PAPERT: Welcome back to EIR Talks. This is Tony Papert. With
me in the studio now is EIR economics writer Richard Freeman.
Rich, we were discussing earlier with John Hoefle, the bailout,
or the takeover, of the Long Term Capital Management hedge fund.
As that was going on, exactly one week ago today, on Sept. 23,
Fed chairman Greenspan, whose organization was arranging the
bailout, was testifying before the Senate budget committee.
FREEMAN: Well, I would say we should watch a clip here of
his testimony, on Sept. 23, and I would just draw people's
attention to two things. First, that he says that this has a
minimal effect on the United States -- the whole world financial
disintegration that's ongoing. And second, his recommendation,
which is to basically keep the current financial structures,
because they're so sound and robust, and can withstand any
problems, and if you have to make changes, make changes on an {ad
hoc} basis.
PAPERT: So, let's turn to that clip now. [Greenspan video
excerpts]
FREEMAN: I think the key thing to say, Tony, about his
testimony Sept. 23, is that here you have a person telling
everybody about the minimal risk that the world faces, who's
lying through his teeth, because at that very moment there are
meetings going on at the Federal Reserve Bank of New York to try
and prevent a breakdown of the world financial system through
these derivatives. And Greenspan, I think, now stands thoroughly
discredited. He has said repeatedly in Congressional testimony
over the last two to three years, that derivatives are not a
problem, [that] in fact they're a very dynamic instrument, and so
forth and so on. And I think at this point the IMF, the Federal
Reserve, and all the so-called financial experts in the world
stand thoroughly exposed on this question.
I think the thing to realize about Greenspan is, first, his
role on derivatives.
He has been running protection for the derivatives market
over the last number of years. In 1997, he gave testimony,
actually spoke before an event of the Atlanta Federal Reserve
District, in which he said that regulation could be no good, and
that it could be very destructive.
At the same time last year, the Financial Accounting
Standards Board, which is a board of independent accountants who
0certify all corporations of any size in this country, came
forward with what I'd call a rather timid proposal, which
basically said, let's take these off-balance-sheet liabilities
which nobody knows how much an institution has, and put them on
the books at current market value, so people know what they're
worth, and what's there. And Greenspan wrote three letters during
the summer of last year, to the Congress and the Financial
Accounting Standards Board, protesting, saying that if this were
done, among other things, this would lead-- wreck, prudent
financial management.
In other words, the financial management would go out the
window if people knew how much the derivatives size was.
His third letter was signed by 22 of what he called major
corporation heads. When you then look at the number of people who
signed, they were all heads of the major banks of the United
States.
This year, the head of the Commodity Futures Trading
Corporation, which has regulation over exchange trading in
derivatives, said, let's look into the risk of
non-exchange-traded derivatives, which are sometimes called
`over-the-counter.' And these are traded by the banks and the
hedge funds. And Greenspan attacked this proposal, attacked the
CFTC, and got his people in the Congress once again, to hold
hearings, to put a stall to any reporting...
PAPERT: ... to make it illegal for them to even do a study.
FREEMAN: ...to even study that there might be a serious
risk, that people would know that. And so I think that Greenspan
has said repeatedly he's against regulation, he has shown his
colors as basically -- to pick up an analogy that John used
earlier -- a mafioso running a protection racket for derivatives.
And I would point out to people that Greenspan came in as
Federal Reserve chairman in August of 1987. The total value of
all derivatives in the United States was about $3 trillion.
Today, if you could [add up] the banks, which have $28.5 trillion
in derivatives (that's the commercial banks), but also the
investment banks and other corporations, we have $40 trillion of
derivatives. And I think that this should accurately be called
the Alan Greenspan derivatives bubble.
PAPERT: And it's a cancer. Now this also affects Japan, but
more generally. Could you talk to us about the status of the
economic-financial crisis in Japan?
FREEMAN: Absolutely. I'd just like to add one word on
Greenspan. He has been recommending putting the Social Security
Trust Fund into the stock market. He has called for slashing
Medicare. He has attacked infrastructure building. And the guy is
really a piece of work. He's a follower of this cultist named Ayn
Rand. He joined the cult in the '50s, has kept friends.... His
personal accountant today is a member of the cult from way back
when.
