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Death of the American Empire PDF Print E-mail
Money and debt - Central banking
Thursday, 23 October 2008 17:29

Death of the American Empire  - By Tanya Cariina Hsu
America is self-destructing & bringing the rest of the world down with it
  "I believe that banking institutions are more dangerous to our liberties than
standing armies." (Thomas Jefferson, US President; 1743 - 1826)

America is dying. It is self-destructing and bringing the rest of the world down
with it. Often referred to as a sub-prime mortgage collapse, this obfuscates the real reason.
By associating tangible useless failed mortgages, at least something 'real' can be
blamed for the carnage. The problem is, this is myth. The magnitude of this fiscal
collapse happened because it was all based on hot air.

The banking industry renamed insurance betting guarantees as 'credit default swaps'
and risky gambling wagers were called 'derivatives'. Financial managers and banking
executives were selling the ultimate con to the entire world, akin to the snake-oil
salesmen from the 18th century but this time in suits and ties. And by October 2009
it was a quadrillion-dollar (that's $1,000 trillion) industry that few could
understand.

Propped up by false hope, America is now falling like a house of cards.

It all began in the early part of the 20th century. In 1907 J.P. Morgan, a private
New York banker, published a rumour that a competing unnamed large bank was about to
fail. It was a false charge but customers nonetheless raced to their banks to
withdraw their money, in case it was their bank. As they pulled out their funds the
banks lost their cash deposits and were forced to call in their loans. People now
therefore had to pay back their mortgages to fill the banks with income, going
bankrupt in the process. The 1907 panic resulted in a crash that prompted the
creation of the Federal Reserve, a private banking cartel with the veneer of an
independent government organisation. Effectively, it was a coup by elite bankers in
order to control the industry.

When signed into law in 1913, the Federal Reserve would loan and supply the nation's
money, but with interest. The more money it was able to print, the more 'income' for
itself it generated. By its very nature the Federal Reserve would forever keep
producing debt to stay alive. It was able to print America's monetary supply at
will, regulating its value. To control valuation however, inflation had to be kept
in check.

The Federal Reserve then doubled America's money supply within five years, and in
1920 it called in a mass percentage of loans. Over five thousand banks collapsed
overnight. One year later the Federal Reserve again increased the money supply by
62%, but in 1929 it again called the loans back in, en masse. This time, the crash
of 1929 caused over sixteen thousand banks to fail and an 89% plunge on the stock
market. The private and well-protected banks within the Federal Reserve system were
able to snap up the failed banks at pennies on the dollar.

The nation fell into the Great Depression and in April 1933 President Roosevelt
issued an executive order that confiscated all gold bullion from the public. Those
who refused to turn in their gold would be imprisoned for ten years, and by the end
of the year the gold standard was abolished. What had been redeemable for gold
became paper 'legal tender', and gold could no longer be exchanged for cash as it
had once been.

Later, in 1971, President Nixon removed the dollar from the gold standard
altogether, therefore no longer trading at the internationally fixed price of $35.
The US dollar was now worth whatever the US decided it was worth because it was 'as
good as gold'. It had no standard of measure, and became the universal currency.
Treasury bills (short-term notes) and bonds (long-term notes) replaced gold as
value, promissory notes of the US government and paid for by the taxpayer.
Additionally, because gold was exempt from currency reporting requirements it could
not be traced, unlike the fiduciary (i.e. that based upon trust) monetary systems of
the West. That was not in America's best interest.

After the Great Depression private banks remained afraid to make home loans, so
Roosevelt created Fannie Mae. A state supported mortgage bank, it provided federal
funding to finance home mortgages for affordable housing. In 1968 President Johnson
privatised Fannie Mae, and in 1970, Freddie Mac was created to compete with Fannie
Mae. Both of them bought mortgages from banks and other lenders, and sold them onto
new investors.

The post World War II boom had created an America flush with cash and assets. As a
military industrial complex, war exponentially profited the US and, unlike any
empire in history, it shot to superpower status. But it failed to remember that,
historically, whenever empires rose they fell in direct proportion.

