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Newsletter 53:
The Destructive Legacy of Paul A. Volcker
Dear Reader,
I want to share a section from my book, Wall Street and the Death of the American Century (2009). The death of former Federal Reserve and US Treasury official, Paul Volcker, at age 92 has led to much misplaced praise of his legacy. What is rarely mentioned is the true role he played in what I consider the most fateful and damaging monetary decision of the past half-century, the decision to decouple the US dollar from gold and to open the floodgates to the greatest peacetime inflation in US postwar history. I hope you find it interesting as we live with the consequences today.
I would ask you to consider buying the book or one of my other books noted at the top of my website. Otherwise if you are able to I greatly appreciate any support contribution via my website PayPal to allow us to maintain free content in a time of growing media suppression of free thought on the internet.
With best regards, William Engdahl www.williamengdahl.com https://peacefromharmony.org/?cat=en_c&key=888 24-12-19
Gods of Money is a book about power and an extraordinarily wealthy elite that has wielded unprecedented power, not for the good, but rather for the enhancement of their own private position. The book tracks the evolution of the power amassed by a tiny group of men who have regarded themselves, quite literally, as gods - The Gods of Money. Their agenda has included assassinations of two of America's most popular presidents; involvement of the United States against the public will in two world wars; and detonation of the world's most destructive weapon, the atomic bomb, on Japanese civilians. It has included scores of regional wars, political assassinations, coups, and systematic corruption of the body politic. The book reveals in an unusual and surprising manner how this powerful elite has systematically set out to literally control the entire world, backed by the most powerful military force the world has ever seen.
Readers say this about Gods of Money:
"Awesome…“ -- New Dawn Magazine "Warning - This Book May Cause Nightmares“ -- Afia "…a truly epic work…“ -- Ila France Porcher, Author of The Shark Sessions "…eye opening…“ -- Amazon Customer "WOW and double WOW“ -- W. Palmer "I wish I had read this book 2 years ago“ -- Paul Majchrowicz "Should be required reading in schools.“ -- Nomadic Luxury "Engdahl doesn't produce less than a 5-star work.“ -- Dr. T
Click here to buy the book: https://clicks.aweber.com/y/ct/?l=IoZ25&m=lhWVN2zQx4Tdiqk&b=uKpCRnX6v8lZHIWKXQaTjw
The Gods of Money: Wall Street and the death of the American Century(2009) © F. William Engdahl
Chapter Fourteen: Nixon walks away from Bretton Woods
You’ve shown how the United States has run rings around Britain and every other empirebuilding nation in history. We’ve pulled off the greatest rip-off ever achieved. --Herman Kahn of Hudson Institute in 1971 when informed how USpayments deficits could be used to exploit other countries 1
1971: Beginning of the endgame
The early 1970s were a watershed in policy for the American establishment. Dramatic measures were needed to ensure the continued domination of the United States as global economic and financial superpower. It was not at all obvious how they would do it. Soon enough however, the powers that dominated Wall Street developed a strategy.
With Lyndon Johnson’s war in South-East Asia escalating, along with its costs, international banks and central banks accelerated their selling of dollars and buying of gold. By 1968 the Federal US budget deficit, fed by exploding costs of the war, reached an unprecedented height of $30 billion. Gold reserves continued to fall precariously close to the legal floor of 25% allowed by law under the Bretton Woods treaty. Political disarray within Johnson’s Administration increased the financial flight as Defense Secretary Robert McNamara, widely viewed as the architect of a “no-win war” strategy, handed in his resignation.
The Vietnam War strategy had been deliberately designed by Defense Secretary Robert McNamara, National Security Adviser McGeorge Bundy, along with Pentagon planners and key advisers around Lyndon Johnson, to be a “no-win war” from the onset, in order to ensure a prolonged buildup of the military sector of the US economy. The American voter, Washington reasoned, would accept large costs for a new war against an alleged ‘encroachment of Godless communism’ in Vietnam, despite the gaping US budget deficits, as long as this produced local jobs in defense plants. Under the US-dictated Bretton Woods rules, by inflating the dollar through huge spending deficits at home, Washington could, in effect, force Europe and other trading partners to ‘swallow’ US war costs in the form of cheapened dollars. So long as the United States refused to devalue the dollar against gold to reflect the deterioration of US economic performance since 1944, Europe had to pay the cost by accepting dollars at the same ratio as it had some 20 years before despite a huge inflation over that period. To finance the enormous deficits of his Great Society program as well as the Vietnam buildup during the 1960s, Johnson, fearful of losing votes if he raised taxes, simply printed dollars by selling more US Treasury bonds to finance the deficits. In the early 1960s, the US federal budget deficit averaged approximately $3 billion annually. It hit an alarming $9 billion in 1967 as the war costs soared, and by 1968 it reached a staggering $25 billion. The European central banks began to accumulate large dollar accounts during this period, which they used as official reserves, the so-called Eurodollar accumulation abroad. Ironically, Washington in 1961 had requested that US allies in Europe and Japan, the Group of Ten countries, should ease the drain on US gold reserves by retaining their growing dollar reserves instead of redeeming the dollars for American gold, as mandated under the terms of Bretton Woods. The European central banks in turn earned interest on these dollars by investing in US government treasury bonds. The net effect was that the European central banks thereby in effect 'financed' the huge US budget deficits of the 1960s Vietnam War they so opposed.2
‘Hot Money’ in offshore Eurodollar markets
Beginning in the late 1950s the major New York banks had greatly increased their power and influence through a series of bank mergers.Rockefeller’s Chase National Bank had merged with the Bank of Manhattan to form Chase Manhattan Bank, headed by John J. McCloy, Rockefeller’s attorney and a Rockefeller Foundation Trustee as well as Chairman of the New York Council on Foreign Relations. McCloy had recently returned to New York after serving as US High Commissioner in Germany. The National City Bank of New York took over the First National Bank of New York to form City Bank of New York, later Citibank, under the chairmanship of James Stillman Rockefeller.