PAPERT: Really?
FREEMAN: Yes.
PAPERT: So he's kept up his ties to it. I didn't realize
that.
FREEMAN: And when he was put in as the head of Nixon's
Council of Economic Advisors, there was Ayn Rand, sitting in the
front row to see her prize student take the oath of office. Now,
her view is that the world populations are motivated by personal,
Hobbesian drives, that the state doesn't exist, that individual
concern for others is wrong and evil. And I think people should
just have in their mind ... and she blows things up. Her books
end up with buildings being blown up, and wanton acts of
destruction.
PAPERT: She always wore a pin... I don't know if she's still
alive, but she always wore a pin that was a dollar sign.
FREEMAN: And when she was buried, her shroud was a dollar
sign put on her coffin. So, you have to have this image of this
fellow who sometimes sits there putting his hand on one finger,
and babbling on, and most people say that they try to interpret
what he's saying, and in his own mind, he's thinking of blowing
things up and destruction. That's why I think he has a personal
affinity for this derivatives market.
But to take up your question on Japan.
Look, this Japan situation is very, very advanced. You have
a banking system that is larger than the United States'. They
have what are estimated by German banks in Tokyo, to be $1.5
trillion of non-performing loans -- we have heard figures that
are even higher. They have no ability to pay off these loans in
any reasonable way. Just on that alone, the Japanese banking
system -- being the biggest in the world, we're the biggest
economy, they're the biggest banking system -- has enough to blow
up the entire world financial system.
On top of that, it was announced by Miyazawa, the finance
minister, three weeks ago, when talking about the Long Term
Credit Bank, one of the big 19 banks in Japan, which is in very
big trouble, that, as he put it, if they have 380 billion of
derivatives on top of non-performing loans, and, as he said, if
they failed, this could lower the credibility of Japan, which is
an understatement; but then said, that this could lead to a
Japan-triggered world financial breakdown.
Now, this is the finance minister of the second-largest
economy of the world.
What has happened in recent weeks, is that there's a
liquidity squeeze so severe, that reports we have out of Japan is
that the Japanese Central Bank is putting Treasury securities
into Japanese banks, and other dollar deposits, so that they will
have enough dollars, because nobody is willing to lend the
Japanese banks dollars on the overnight market, because they
don't believe the Japanese banks are going to be there tomorrow.
So, this crisis by itself could blow up the world financial
system.
Then you have the ongoing situation in Russia, where there
was a default declared on August 19th of all foreign debt, which
ended the world financial system in its current form as we know,
as Lyndon LaRouche has said repeatedly. And there you have a
situation in which we don't even know still the size of losses
which may have occurred from the derivatives, which were about
$100 to $150 billion in the Russian market.
So you have these two major places hanging over the world
right now.
PAPERT: Now, what about Brazil? Brazil seems to be going
through something like what happened in Russia earlier.
FREEMAN: Precisely. Brazil... fascinating. Their foreign
reserves, which are the reserves a country keeps in its central
bank of other currencies, and its own currency, mostly dollars,
at the start of August, was about 70 to 75 billion. It is now
down, as of September 22, to 42 billion. So they have lost at
minimum 28 billion, maybe 33 billion, of reserves. This means
capital is fleeing the country. They will have to tackle the
question that they will have bonded debt, the Brazilians, at the
end of this year, of 320 billion dollars. The danger is, that the
Brazilian economy is the second largest in our hemisphere, after
our own, and their financial system is quite huge. They could go
go under.
And, again, this shows you the hypocrisy of what's going on.
People say, well, there's no trouble with Brazil. Brazil is
sound. Yet, last week, Brazil's president, Sir Enrique Cardoso,
said that Brazil might consider a loan from the International
Monetary Fund, which people have put as large as $50 billion.
Well, if everything was fine in Brazil, why do they need a
$50-billion loan from the IMF, an IMF which is already bankrupt
to start?
If Brazil goes, there will be no emerging market, as they
call Third World economies' markets, standing. It is simply the
biggest of them all. It will bring down the whole North American,
and South American, financial system. All the secondary markets,
like the Brady bonds, the devalued bonds which are trading, will
go out the window.