Americans could afford all the modern conveniences, exporting its manufactured goods
all over the world. After the Vietnam War, the US went into an economic decline. But
people were loath to give up their elevated standard of living despite the loss of
jobs, and production was increasingly sent overseas. A sense of delusion and
entitlement kept Americans on the treadmill of consumer consumption.

In 1987 the US stock market plunged by 22% in one day because of high-risk futures
trading, called derivatives, and in 1989 the Savings & Loan crisis resulted in
President George H.W. Bush using $142 billion in taxpayer funds to rescue half of
the S&L's. To do so, Freddie Mac was given the task of giving sub-prime (below
prime-rate) mortgages to low-income families. In 2000, the "irrational exuberance"
of the dot-com bubble burst, and 50% of high-tech firms went bankrupt wiping $5
trillion from their over-inflated market values.

After this crisis, Federal Reserve Chairman Alan Greenspan kept interest rates so
low they were less than the rate of inflation. Anyone saving his or her income
actually lost money, and the savings rate soon fell into negative territory.

During the 1990s, advertisers went into overdrive, marketing an ever more luxurious
lifestyle, all made available with cheap easy credit. Second mortgages became
commonplace, and home equity loans were used to pay credit card bills. The more
Americans bought, the more they fell into debt. But as long as they had a house
their false sense of security remained: their home was their equity, it would always
go up in value, and they could always remortgage at lower rates if needed. The
financial industry also believed that housing prices would forever climb, but should
they ever fall the central bank would cut interest rates so that prices would jump
back up. It was, everyone believed, a win-win situation.

Greenspan's rock-bottom interest rates let anyone afford a home. Minimum wage
service workers with aspirations to buy a half million-dollar house were able to
secure 100% loans, the mortgage lenders fully aware that they would not be able to
keep up the payments.

So many people received these sub-prime loans that the investment houses and lenders
came up with a new scheme: bundle these virtually worthless home loans and sell them
as solid US investments to unsuspecting countries who would not know the difference.
American lives of excess and consumer spending never suffered, and were being
propped up by foreign nations none the wiser.

It has always been the case that a bank would lend out more than it actually had,
because interest payments generated its income. The more the bank loaned, the more
interest it collected even with no money in the vault. It was a lucrative industry
of giving away money it never had in the first place. Mortgage banks and investment
houses even borrowed money on international money markets to fund these 100% plus
sub-prime mortgages, and began lending more than ten times their underlying assets.

After 9/11, George Bush told the nation to spend, and during a time of war, that's
what the nation did. It borrowed at unprecedented levels so as to not only pay for
its war on terror in the Middle East (calculated to cost $4 trillion) but also pay
for tax cuts at the very time it should have increased taxes. Bush removed the
reserve requirements in Fannie Mae and Freddie Mac, from 10% to 2.5%. They were free
to not only lend even more at bargain basement interest rates, they only needed a
fraction of reserves. Soon banks lent thirty times asset value. It was, as one
economist put it, an 'orgy of excess'.

It was flagrant overspending during a time of war. At no time in history has a
nation gone into conflict without sacrifice, cutbacks, tax increases, and economic
conservation.

And there was a growing chance that, just like in 1929, investors would rush to
claim their money all at once.

To guarantee, therefore, these high risk mortgages, the same financial houses that
sold them then created 'insurance policies' against the sub-prime investments they
were selling, marketed as Credit Default Swaps (CDS). But the government must
regulate insurance policies, so by calling them CDS they remained totally
unregulated. Financial institutions were 'hedging their bets' and selling premiums
to protect the junk assets. In other words, the asset that should go up in value
could also have a side-bet, just in case, that it might go down. By October 2008,
CDS were trading at $62 trillion, more than the stock markets of the whole world
combined.

These bets had absolutely no value whatsoever and were not investments. They were
just financial instruments called derivatives - high stakes gambling, 'nothing from
nothing' - or as Warren Buffet referred to them, 'Weapons of Financial Mass
Destruction'. The derivatives trade was 'worth' more than one quadrillion dollars,
or larger than the economy of the entire world. (In September 2008 the global Gross
Domestic Product was $60 trillion).

