of
the Asian countries' productive assets by so-called "vulture foreign
investors".6 In Thailand, 56 domestic banks and financial institutions were
closed down on orders of the IMF, unemployment virtually doubled overnight.
Similarly in Korea, the IMF "rescue operation" has unleashed a lethal chain
of bankruptcies, leading to an outright liquidation of so-called "troubled
merchant banks". In the wake of the IMF's "mediation" (put in place in
December 1997 after high-level consultations with the World's largest
commercial and merchant banks), "an average of more than 200 companies
[were] shut down per day (...) 4,000 workers every day were driven out onto
streets as unemployed".
Resulting from the credit freeze and "the instantaneous bank shut-down",
some 15,000 bankruptcies are expected in 1998, including 90 percent of
Korea's construction companies (with combined debts of $20 billion dollars
to domestic financial institutions). South Korea's Parliament has been
transformed into a "rubber stamp". Enabling legislation is enforced through
"financial blackmail": if the legislation is not speedily enacted according
to IMF's deadlines, the disbursements under the bail-out will be suspended
with the danger of renewed currency speculation.
In turn, the IMF sponsored "exit programme" (ie. forced bankruptcy) has
deliberately contributed to fracturing the chaebols which are now invited
to establish "strategic alliances with foreign firms" (meaning their
eventual control by Western capital). With the devaluation, the cost of
Korean labour had also tumbled: "It's now cheaper to buy one of these [high
tech] companies than buy a factory -- and you get all the distribution,
brand-name recognition and trained labour force free in the bargain"...
The Demise of Central Banking
In many regards, this worldwide crisis marks the demise of central banking
meaning the derogation of national economic sovereignty and the inability
of the national State to control money creation on behalf of society. In
other words, privately held money reserves in the hands of "institutional
speculators" far exceed the limited capabilities of the World's central
banks. The latter acting individually or collectively are no longer able to
fight the tide of speculative activity. Monetary policy is in the hands of
private creditors who have the ability to freeze State budgets, paralyze
the payments process, thwart the regular disbursement of wages to millions
of workers (as in the former Soviet Union) and precipitate the collapse of
production and social programs. As the crisis deepens, speculative raids on
central banks are extending into China, Latin America and the Middle East
with devastating economic and social consequences.
This ongoing pillage of central bank reserves, however, is by no means
limited to developing countries. It has also hit several Western countries
including Canada and Australia where the monetary authorities have been
incapable of stemming the slide of their national currencies. In Canada,
billions of dollars were borrowed from private financiers to prop up
central bank reserves in the wake of speculative assaults. In Japan where
the yen has tumbled to new lows-- "the Korean scenario" is viewed
(according to economist Michael Hudson), as a "dress rehearsal" for the
take over of Japan's financial sector by a handful of Western investment
banks. The big players are Goldman Sachs, Morgan Stanley, Deutsche Morgan
Gruenfell among others who are buying up Japan's bad bank loans at less
than ten percent of their face value.
In recent months both US Secretary of the Treasury Robert Rubin and
Secretary of State Madeleine K. Albright have exerted political pressure on
Tokyo insisting "on nothing less than an immediate disposal of Japan's bad
bank loans--preferably to US and other foreign "vulture investors" at
distress prices. To achieve their objectives they are even pressuring Japan
to rewrite its constitution, restructure its political system and cabinet
and redesign its financial system... Once foreign investors gain control of
Japanese banks, these banks will move to take over Japanese industry..."
Creditors and Speculators
The World's largest banks and brokerage houses are both creditors and
institutional speculators. In the present context, they contribute (through
their speculative assaults) to destabilizing national currencies thereby
boosting the volume of dollar denominated debts. They then reappear as
creditors with a view to collecting these debts. Finally, they are called
in as "policy advisors" or consultants in the IMF-World Bank sponsored
"bankruptcy programs" of which they are the ultimate beneficiaries. In
Indonesia, for instance, amidst street rioting and in the wake of Suharto's
resignation, the privatization of key sectors of the Indonesian economy
ordered by the IMF was entrusted to eight of the World's largest merchant
banks including Lehman Brothers, Credit Suisse-First Boston, Goldman Sachs
and UBS/SBC Warburg Dillon Read. The World's largest money managers set
countries on fire and are then called in as firemen (under the IMF "rescue
plan") to extinguish the blaze. They ultimately decide which enterprises
are to be closed down and which are to be auctioned off to foreign
investors at bargain prices.