Other large New York banks, including Chemical bank, Manufacturers Hanover Trust and Bankers Trust, underwent similar mergers and consolidations. According to a 1961 US Department of Justice report, the five largest New York banks, dominated by the two Rockefeller banks, controlled 75% of all deposits in the nation’s largest city, the world’s international financial center. 3
The remarkable concentration of money power into those few New York banks by the 1960s would prove decisive in determining international political and financial developments for the ensuing four decades into the 21st Century and the financial securitization crisis of 2007.
To facilitate this extraordinary concentration of financial power, the US Government exempted banks from US anti-trust laws prohibiting undue concentration or cartelization.4
By the 1960s these newly consolidated and enormously influential New York banks moved to create a new offshore market for dollars outside the United States -- the new ‘Eurodollar’ market, a name for dollars held abroad in Europe.
During the late 1960s the New York banks, led by Chase Manhattan and Citibank, began to develop a use for the billions of dollars accumulating overseas in London and Continental European banks. Through astute lobbying by the New York banks, loans made by foreign branches of American banks to foreign residents had been declared exempt from the new 1964 US Interest Equalization Tax designed to curb US bank lending abroad and to stop the dollar drain. The exemption of course meant that the dollar drain continued unabated.
As a result, US banks scrambled to establish branches in London and other appropriate centers. once again, the City of London, despite the weakness of the British economy, had maneuvered to become a centerpiece of world finance and banking through development of the vast new and unregulated dollar banking and lending market with its center in London. 5 The increasing efforts of Washington to persuade overseas dollar holders not to redeem dollars for gold led to a growing volume of dollars more or less permanently overseas, mostly in Western Europe or London. London's sagging fortunes began once more to brighten as the City of London, the banking district, began to corner the market in expatriate US dollars. The Bank of England and London banker Sir Siegmund Warburg, founder of the influential British merchant bank, S.G. Warburg & Co., were at the heart of the growing Eurodollar offshore money market. With the assistance of his friends in Washington, especially Undersecretary of State George Ball, Warburg had cleverly lured the dollars into what was to become the largest concentration of dollar credit outside of the US itself.
The resulting London Eurodollar market was also ‘offshore,’ meaning it was outside the jurisdiction of US national laws or central bank supervision.
New York banks and Wall Street brokerage houses set up offices in London to manage the blossoming new Eurodollar casino, far away from the eyes of US tax authorities. The international branches of the large New York banks got cheap funds from the Eurodollar market as well as large multinational corporations. Washington during the early 1960's willingly allowed the floodgates to be opened wide to a flight of the dollar from American shores into the new ‘hot money’ Eurodollar market.
Buyers of these new Eurodollar bonds, called Eurobonds, were anonymous persons, cynically called ‘Belgian dentists’ by the London and Swiss and New York bankers running this new game. These Eurobonds were ‘bearer’ bonds meaningno buyers’ names were registered anywhere, so they were a favorite for investors looking for tax avoidance, or even for drug kingpins or other unsavory characters wanting to launder illegal profits. What better way to hold onto your black earnings than in Eurodollar bonds, with interest paid by General Motors or the Italian Autostrada Corporation? An astute analyst of the Eurodollar process noted, “the Eurodollar market was the most important financial phenomenon of the 1960s, for it was here that the financial earthquake of the early 1970s originated.” 6
A major turning point in the relation of the major New York banks to their rapidly growing accumulation of Eurodollars took place in 1966. Like most major new turns of postwar US financial policy, it began with the Rockefellers’ Chase Manhattan Bank.
Chase moves on Lebanon
A confidential internal memo was circulated within the bank in 1966 on the subject of the disadvantages that American, i.e. New York, banks had in capturing the lucrative international market for ‘flight capital.’ The memo pointed to the advantages enjoyed by Swiss banks that dominated the lucrative market in managing and profiting from the hidden fortunes of dictators like Marcos in the Philippines, Saudi princes, drug barons and the like. The memo proposed that Chase open up a foreign entity to capture a major share of the booming offshore flight capital, or ‘hot money,’ for itself. Citibank had already begun such lucrative ‘hot money’ banking activity in connection with Bernie Cornfeld, the fraud artist and founder of Investor Overseas Services.7
The Chase internal memo identified Beirut, Lebanon as the model location. Beirut was dominated by one bank, Intra Bank, and its affiliated Casino du Liban, the world’s largest gambling and money laundering enterprise at the time, exceeding even Las Vegas. 8
Lebanon’s Intra Bank became insolvent under suspicious circumstances in 1966. At a time when the bank needed to borrow to cover stock and gold trading losses, the King of Saudi Arabia, rarely known to make bold decisions without first checking with Washington, abruptly withdrew his substantial deposits. Then Chase Manhattan Bank initiated a freeze on Intra Bank’s deposits in New York as hostage to outstanding loans. The Beirut bank was forced to stop payments on October 14, 1966. Its depositors transferred their funds to the Beirut branch of Chase Manhattan for “safety.”