Challenged as being illegal in the 1990s, Greenspan legalised the derivatives
practise. Soon hedge funds became an entire industry, betting on the derivatives
market and gambling as much as they wanted. It was easy because it was money they
did not have in the first place. The industry had all the appearances of banks, but
the hedge funds, equity funds, and derivatives brokers had no access to government
loans in the event of a default. If the owners defaulted, the hedge funds had no
money to pay 'from nothing'. Those who had hedged on an asset going up or down would
not be able to collect on the winnings or losses.

The market had become the largest industry in the world, and all the financial
giants were cashing in: Bear Stearns, Lehman Brothers, Citigroup, and AIG. But
homeowners, long maxed out on their credit, were now beginning to default on their
mortgages. Not only were they paying for their house but also all the debt amassed
over the years for car, credit card and student loans, medical payments and home
equity loans. They had borrowed to pay for groceries and skyrocketing health
insurance premiums to keep up with their bigger houses and cars; they refinanced the
debt they had for lower rates that soon ballooned. The average American owed 25% of
their annual income to credit card debts alone.

In 2008, housing prices began to slide precipitously downwards and mortgages were
suddenly losing value. Manufacturing orders were down 4.5% by September, inventories
began to pile up, unemployment was soaring and average house foreclosures had
increased by 121% and up to 200% in California.

The financial giants had to stop trading these mortgage-backed securities, as now
their losses would have to be visibly accounted for. Investors began withdrawing
their funds. Bear Stearns, heavily specialised in home loan portfolios, was the
first to go in March.

Just as they had done in the 20th century, JP Morgan swooped in and picked up Bear
Stearns for a pittance. One year prior Bear Stearns shares traded at $159 but JP
Morgan was able to buy in and take over at $2 a share. In September, Washington
Mutual collapsed, the largest bank failure in history. JP Morgan again came in and
paid $1.9 billion for assets valued at $176 billion. It was a fire sale.

Relatively quietly over the summer Freddie Mac and Fannie Mae, the publicly traded
companies responsible for 80% of the home mortgage loans, lost almost 90% of their
value for the year. Together they were responsible for half the outstanding loan
amounts but were now in debt $80 to every $1 in capital reserves.

To guarantee they would stay alive, the Federal Reserve stepped in and took over
Freddie Mac and Fannie Mae. On September 7th 2008 they were put into
"conservatorship": known as nationalisation to the rest of the world, but Americans
have difficulty with the idea of any government run industry that required taxpayer
increases.

What the government was really doing was handing out an unlimited line of credit.
Done by the Federal Reserve and not US Treasury, it was able to bypass Congressional
approval. The Treasury Department then auctioned off Treasury bills to raise money
for the Federal Reserve's own use, but nonetheless the taxpayer would be funding the
rescue. The bankers had bled tens of billions from the system by hedging and
derivative gambling, and triggered the portfolio inter-bank lending freeze, which
then seized up and crashed.

The takeover was presented as a government funded bailout of an arbitrary $700
billion, which does nothing to solve the problem. No economists were asked to
present their views to Congress, and the loan only perpetuates the myth that the
banking system is not really dead.

In reality, the damage will not be $700 billion but closer to $5 trillion, the value
of Freddie Mac and Fannie Mae's mortgages. It was nothing less than a bailout of the
quadrillion dollar derivatives industry which otherwise faced payouts of over a
trillion dollars on CDS mortgage-backed securities they had sold. It was necessary,
said Treasury Secretary Henry Paulson, to save the country from a "housing
correction". But, he added, the $700 billion taxpayer funded takeover would not
prevent other banks from collapsing, in turn causing a stock market crash.

In other words Paulson was blackmailing Congress in order to lead a coup by the
banking elite under the false guise of necessary legislation to stop the dyke from
flooding. It merely shifted wealth from one class to another, as it had done almost
a century prior. No sooner were the words were out of Paulson's mouth before other
financial institutions began imploding, and with them the disintegration of the
global financial system - much modelled after the lauded system of American banking.

