Imagine That You Wake Up... And the Global Financial System is Gone!
May 24, 2010 • 9:28AM

by Helga Zepp-LaRouche

That is just what could happen, since neither the U.S. Senate, nor the German Bundestag, nor the G20 countries have yet done anything to prevent it. On the contrary: The financial reform bill just passed by the U.S. Senate, which left the fattest loopholes for speculators, has increased the instability enormously. And the Bundestag's rubber-stamping of the EU750 billion "rescue package" for Greece has accelerated the dynamic of disintegration of the global financial system—whether by a chain-reaction domino effect, or by global hyperinflation.

A taste of what could happen at any time, on a much larger scale, was shown by the collapse of the Dow Jones on May 6, falling by 10% in 16 minutes, wiping out $700 billion, with the automatic trading systems apparently on autopilot. The quick and partial rebound that occurred then might not the next time, and the whole world financial system could actually disintegrate overnight. All it takes is a grave mistake once again, somewhere on the globe, and the world could plunge into chaos.

Only hours after the U.S. Senate passed the version of the financial reform bill demanded by the White House and top executives of Wall Street, a Newsweek blog compared the law to a doughnut, with a huge hole in the middle "that is so critical to the success or failure of the bill that it becomes the legislation's defining characteristic"!

Newsweek's comment refers particularly to the fact that the amendment on controlling derivatives trading that Sen. Maria Cantwell (D-Wash.) had tried to bring to a vote, was blocked by Senate Majority Leader Harry Reid, as was the amendment that would have reintroduced the Glass-Steagall standard. Newsweek quoted a source who said that, in Cantwell's view, "the bill is a joke," because "the clearing of derivatives and exchange trading is the heart of the whole bill." And that's precisely what is missing.

As the result of this vote, the derivatives trade, which the American people rightly blame for the crisis, is not only not restricted, but the U.S. Senate has destroyed its credibility in this matter once and for all. For in the preceding debate, many senators, such as Byron Dorgan (D-N.D.), Jeff Merkley (D-Ore.), Barbara Mikulski (D-Md.), Tom Harkin (D-Iowa), and others, gave fiery speeches promising to support the amendments of Senators Cantwell, McCain, and Feingold, for reintroduction of a split banking system,1The FDR-era Glass-Steagall Bill, repealed in 1999, erected a "firewall" between investment banking and commercial banking. and Sen. Blanche Lincoln's (D-Ark.) for control of derivatives.

But the leading Wall Street banks' top lobbyists, who have decades of expertise in the manipulation of Congress, turned up just in time to ensure, together with the White House, that those senators turned out to be full of hot air, voting on the first ballot to end debate, and then voting for the bill without the amendments that would have made sure that the high-risk speculation would have been truly eliminated. Not even the watered-down "Volcker Rules" were voted up. Even the new senator from Massachusetts, Scott Brown (R), who was elected to office by the Tea Party movement, evidently had all the fight taken out of him. Washington sources report that there have never been such massive threats, manipulation, and money transfers, as in the days leading up to the vote.

What this means is that the credibility and influence of Lyndon LaRouche and his Political Action Committee have never been greater; they are seen as the only force that is not discredited, because before the vote, they launched a nationwide mobilization for restoring the Glass-Steagall Act and replacing the casino economy with a credit system. This mobilization will now continue, given the deplorable behavior of the Senate, and senators and congressmen, during the upcoming break, will face the very unpleasant task of explaining to their angry constituents why they capitulated to Wall Street, once again.

- Chancellor Merkel Breaks the Mold -

However, certain relevant Washington circles responded respectfully to the German government's and the BaFin's2Germany's financial regulatory agency. banning of naked short sales of stocks and government bonds, as well as unsecured credit default swaps (CDS)—i.e., credit default swaps with no real foundation. The news of this action sent some hard-nosed bankers into a state of shock, since they never would have thought that Germany, of all countries, would act unilaterally—at least on this point—to prevent the German taxpayer from having to pay the consequences of these short sales. Meanwhile, in Austria, Belgium, Holland, Switzerland, and the Czech Republic, there are efforts to follow suit.

Quite obviously, the German government, by taking this measure, was getting revenge for the massive pressure that President Obama, Prime Minister Brown, President Sarkozy, and EU Commission President Barroso had applied to Chancellor Merkel, who agreed to the EU750 billion rescue package, after long resistance. The above-mentioned gentlemen were treading in the footsteps of Margaret Thatcher, François Mitterrand, and George H.W. Bush, who once pressured Chancellor Helmut Kohl, against his better judgment, to agree to the European Monetary Union—the euro- as the price for their acceptance of German reunification.