Chase then sent an intermediary, Roger Tamraz, an ambitious Lebanese-born man who at the time was a young executive with Wall Street’s Kidder Peabody & Co. Tamraz successfully re-floated the large Lebanese bank. The bank had been founded in Beirut in 1951 and owned Beirut Port Authority, Middle East Airlines, as well as Casino du Liban. The collapse of the bank had brought the Lebanese economy to a halt and sent shockwaves throughout the Middle East. It was the world’s largest bank catastrophe since World War II. 9
Chase Manhattan’s venture into Lebanese offshore hot money’ banking marked the onset of a major shift by the powerful New York money center banks away from government regulators and tax obligations. The profits were staggering.Because they were offshore and were de facto permitted by US authorities, they were completely uncontrolled.
That foray into offshore banking marked a sea change in New York banking practice that would explode in importance during the next three decades and beyond. Chase Manhattan, Citibank and other major US money center banks were to launder hundreds of billions of dollars of illicit hot money, no questions asked, whether the funds originated from USfriendly dictators like the Philippines’ Ferdinand Marcos, Iran’s Shah Reza Pahlavi, Mexico’s Raúl Salinas de Gortari, or Juárez drug cartel money being transferred to Uruguay and Argentina, or from countless other controversial and politically sensitive transactions.10
It was clearly only a matter of time before the foundational structure of the postwar Bretton Woods system cracked.
The crack finally occurred on August 15, 1971 when President Richard Nixon announced to the world that he had ordered the Gold Discount Window of the New York Federal Reserve to be permanently shut. Foreign holders of dollars had without warning been robbed of their right to gold by the unilateral act of the US President, and in violation of a treaty obligation of the United States.
Nixon’s dollar coup
In August 1971, Nixon was acting on the advice of a small circle of Rockefeller-linked advisers, including Secretary of State Henry Kissinger, a life-long appendage of the Rockefeller interests, and budget adviser George Shultz, later Secretary of State and chairman of the vast Bechtel construction giant. The small circle also included Jack F. Bennett of the Treasury who went on to become a director of Rockefeller’s Exxon Oil Co., and Treasury Under Secretary for International Monetary Affairs and former Chase Manhattan Bank executive, Paul Volcker, a life-long enabler of Rockefeller interests. Volcker went on eight years later, at the urging of David Rockefeller, to become Jimmy Carter’s nominee to head the Federal Reserve. 11
Nixon's unilateral action on gold convertibility was reluctantly accepted in international talks that December in Washington, by the leading European governments, Japan and a few others. They saw little choice as the dollar was the pillar of the world financial system. The talks resulted in a temporary compromise known as the Smithsonian Agreement, which Nixon called“the most significant monetary agreement in the history of the world.”
The US had formally devalued the dollar, but not anywhere near the amount Europe felt was needed to reestablish global equilibrium. They devalued by a mere 8% against gold, placing gold at $38/fine ounce instead of the long-standing $35. The agreement also officially permitted a range of currency value fluctuation of 2.25 percent instead of the original one percent of the IMF Bretton Woods rules. The French had called for a gold price of $70.
By declaring to world dollar holders that their paper would no longer be redeemed for gold, however, Nixon set into motion a series of events that would rock the world. Within weeks, confidence in the Smithsonian agreement had also begun to collapse.
Gold itself has little intrinsic value. It has certain industrial uses and is attractive as jewelry. But historically, because of its scarcity, it has served as a recognized standard or store of value against which different nations have fixed the terms of their trade and therefore their currencies. When Nixon decided no longer to honor US currency obligations in gold, he opened the floodgates to a worldwide Las Vegas-style speculation binge of a dimension never before experienced in history.
Instead of calibrating long-term economic affairs to fixed standards of exchange, after August 1971 world trade was simply another arena of speculation about which direction various currencies would fluctuate. The United States was now free to create as many dollars as it wished, no longer bound by need to back the new dollars with gold. So long as the rest of the world would take the US paper dollars, the game proceeded. So long as the United States remained the Western world’s major military power, the world swallowed the inflated US dollars. It saw little choice during the Cold War. Should US-linked countries occasionally forget, they would be rudely reminded by Washington or its Wall Street emissaries.
As a consequence, the total volume of US dollars in world circulation ballooned over the next 20 years. From a rather steady level that had persisted from 1950 through to the end of the 1960s, the volume of dollars expanded exponentially after 1971, increasing by more than 2500% by the end of the 1990s. That printing of dollars was the source of an escalating global inflation. For the New York bankers, their control of the expanding dollar market was a source of vast power and profit. 12
The suspension of gold redemption and the resulting international ‘floating exchange rates’ of the early 1970s solved nothing in terms of the basic problems of the US economy. It only bought some time for the US financial powers to decide their next moves. By 1972, massive capital flows again left the dollar for better returns in Japan and Europe. Then on February 12, 1973 Nixon finally announced a second devaluation of the dollar, of 10 percent against gold, officially pricing gold where it remains as of 2009, at $42.22 per ounce.