In September the Federal Reserve, its line of credit assured, then bought the world
largest insurance company, AIG, for $85 billion for an 80% stake. AIG was the
largest seller of CDS, but now that it was in the position of having to pay out,
from collateral it did not have, it was teetering on the edge of bankruptcy.

In October the entire country of Iceland went bankrupt, having bought American
worthless sub-prime mortgages as investments. European banks began exploding, all
wanting to cash in concurrently on their inflated US stocks to pay off the low
interest rate debts before rates climbed higher. The year before the signs had been
evident, when the largest US mortgage lender Countrywide fell. Soon after, the
largest lender in the UK, Northern Rock, went under - London long having copied Wall
Street creative financing. Japan and Korea's auto manufacturing nosedived by 37%,
global economies contracting. Pakistan is on the edge of collapse too, with real
reserves at $3 billion - enough to only buy a month's supply of food and oil and
attempting to stall payments to Saudi Arabia for the 100,000 barrels of oil per day
it provides to the country. Under President Musharraf, who left office in the nick
of time, Pakistan's currency lost 25% of its value, its inflation running at 25%.

Meanwhile energy costs had soared, with oil reaching a peak of almost $150 per
barrel in the summer. The costs were immediately passed on to the already spent
homeowner, in rising heating and fuel, transport and manufacturing costs. Yet 30% of
the cost of a barrel of oil was based upon Wall Street speculators, climbing to 60%
as a speculative fear factor during the summer months. As soon as the financial
crisis hit, suddenly oil prices slid down, slicing oil costs to $61 from a high of
$147 in June and proving that the 60% speculation factor was far more accurate. This
sudden decline also revealed OPEC's lack of control over spiralling prices during
the past few years, almost squarely laid on the shoulders of Saudi Arabia alone.
When OPEC, in September, sought to maintain higher prices by cutting production, it
was Saudi Arabia who voted against such a move at the expense of its own revenue.

Europe then decided that no more would it be ruined by the excess of America. 'Olde
Europe' may have had enough of being dictated to by the US, who refused to
compromise on loans lent to their own broken nations after WWII. On October the
13th, the once divided EU nations unilaterally agreed to an emergency rescue plan
totaling $2.3 trillion. It was more than three times greater than the US package for
a catastrophe America alone had created.

By mid October, the Dow, NASDAQ and S&P 500 had erased all the gains they made over
the previous decade. Greenspan's pyramid scheme of easy money from nothing resulted
in a massive overextension of credit, inflated housing prices, and incredible stock
valuations, achieved because investors would never withdraw their money all at once.
But now it was crashing at break-neck speed and no solution in sight. President Bush
said that people ought not to worry at all because "America is the most attractive
destination for investors around the globe."

Those who will hurt the most are the very men and women who grew the country after
WWII, and saved their pensions for retirement due now. They had built the country
during the war production years, making its weapons and arms for global conflict.
During the Cold War the USSR was the ever-present enemy and thus the military
industrial complex continued to grow. Only when there is a war does America profit.

Russia will not tolerate a new cold war build-up of ballistic missiles. And the
Middle East has seen its historical ally turn into its worst nightmare, be it
militarily or economically. No longer will these nations continue to support the
dollar as the world's currency. The world's economy is no longer America's to
control and the US is now indebted to the rest of the world. No more will the US be
able to demand its largest Middle Eastern oil supplier open up its banking books so
as to be transparent and free from corruption and terrorist connections lest there
be consequences - the biggest act of criminal corruption in history has just been
perpetrated by the United States.

It was the best con game in town: get paid well for selling vast amounts of risk,
fail, and then have governments fix the problem at the expense of the taxpayers who
never saw a penny of shared wealth to begin with.

There is no easy solution to this crisis, its effects multiplying like an infectious
disease.

Ironically, least affected by the crisis are Islamic banks.