Who Funds the IMF Bailouts?
Under repeated speculative assaults, Asian central banks had entered into
multi-billion dollar contracts (in the forward foreign exchange market) in
a vain attempt to protect their currency. With the total depletion of their
hard currency reserves, the monetary authorities were forced to borrow
large amounts of money under the IMF bailout agreement. Following a scheme
devised during the Mexican crisis of 1994-95, the bailout money, however,
is not intended "to rescue the country"; in fact the money never entered
Korea, Thailand or Indonesia; it was earmarked to reimburse the
"institutional speculators", to ensure that they would be able to collect
their multi-billion dollar loot. In turn, the Asian tigers have been tamed
by their financial masters . Transformed into lame ducks-- they have been
"locked up" into servicing these massive dollar denominated debts well into
the third millennium.
But "where did the money come from" to finance these multi-billion dollar
operations? Only a small portion of the money comes from IMF resources:
starting with the Mexican 1995 bail-out, G7 countries including the US
Treasury were called upon to make large lump-sum contributions to these IMF
sponsored rescue operations leading to significant hikes in the levels of
public debt.13 Yet in an ironic twist, the issuing of US public debt to
finance the bail-outs is underwritten and guaranteed by the same group of
Wall Street merchant banks involved in the speculative assaults.
In other words, those who guarantee the issuing of public debt (to finance
the bailout) are those who will ultimately appropriate the loot (e.g. As
creditors of Korea or Thailand) i.e. they are the ultimate recipients of
the bailout money (which essentially constitutes a "safety net" for the
institutional speculator). The vast amounts of money granted under the
rescue packages are intended to enable the Asian countries meet their debt
obligations with those same financial institutions which contributed to
precipitating the breakdown of their national currencies in the first
place. As a result of this vicious circle, a handful of commercial banks
and brokerage houses have enriched themselves beyond bounds; they have also
increased their stranglehold over governments and politicians around the
world.
Strong Economic Medicine
Since the 1994-95 Mexican crisis, the IMF has played a crucial role in
shaping the "financial environment" in which the global banks and money
managers wage their speculative raids. The global banks are craving for
access to inside information. Successful speculative attacks require the
concurrent implementation on their behalf of "strong economic medicine"
under the IMF bail-out agreements. The "big six" Wall Street commercial
banks (including Chase, Bank America, Citicorp and J. P. Morgan) and the
"big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan
Stanley and Salomon Smith Barney) were consulted on the clauses to be
included in
the bail-out agreements. In the case of Korea's short-term debt, Wall
Street's largest financial institutions were called in on Christmas Eve (24
December 1997), for high level talks at the Federal Reserve Bank of New
York.
The global banks have a direct stake in the decline of national currencies.
In April 1997 barely two months before the onslaught of the Asian currency
crisis, the Institute of International Finance (IIF), a Washington based
think-tank representing the interests of some 290 global banks and
brokerage houses had "urged authorities in emerging markets to counter
upward exchange rate pressures where needed...".
This request (communicated in a formal Letter to the IMF) hints in no
uncertain terms that the IMF should advocate an environment in which
national currencies are allowed to slide. Indonesia was ordered by the IMF
to unpeg its currency barely three months before the rupiahs dramatic
plunge. In the words of American billionaire and presidential candidate
Steve Forbes: "Did the IMF help precipitate the crisis? This agency
advocates openness and transparency for national economies, yet it rivals
the CIA in cloaking its own operations. Did it, for instance, have secret
conversations with Thailand, advocating the devaluation that instantly set
off the catastrophic chain of events?" (...) Did IMF prescriptions
exacerbate the illness? These countries' moneys were knocked down to
absurdly low levels".
Deregulating Capital Movements
The international rules regulating the movements of money and capital
(across international borders) contribute to shaping the "financial
battlefields" on which banks and speculators wage their deadly assaults. In
their Worldwide quest to appropriate economic and financial wealth, global
banks and multinational corporations have actively pressured for the
outright deregulation of international capital flows including the movement
of "hot" and "dirty" money.
Caving in to these demands (after hasty consultations with G7 finance
ministers), a formal verdict to deregulate capital movements was taken by
the IMF Interim Committee in Washington in April 1998. The official
communique stated that the IMF will proceed with the Amendment of its
Articles with a view to "making the liberalization of capital movements one
of the purposes of the Fund and extending, as needed, the Fund's
jurisdiction for this purpose".