The devaluation did little to stem dollar selling. However, in May 1973 on a resort island outside Stockholm, a highly secret meeting took place that gave the dollar a new lease on life, a lease at the expense of world industrial growth.
Wall Street and Washington power elites around Secretary of State Henry Kissinger decided to impose a dramatic shock on the world economy in order to rescue the falling dollar as the asset of world trade and finance, and restore it as a pillar of the American economic imperial strategy.
Saltsjoebaden: the Bilderberg plot
The design behind Nixon's August 15, 1971 dollar strategy did not clearly emerge until October 1973, and even then, few people other than a handful of insiders grasped the connection. The New York financial establishment used Nixon’s August 1971 demonetization of the dollar to buy time, while policy insiders prepared a bold new monetarist design, a ‘paradigm shift’ as some preferred to call it. Certain influential voices in the American financial establishment had devised a strategy to rebuild a strong dollar, and once again to assert and expand their relative political power in the world, just when it had seemed that they were in decisive rout.
In May 1973, with the dramatic fall of the dollar still vivid, a group of 84 of the world's top financial and political insiders met at the secluded island resort of the Swedish Wallenberg banking family, at Saltsjoebaden, Sweden. This gathering later came to be known as Prince Bernhard's Bilderberg Group.At the meeting, the group heard an American participant outline a ‘scenario’ for an imminent 400% increase in OPEC petroleum revenues. The purpose of the secret Saltsjoebaden meeting was not to prevent the expected oil price shock, but rather to plan how to manage the about-to-be-created flood of oil dollars, a process US Secretary of State Kissinger later called “recycling the petro-dollar flows.” 13
Bilderberg annual meetings had been initiated in utmost secrecy in May1954 by an elite trans- Atlantic establishment group which included David Rockefeller, George Ball, Dr. Joseph Retinger, Holland's Prince Bernhard, and George C. McGhee, then a diplomat with the US State Department and later a senior executive of Rockefeller’s Mobil Oil.
Named for the place of their first gathering, the Hotel de Bilderberg near Arnheim in the Netherlands, the annual Bilderberg meetings gathered top elites of Europe and America for secret deliberations and policy discussions. Consensus was then “shaped” and carefully propagandized in subsequent press comments and media coverage, but never with reference to the secret Bilderberg meetings themselves. The Bilderberg process was one of the most effective vehicles of postwar Anglo-American policy-shaping. 14
At the 1973 meeting, the American speaker was Walter Levy, a consultant to the Rockefeller Standard Oil companies, Levy explained to the Bilderberg meeting on Atlantic-Japanese Energy Policy what was to happen. After projecting that future world oil needs would be supplied by a small number of Middle East oil-producing countries, Levy declared prophetically that, The cost of these oil imports would rise tremendously, with difficult implications for the balance of payments of consuming countries. Serious problems would be caused by unprecedented foreign exchange accumulations of countries such as Saudi Arabia and Abu Dhabi.
The speaker added, A complete change was underway in the political, strategic and power relationships between the oil producing, importing and home countries of international oil companies and national oil companies of producing and importing countries. 15
He then projected an OPEC Middle East oil revenue rise, which would translate into just over 400 %, the same level Kissinger was soon to demand from the Shah of Iran.
In May 1972, a year before the Bilderberg Saltsjoebaden talks, the Shah had met with Kissinger and President Nixon in Teheran. Nixon and Kissinger promised the Shah he could buy any US military equipment he wanted from the US defense arsenal except nuclear weapons, and he would be permitted to do it without US Congressional OK.
In order to finance the huge purchases, the Shah would need vastly higher oil revenues. Chase Manhattan Bank, of course, was Iran’s bank, the Shah’s personal bank, National Iranian Oil Company’s bank, the Pahlavi family bank, and the Pahlavi Foundation’s bank. The entire financial empire of the Pahlavi regime was a Rockefeller operation from top to bottom. 16
It was to take just a year after the May 1972 meeting between Kissinger, Nixon and the Shah before Wall Street’s strategy emerged, laid out for the elite powerbrokers of Europe and the United States at the Bilderberg meeting at Saltsjoebaden.
A Swedish winter in May
Present at Saltsjoebaden for the May 1973 gathering were, of course, David Rockefeller of Chase Manhattan Bank, by then the acknowledged ‘chairman of the board’ of the American establishment; close Rockefeller ally, Robert O. Anderson of Atlantic Richfield Oil Co.; Lord Greenhill, chairman of British Petroleum; Sir Eric Roll of S.G. Warburg, co-creator of Eurobonds; George Ball of Lehman Brothers investment bank, the man who some ten years earlier as Assistant Secretary of State, had advised Siegmund Warburg of London’s S. G. Warburg & Co. to develop London's Eurodollar market; Zbigniew Brzezinski, the new Executive Director of David Rockefeller’s private Trilateral Commission and soon to be President Carter's National Security Adviser; Italy's Gianni Agnelli, a close Rockefeller business associate and head of the Fiat auto empire; and Germany's Otto Wolff von Amerongen, one of the most influential German postwar business figures and the first German to be named a director of Rockefeller’s Exxon Oil Co. Henry Kissinger had also been invited to the gathering.