They have largely been immune to the collapse because Ilamic banking prohibits the
acquisition of wealth via gambling (or alcohol, tobacco, pornography, or stocks in
armaments companies), and forbids the buying and selling of a debt as well as usury.
Additionally, Shari'ah banking laws forbid investing in any company with debts that
exceed thirty percent.

"Islamic banking institutions have not failed per se as they deal in tangible assets
and assume the risk" said Dr. Mohammed Ramady, Professor of Economics at King Fahd
University of Petroleum & Minerals. "Although the Islamic banking sector is also
part of the global economy, the impact of direct exposure to sub-prime asset
investments has been low" he continued. "The liquidity slowdown has especially
affected Dubai, with its heavy international borrowing. The most negative effect has
been a loss of confidence in the regional stock markets." Instead, said Dr. Ramady,
oil surplus Arab nations are "reconsidering overseas investments in financial
assets" and speeding up their own domestic projects.

Eight years ago, in May 2000, Saudi Islamic banker His Highness Dr. Nayef bin Fawaaz
ibn Sha'alan publicly gave a series of economic lectures in Gulf states. At the time
his research showed that Arab investments in the US, to the tune of $1.5 trillion,
were effectively being held hostage and he recommended they be pulled out and
reinvested in the tangibles of the Arab and Islamic markets. "Not in stocks however
because the stock market could be manipulated remotely, as we have seen in the last
couple of years in the Arab market where trillions of dollars evaporated" he said.

He warned then that it was a certainty that the US economic system was on the verge
of collapse because of its cumulative debts, ever-increasing deficit and the
interest on that debt. "When the debts and deficits come due, they just issue new
Treasury bonds to cover the old bonds due, with their interest and the new deficit
too." The cycle cannot be stopped or the debt cancelled because the US would no
longer be able to borrow. The consequence of relieving this cycle would be a total
collapse of their economic system as opposed to the partial, albeit massive, crash
of 2008.

"Islamic banking", said Dr. Al-Sha'alan, "always protects the individuals' wealth
while putting a cap on selfishness and greed. It has the best of capitalism -
filtering out its negatives - and the best of socialism - filtering out its
negatives too." Both systems inevitably had to fail. Additionally, Europe and Japan
did not need to be held accountable and indebted to America anymore for protection
against the Soviets.

"The essential difference between the Islamic economic system and the capitalist
system", he continued "is that in Islam wealth belongs to God - the individual being
only its manager. It is a means, not a goal. In capitalism, it is the reverse: money
belongs to the individual, and is a goal in and of itself. In America especially,
money is worshipped like God."

In sum, the crash of the entire global economic system is a result of America's
fiscal arrogance based upon one set of rules for itself and another for the rest of
the world. Its increased creative financing deluded its people into a false sense of
security, and now looks like the failure of capitalism altogether.

The whole exercise in democracy by force against Arab Muslim nations has almost
bankrupted the US. The Cold War is over and the US has nothing to offer: no exports,
no production, few natural resources, and no service sector economy.

The very markets that resisted US economic policies the most, having curbed foreign
direct investments into America, are those who will fare best and come out ahead.

But not before having paid a very high price.

Tanya Cariina Hsu is a political researcher and analyst focusing on Saudi Arabian
and US relations. One of the contributors to recent written testimony on the Kingdom
of Saudi Arabia for the US Congressional Senate Judiciary Committee on behalf of
FOCA (Friends of Charities Association) in its Hearing on Capitol Hill in Washington
D.C., her analysis has been published and critically acclaimed throughout the US,
Europe and the Middle East.

The first to break the barrier against public discussion of the Israeli influence
upon US foreign policy decision making, in Capitol Hill's "A Clean Break" Symposium
in Washington D.C. in 2004, as the Institute for Research: Middle East Policy
(IRmep) Director of Development and Senior Research Analyst, Ms. Hsu remains an
International Fellow with the Institute.

Born in London, she re-located to Riyadh, Saudi Arabia in 2005 and is currently
completing a book on US policy towards Saudi Arabia.
 


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