The IMF managing director, Mr. Michel Camdessus nonetheless conceded in a
dispassionate tone that "a number of developing countries may come under
speculative attacks after opening their capital account" while reiterating
(ad nauseam) that this can be avoided by the adoption of "sound
macroeconomic policies and strong financial systems in member countries".
(ie. the IMF's standard "economic cure for disaster").20
The IMF's resolve to deregulate capital movements was taken behind closed
doors (conveniently removed from the public eye and with very little press
coverage) barely two weeks before citizens' groups from around the World
gathered in late April 1998 in mass demonstrations in Paris opposing the
controversial Multilateral Agreement on Investment (MAI) under OECD
auspices. This agreement would have granted entrenched rights to banks and
multinational corporations overriding national laws on foreign investment
as well derogating the fundamental rights of citizens. The MAI constitutes
an act of capitulation by democratic government to banks and multinational
corporations.
The timing was right on course: while the approval of the MAI had been
temporarily stalled, the proposed deregulation of foreign investment
through a more expedient avenue had been officially launched: the Amendment
of the Articles would for all practical purposes derogate the powers of
national governments to regulate foreign investment. It would also nullify
the efforts of the Worldwide citizens' campaign against the MAI: the
deregulation of foreign investment would be achieved ("with a stroke of a
pen") without the need for a cumbersome multilateral agreement under OECD
or WTO auspices and without the legal hassle of a global investment treaty
entrenched in international law.
Creating a Global Financial Watchdog
As the aggressive scramble for global wealth unfolds and the financial
crisis reaches dangerous heights, international banks and speculators are
anxious to play a more direct role in shaping financial structures to their
advantage as well as "policing" country level economic reforms. Free market
conservatives in the United States (associated with the Republican Party)
have blamed the IMF for its reckless behavior. Disregarding the IMF's
intergovernmental status, they are demanding greater US control over the
IMF. They have also hinted that the IMF should henceforth perform a more
placid role (similar to that of the bond rating agencies such as Moody's or
Standard and Poor) while consigning the financing of the multi-billion
dollar bail-outs to the private banking sector.
Discussed behind closed doors in April 1998, a more perceptive initiative
(couched in softer language) was put forth by the World's largest banks and
investment houses through their Washington mouthpiece (the Institute of
International Finance). The banks' proposal consists in the creation of a
"Financial Watchdog --a so-called "Private Sector Advisory Council"-- with
a view to routinely supervising the activities of the IMF. "The Institute
[of International Finance], with its nearly universal membership of leading
private financial firms, stands ready to work with the official community
to advance this process."
Responding to the global banks initiative, the IMF has called for concrete
"steps to strengthen private sector involvement" in crisis management
--what might be interpreted as a "power sharing arrangement" between the
IMF and the global banks.
The international banking community has also set up it own high level
"Steering Committee on Emerging Markets Finance" integrated by some of the
World's most powerful financiers including William Rhodes, Vice Chairman of
Citibank and Sir David Walker, Chairman of Morgan Stanley. The hidden
agenda behind these various initiatives is to gradually transform the IMF
--from its present status as an inter-governmental body-- into a full
fledged bureaucracy which more effectively serves the interests of the
global banks. More importantly, the banks and speculators want access to
the details of IMF negotiations with member governments which will enable
them to carefully position their assaults in financial markets both prior
and in the wake of an IMF bailout agreement. The global banks (pointing to
the need for "transparency") have called upon "the IMF to provide valuable
insights [on its dealings with national governments] without
revealingconfidential information...". But what they really want is
privileged inside information.
The ongoing financial crisis is not only conducive to the demise of
national State institutions all over the World, it also consists in the
step by step dismantling (and possible privatisation) of the post War
institutions established by the founding fathers at the Bretton Woods
Conference in 1944. In striking contrast with the IMF's present-day
destructive role, these institutions were intended by their architects to
safeguard the stability of national economies. In the words of Henry
Morgenthau, US Secretary of the Treasury in his closing statement to the
Conference (22 July 1944): "We came here to work out methods which would do
away with economic evils --the competitive currency devaluation and
destructive impediments to trade-- which preceded the present war. We have
succeeded in this effort."
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