The powerful Bilderberg elite group that met in Sweden in May 1973 had evidently decided to launch a colossal assault against industrial growth in the world, in order to tilt the balance of power back to the advantage of American Wall Street financial interests, and specifically to support the vulnerable dollar, the heart of their global financial and economic power. In order to do this, they would use their most valuable strategic weapon—their control of the world's oil flows.
The Bilderberg policy was put into effect six months later in October 1973 when US diplomacy was deployed to trigger a global oil embargo, shockingly enough, in order to force the intended dramatic increase in world oil prices. Since 1945, world oil trade had by international custom been priced in dollars because American oil companies dominated the postwar market. A sharp and sudden increase in the world price of oil, therefore, meant an equally dramatic increase in world demand for US dollars to pay for that necessary oil. In addition to making Exxon, Mobil Oil and the other Rockefeller companies into the largest corporations in the world, it would make their banks—Chase Manhattan, Citibank and a handful of others—into the world’s largest banks.
The Rockefeller-dominated American financial establishment had resolved to use their oil power in a manner no one could imagine possible. The very outrageousness of their scheme was to their advantage. No one could conceive that such a thing could possibly be deliberate. It was. 17
Kissinger's Yom Kippur ‘Oil Shokku’
On October 6, 1973, Egypt and Syria invaded Israel, igniting what became known as the ‘Yom Kippur’ war. The Yom Kippur war was not the simple result of miscalculation, blunder, or an Arab decision to launch a military strike against the state of Israel. The entire series of events leading up to the outbreak of the October war had been secretly orchestrated by Washington and London, using powerful ‘back door’ diplomatic channels developed by Nixon's National Security Adviser, Henry Kissinger.
Kissinger effectively controlled the Israeli policy response through his intimate connection with Israel's Washington ambassador, Simcha Dinitz. Kissinger had also cultivated channels to the Egyptian and Syrian side. His method was simply to misrepresent to each party the critical elements of the other’s position, ensuring the outbreak of war and the subsequent Arab oil embargo.
King Faisal of Saudi Arabia had repeatedly made clear to Kissinger and Washington that the consequence of the US continuing its one-sided delivery of US military supplies to Israel would be an OPEC embargo on oil supplies to the United States.18 Faisal did not make the threat to his American friends lightly.
US intelligence reports, including intercepted communications from Arab officials, confirmed their buildup for war. Kissinger, who was by then Nixon's intelligence czar, reportedly suppressed the reports.
The war brought about the very oil price shock discussed at the Bilderberg deliberations of the previous May in Saltsjoebaden, some six months before outbreak of the war.
OPEC and the Arab oil-producing nations would be the scapegoats for the coming rage of the world over the resulting oil embargo to the United States and Europe and an ensuing huge increase in oil prices, while the Anglo-American interests that were actually responsible, stood quietly in the background, ready to reap the windfall.19
In mid-October 1973 the German Government of Chancellor Willy Brandt told the US Ambassador to Bonn that Germany was neutral in the Middle East conflict and would not permit the US to re-supply Israel from German NATO military bases. on October 30, 1973 Nixon sent Chancellor Brandt a sharply worded protest note, reportedly drafted by Kissinger: We recognize that the Europeans are more dependent upon Arab oil than we, but we disagree that your vulnerability is decreased by disassociating yourselves from us on a matter of this importance...You note that this crisis was not a case of common responsibility for the Alliance, and that military supplies for Israel were for purposes which are not part of alliance responsibility. I do not believe we can draw such a fine line....20
Washington would not permit Germany to declare its neutrality in the Middle East conflict. But, significantly, Britain was allowed to clearly state its neutrality, thus avoiding the impact of the Arab oil embargo. London had maneuvered itself skillfully around an international crisis it had been instrumental in precipitating. Britain was clearly an insider in matters related to Anglo-American oil control. Germany, as a major European industrial exporter and oil importer had the potential to disrupt that very significant game. For that reason, Nixon and Kissinger made clear to Brandt who ran Germany -- and it wasn’t the German Chancellor.
In December 1973, as the dust was settling from the Yom Kippur War, the Saudi King sent his most trusted emissary, his oil minister Sheikh Zaki Yamani, to the Shah in Teheran to ask the Shah why Iran was demanding that such an extraordinarily high price be formalized at the upcoming OPEC ministers meeting. The price demanded by the Shah would raise OPEC prices, on average, a staggering and unprecedented 400% from the level before the crisis. When Yamani asked the Shah on behalf of his King, the Shah replied, “Tell your majesty that if he wants the answer to this question he must go to Washington and ask Henry Kissinger.” 21
One enormous consequence of the ensuing 400% rise in OPEC oil prices was that the risky North Sea investments of hundreds of millions of dollars by British Petroleum, Royal Dutch Shell and other Anglo-American petroleum concerns could produce oil at a profit.It was a curious fact of the time that the profitability of the new North Sea oil fields was not at all secure until after Kissinger's oil shock. At pre-1973 world oil prices, the North Sea projects would have gone bankrupt before the first oil could flow.