And what people have to think about, from the point of view
of the United States: If this happens with Japan, Russia, Brazil,
go, you trigger the $140-trillion derivatives market, of which
the United States has $40 trillion. If that happens, regardless
of what's the instigating incident, you will have a meltdown of
the 7 to 8 largest banks, people will lose their checking
accounts, their savings accounts, their pensions, their social
security -- there will not be a banking system left standing in
the United States, and we're inches from that.
PAPERT: Now, in response to that danger, Mr. LaRouche called
for a New Bretton Woods, harkening back to Roosevelt's Bretton
Woods Conference in 1944, which formed the post-war monetary
system. Since then, some unlikely characters have also called for
a New Bretton Woods, including Tony Blair and leaders of the
French government. What's that about?
FREEMAN: Well, Tony Blair represents what Mr. LaRouche has
identified as the `Third Way,' which I guess is neither man nor
woman. And their proposal, Blair spoke Sept. 21st in New York, is
to set up a new international financial authority which, among
some of the things it would do, would manage risk-management of
these derivatives. So, they take a recognition that there's a
problem. Only the most insane people today would not admit
there's a problem.
So then they say, we will put up a new institution -- we
will manage the risk. I think the point that is very clear, is
that we don't need a new institution to manage the risk; we need
to get rid of these derivatives from top to bottom, and this is
just pure fakery, which he has sold to certain people in the
French government. He's made overtures to the United States
government. So far, the United States has not bitten at these
proposals. But these will come up.
I think what people need to focus on, is what Lyndon
LaRouche, who put forth a proposal for a New Bretton Woods
system, and actually has called for a reorganization of the
monetary system for at least 30 years, and whose authority is
going up by leaps and bounds every day, because he's the only
accurate economist over the last 30 years, including his last
forecast, which he made in 1994, predicting exactly what would
happen, forecasting this.
He has issued a statement which, if I could, I'd just like
to mention one feature of it. And people can see this on the web
site of the Executive Intelligence Review, and also in the next
issue of Executive Intelligence Review magazine.
PAPERT: The web site is larouchepub.com.
FREEMAN: And this is a major statement. It's called ``What
each among all nations must do now,'' and it was issued September
27th, as this crisis became deeper and deeper. And, if I could
just identify two points.
LaRouche says, ``In general, it must be recognized that this
is not only the most explosive and dangerous financial and
monetary emergency in modern history, but an immediate and
unavoidable threat.... There will be, repeatedly, objections in
the form of: `Is it really that bad, after all?' The answer is,
invariably, `It is not only that bad, but much worse.' To the
related objection, `But are such measures really necessary,
after all?' The answer is, `Your life and your family's life
probably depend upon these actions.'"
I'd like to just cite one of eight measures that Mr.
LaRouche cites, and urge people to get a hold of it.
But he says, ``Under this assertion of sovereignty, each
nation must assume perfect sovereignty respecting its financial
monetary, and economic affairs. Under present circumstances, this
requires immediate measures of capital controls, exchange
controls, international regulation of financial and monetary
affairs, and terms of trade, by each and all individual sovereign
nation-states. This must include the setting of protected prices
for essential commodities of domestic consumption and
export-import trade.... It is by parallel and cooperative use
of these measures, that national economies shall be defended
against an already inevitable, early, sudden, and rapid collapse
of fictitious financial instruments.''
So, I think that the point that we would make off of this,
is that the crisis-management approach, or as people saw in the
Greenspan statement -- the very last words he says, we're going
to approach this ``ad hoc,'' -- crisis management, muddling
through, is just another word for impotence. And what we must
have is the type of leadership that FDR represents, and Mr.
LaRouche has represented, of saying, you cannot save this system
-- it is not worth sacrificing the human race to try and do it.
There are proposals which have proven that they will work, as you
cited 1944, we know how this system can be put back together.
PAPERT: Yes, or as Angela said, at the beginning of our
show, there is no globalist future, there is no future for these
multinational institutions. There is either a future for
sovereign nation states, or basically no civilized future worth
living in at all.
FREEMAN: Exactly, And we can rebuild the productive
capacities. We know how to do that. We put credit into a
federalized Federal Reserve, which becomes a third national bank,
and put 6- to 700 billion into infrastructure, creating 6-8
million productive jobs, building the sorts of things we need in
this country.
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