The Austrian daily Die Presse (May 15) spoke of a "monetary coup d'état," in which the European heads of state and finance ministers had decided on nothing less than a "genuine currency reform," which changed the euro into an inflation-prone soft currency and made all EU members collectively responsible. By purchasing government bonds of bankrupt states, the European Central Bank (ECB) has lost all credibility, the article said.

The same can be confidently said about the German Bundestag and the Bundesrat, which gave the go-ahead on Friday, May 21, for the German share of the bailout package—around EU150 billion—although the euro, completely unimpressed by the mega-package, had slipped from Monday through Thursday from 1.30 to sometimes as low as 1.22 against the dollar. The combination of the mega-bailout package, the ECB's massive easing of monetary policy, and brutal austerity and the European debt brake, means a disastrous combination of hyperinflation in the tradition of 1923, plus Chancellor Heinrich Brüning's austerity policy of the beginning of the 1930s.

"Tagesthemen" TV news then reported on the same evening who was really profiting from the (probably unconstitutional) package—not the Greek population, which is going to have to tighten its belts, but, among others, Greece's richest banker, Spiro Latsis, whose Eurobank holds EU12 billion in Greek government bonds, and aboard whose luxury yacht EU Commission President Jose Manuel Barroso has spent his vacation several times.

Thus we have the same problem as in previous votes, whether on the health reform (as leading Christian Democratic parliamentarian Friedrich Merz himself said) or on the Lisbon Treaty, which the Members of Parliament had obviously not read: that the parliamentarians have almost no idea about what they are voting on. At least Chancellor Merkel admitted that for her and for politicians in general, it is difficult to figure out the complex processes in the financial markets, and disinterested advisors are hard to find in the financial sector. To say it a bit more clearly: The representatives of the financial interests lie through their teeth.

They depend upon people's short memories, just like Obama's economic adviser Larry Summers, who verbally welcomed the Wall Street-approved version of the U.S. financial reform, saying that if this law had been in effect, the crisis would never have occurred! Summers of all people, who was the one responsible for abolishing Glass-Steagall in 1999! The hyperventilated speeches of the Greens and the Social Democratic Party in the Bundestag, however, were just as duplicitous; what the stony-faced Sigmar Gabriel (SPD) has apparently forgotten, is that it was the Red-Green coalition3Social Democratic-Green. that introduced deregulation of the financial markets and True Sale International4This was the legislation that allowed hedge funds and private equity funds to operate. to Germany in 2004.

- A Global Glass-Steagall Needed -

Neither the EU750 billion package nor the austerity and budget control measures designed by the European Union will stop the escalation of the systemic crisis; on the contrary, they are making the situation worse. Only a real reorganization of the world financial system, dealing with the problem at its root, will make it possible to overcome the systemic crisis.

The only real way out is the immediate introduction of a split global banking system—a global Glass-Steagall—protecting the commercial banks, and making loans available for industry, agriculture, and trade, while keeping the people's life savings safe. Anyone who wants to continue with high-risk gambling will do so at his own risk, and will no longer be able to count on the taxpayers' money to bail him out.

The "creative financial instruments" introduced by U.S. Federal Reserve Chairman Alan Greenspan in 1987—i.e., derivatives and securitization—are as little needed for a well-financed real economy as is currency speculation, which must be prohibited by fixed exchange rates. The current hopelessly bankrupt monetary system must be replaced by a credit system, in which long-term multilateral agreements are concluded among sovereign states, over two or more generations, investing in such future-oriented projects such as infrastructure, the inherently safe high-temperature nuclear reactor, nuclear fusion, manned space flight, and other revolutionary technologies, to increase the productivity of the economy and lead to full, productive employment.

For the parties that are represented in the Bundestag, the current economic crisis is evidently too complex, since not one has rejected the EU package on a principled basis. Support the BüSo, the only party which has long predicted the crisis, which knows today how to overcome it, and which has the courage to call a spade a spade.


1The FDR-era Glass-Steagall Bill, repealed in 1999, erected a "firewall" between investment banking and commercial banking.
2Germany's financial regulatory agency.
3Social Democratic-Green.
4This was the legislation that allowed hedge funds and private equity funds to operate.