By October 16, 1973 the Organization of Petroleum Exporting Countries, following a meeting on oil price in Vienna, had already raised their price by a whopping 70%, from $3.01/barrel to $5.11. That same day, the members of the Arab OPEC countries, citing US support for Israel in the Middle East war, declared an embargo on all oil sales to the United States and the Netherlands--the location of the primary oil port of Western Europe.
Saudi Arabia, Kuwait, Iraq, Libya, Abu Dhabi, Qatar and Algeria announced on October 17, 1973 that they would cut their production below the September level by 5% for October and an additional 5%, per month, “until Israeli withdrawal is completed from the whole Arab territories occupied in June 1967 and the legal rights of the Palestinian people are restored.” The resulting massive shortages produced the world's first ‘oil shock,’ or as the Japanese termed it, ‘Oil Shokku.’ Notably, David Rockefeller’s good friend, the Shah of Iran was absent from the OPEC embargo producers. In effect, the Shah, dependent on US arms and other support, had agreed to “boycott the boycott” and to supply whatever the US and Britain needed.22
Significantly, the oil crisis hit full force just as the President of the United States was becoming personally embroiled in the ‘Watergate affair,’ leaving Henry Kissinger as de facto President, running US foreign policy during the crisis in late 1973.
The US Treasury ‘arrangement’ with Saudi Arabia on dollar pricing of oil was finalized in a February 1975 memo from Treasury’s Under Secretary for Monetary Affairs Jack F. Bennett to Secretary of State Kissinger. Under the terms of the agreement, the huge new Saudi oil revenue windfall would be channeled largely into financing the US government deficits. David Mulford, a Wall Street investment banker, was sent to Saudi Arabia to become the principal ‘investment adviser’ to SAMA, to guide Saudi petrodollar investments to the correct banks, primarily US banks in London and New York.
The Bilderberg scheme was operating fully as planned. The Eurodollar market that had been built up over the previous several years was to play a decisive role in the offshore petrodollar ‘recycling’ strategy. 23Subsequently, Rockefeller’s Chase Manhattan Bank estimated that between 1974 and the end of 1978 the oil producing countries of OPEC generated a surplus from oil exports of $185 billion, more than three-fourths of which passed through Western financial institutions, the lion’s share through Chase and allied banks in New York and London, and from thereon as loans to the Third World.24 That was a staggering sum of dollar flows.
Kissinger, already firmly in control of key US intelligence estimates as Nixon's all-powerful National Security Adviser, had secured control of US foreign policy as well, having persuaded Nixon to name him Secretary of State in 1973 just prior to the October Yom Kippur war. Kissinger retained both titles and positions simultaneously, something not done by anyone before or since. No other single person during the last months of the Nixon presidency wielded as much absolute power as did Henry Kissinger.
Following a meeting in Teheran on January 1, 1974, a second oil price increase of more than 100% was added, bringing OPEC benchmark prices to $11.65. This was done allegedly on the demand of the Shah of Iran, who had been secretly ordered to do so by Henry Kissinger. The Shah knew he owed his return to power in 1953 to the CIA and to Washington’s backing. As noted, back in 1972 he had sealed his fate by making a secret weapons for oil deal with Nixon that would run Iran’s national revenues, as well as the Pahlavi’s, through Rockefeller’s Chase Manhattan Bank.25Kissinger's own State Department had not been informed of Kissinger's secret machinations with the Shah. 26
From 1949 until the end of 1970, Middle East crude oil prices had averaged approximately $1.90/barrel. They had risen to $3.01 in early 1973, the time of the fateful Saltsjoebaden meeting of the Bilderberg group who discussed the imminent 400% future rise in OPEC's price. By January 1974 that 400% increase was a fait accompli.
After Nixon had eliminated the gold exchange mechanism in August 1971, the offshore Eurodollar market exploded to a size that began to dwarf the domestic US banking market. Then, by the mid-1970s, in the wake of the 400% OPEC oil price rise, the Eurodollar market reached an estimated $1.3 trillion pool of ‘hot money.’ Interestingly, by the end of the 1980s, the volume of international narcotics revenues alone -- which had to be laundered through such offshore ‘hot money’ banks -- exceeded an estimated $1 trillion a year. The big New York and London banks made sure they got the lion’s share of drug money.
The London Eurodollar banking market became the centerpiece of the huge Petrodollar recycling operation, lending OPEC oil revenue deposits from banks ‘offshore’ in London,to Argentina, Brazil, Poland, Yugoslavia, Africa and other oil importing nations that were starved for dollars with which to import the more expensive OPEC oil after 1974.
The Money Trust’s counter-revolution
As indicated, by the early 1970s the US economy was anything but robust. The August 1971 decision to unilaterally tear up the Bretton Woods Treaty and end dollar-gold convertibility was, in effect, the beginning of the end of the American Century, a system that had been based in 1944 on the world’s strongest economy and its soundest currency.
The dollar system, in its new incarnation as a paper or fiat currency, went through several phases after August 1971. The first phase, described earlier, could be called the ‘petrodollar’ currency phase in which the strength of the dollar rested on the 400% rise in oil on the world market priced in dollars, and on the highly profitable recycling of those petrodollars through the US and UK and a select handful of other international banks in the City of London, the offshore haven for Eurodollars. That phase lasted until about the end of the 1970s.
The second phase of the post-1971 dollar system was sustained on the Volcker interest rate coup of October 1979 and lasted until approximately 1989 when the fall of the Berlin Wall opened a vast new domain for dollarization and asset looting by Wall Street banks. That opening, combined with the colossal economic growth of China as a member of the WTO, opened the world economy to a drastic lowering of wages across the board, most dramatically in the industrial countries.
In 1997 yet another phase in the post-1971 dollar system was initiated with a politicallydriven hedge fund attack on the vulnerable currencies of the high-growth ‘Tiger’ economies of east Asia, beginning with Thailand, the Philippines, Indonesia and spreading to South Korea. That phase was in large part responsible for a massive inflow of Asian central bank dollars into the US dollar to build dollar reserves as defense against a possible new speculative attack. The inflow of hundreds of billions of dollars of Asian capital after 1998 fuelled the US IT stock market bubble of 1999-2002.
The final phase of the dollar system after August 1971 was the Alan Greenspan Revolution in finance, which he launched after the collapse of the IT stock market bubble in 2001-2002, By his strong support of the revolution in finance, mortgage and other assets as security to issue new bonds, Greenspan helped engineer the ‘securitization revolution’ which ended with the collapse of his real estate securitization bubble in 2007.
David’s Trilateral scheme
However, the year 1973 and the resulting oil shock marked the most pivotal turning point in the overall strategy of the powerful American establishment around David Rockefeller and his brothers.
The decision of the powerful circles around the Rockefellers and the Anglo-American oil cartel and allied bankers to engineer a major shock to global oil prices during the October 1973 Yom Kippur war would buy several more years of life for the dollar as the foundation of the global economic and trading system, but it was a precarious foundation. Even bolder actions were needed to secure the financial dominance of the giant banks and multinationals around the Council on Foreign Relations and the Rockefellers.
In 1973 David Rockefeller was Chairman of the Council on Foreign Relations and head of the family’s Chase Manhattan Bank. He believed it was necessary to broaden the political base of American influence by creating a new international organization that would be private and byinvitation-only, like their Bilderberg meetings. But, unlike Bilderberg, which was restricted to American and European decision-makers, Rockefeller’s new organization would have three poles—North America, Europe and Japan -- with which to bring the emerging vast Asian market under their control. It was aptly named the Trilateral Commission.
With Japan emerging as the economic wonder of Asia, it was felt that the Japanese markets and goals had to be brought into closer coordination with the strategic goals of the New York power circles.
Membership in the elite Trilateral Commission was more or less taken from David Rockefeller’s Rolodex. Founding members included primarily influential business associates of the vast international Rockefeller interests or politicians close to, British merchant banker and Eurodollar creator, Lord Roll of Ipsden Italian FIAT chief Gianni Agnelli, and Royal Dutch Shell’s John Loudon. Rockefeller chose his close friend, geopolitical strategist Zbigniew Brzezinski, to be the first Executive Director. The list also included Wall Street bankers, Alan Greenspan and Chase Manhattan’s Paul Volcker and a then-obscure Governor of Georgia named Jimmy Carter. 27
Indicative of its concerns, a Trilateral Commission Task Force Report, presented at their 1975 meeting in Kyoto, Japan, was called An Outline for Remaking World Trade and Finance. It stated: Close Trilateral cooperation in keeping the peace, in managing the world economy, and in fostering economic development and in alleviating world poverty, will improve the chances of a smooth and peaceful evolution of the global system.28
Another Trilateral Commission document read: The overriding goal is to make the world safe for interdependence by protecting the benefits which it provides for each country against external and internal threats which will constantly emerge from those willing to pay a price for more national autonomy. This may sometimes require slowing the pace at which interdependence proceeds…More frequently however, it will call for checking the intrusion of national government into the international exchange of both economic and non-economic goods. (emphasis added, w.e.). 29
The Rockefeller’s Trilateral agenda was, overall, the agenda of the US establishment that had been announced the same year by David Rockefeller’s brother, John D. III, in a book modestly titled, The Second American Revolution.
In 1973, John D. Rockefeller III had published the family’s landmark policy declaration in preparation for the American Revolution’s Bi-Centennial in 1976. In the book, the elite of the Money Trust declared their ‘Second American Revolution,’ appropriately published by the Council on Foreign Relations, chaired by David Rockefeller.
John D. Rockefeller’s book called for a radical reduction in the powers of government, for expanded ‘privatization’ of functions long performed by the state, “moving as many government functions and responsibilities toward the private sector as possible.” It was a clear call for abandonment of New Deal Keynesian policies—at least the use of the state to correct imbalances in social distribution of jobs and income that had existed since the 1930s. 30
Rockefeller’s 1973 call served as the signal for launching a national media propaganda campaign against alleged Government inefficiency, incompetence, and obstruction,using the inevitable bureaucratic inefficiencies of social services as a smoke screen to end all oversight and regulation of banking and large commercial transactions. The book used carefully selected examples that every citizen could recognize to build support for essentially destroying the traditional and necessary role of the state in regulating commerce and the pubic welfare, to the advantage of the pure and unfettered profit-maximization of private companies and banks financing those companies. It was a Darwinian world they unleashed where the fittest were the biggest and naturally the ones with the clout to destroy their competitors.
The ‘Trilateral President’
In 1976, the Rockefeller agenda for a ‘second American revolution’ made a significant advance: David Rockefeller’s protégé at the Trilateral Commission, Georgia peanut farmer turned Governor, Jimmy Carter, won an upset election against incumbent Gerald Ford who had taken over when Nixon was driven from office by the Watergate scandals. Carter promptly went on to staff his key cabinet positions with 26 members of Rockefeller’s Trilateral Commission, including Vice President Walter Mondale, Secretary of State Cyrus Vance, Defense Secretary Harold Brown, and Treasury Secretary Michael Blumenthal.
As President, Carter's entire foreign policy, much of his election strategy, and some of his domestic policy came directly from Rockefeller’s Trilateral Commission. The architect of Carter's foreign policy from 1975 was his National Security Adviser Zbigniew Brzezinski who had resigned as Trilateral Commission Executive Director in order to take the post. Brzezinski wrote Carter's major speeches during the campaign, and crafted Carter’s foreign policy with assists fromTrilateralists Vance, Brown and Blumenthal. The watchword for Carter's foreign policy from 1975 on was "clear it with Brzezinski." Carter would ask when given a memorandum on foreign policy, "has Brzezinski seen this...?"31
The predominance of so many Trilateral Commission members in the Carter Administration led some media to refer to it as the Trilateral Presidency. It more accurately should have been called the David Rockefeller Presidency. It was Carter who began the Rockefeller group’s long process of Government deregulation and privatization that his successor, Ronald Reagan, would make the centerpiece of his Presidency.
Reportedly it was after Gerald Ford, on advice of his then White House Chief of Staff, Donald Rumsfeld, had decided to drop Vice President Nelson Rockefeller as his 1976 running mate, that David Rockefeller introduced Democrat Jimmy Carter to Trilateral Commission members at their meeting in Kyoto, Japan, referring to him as, “the next President.” 32
Clawing back New Deal concessions
The deepening US economic crisis of the 1970s was the motivation for the Rockefellers and other US establishment leaders to come up with radical new strategies. The US was faced with stagnation or even decline of its market strength and corresponding profit share globally and within the United States, still the world’s largest market for goods and services.By 1975 the share of total wealth held by the wealthiest 1% of American households had fallen to its lowest since 1922, measured in terms of the combined housing, stocks, bonds, cash and other durable wealth.33
Their dramatic manipulation of world oil prices had been responsible for triggering the most serious postwar global recession. By 1975 it was clear that the world economy, in the wake of the declining profit rate, had entered what economists termed a ‘structural crisis.’ It included diminished growth rates, falling per capita productivity, a wave of unemployment, and cumulative high inflation.
From this crises emerged a new social vision or political philosophy called “neoliberalism,” appearing first within the countries at the center of the industrial world—beginning with the United Kingdom and the United States—and then gradually exporting to the “periphery,” or the so-called emerging markets of the developing world.
Neoliberalism had little to do with Keynesian ‘liberal’ economics. The neoliberal revolution that was launched in the mid-1970s was a project of the US establishment and their British counterparts. Specifically, it was a concoction of the Rockefeller brothers, based on the radical free market dogma of Milton Friedman, a member of the arch-conservative Mont Pelerin Society and then Professor of Economics at the University of Chicago, an institution founded decades earlier with Rockefeller Standard Oil money. Neoliberalism could more accurately have been called neo-feudalism.
Echoing John D. Rockefeller’s 1973 manifesto, Friedman’s neoliberalism, enshrined in his popular book, Free to Choose, called for untrammeled free markets and free trade, and attacked trade unions as a “throwback to a pre-industrial period.” 34
The neoliberal revolution was, in essence, a globalized version of John D. Rockefeller’s Second American Revolution. The International Chamber of Commerce in Paris approved heartily of the global neoliberal mandate “to break down barriers to international trade and investment so that all countries can benefit from improved living standards through increased trade and investment flows.” 35 It was the initial phase of what two decades later would be called “globalization.”
The powerful circles around the Rockefellers within the US financial establishment called explicitly for a global restructuring to their benefit, including: new discipline of labor and management to the benefit of lenders and shareholders; the diminished intervention of the state concerning development and welfare; the dramatic growth of financial institutions; the implementation of new relationships between the financial and non-financial sectors to the benefit of the former; a new legal stand in favor of mergers and acquisitions; the strengthening of central banks and the targeting of their activity toward price stability, and the new determination to drain the resources of the periphery toward the center. 36
The predominant feature of the new neoliberalism was not just its structural arrangements, but the creation of mechanisms to extend the dollar’s reach to the rest of the planet, the globalization of the dollar and of US finance behind it. The destructive process of market liberalization spread with devastating speed and efficiency, assisted by creation of new multinational institutions such as the World Trade Organization and massive trade pressures from Washington and its free market allies, especially Britain. Milton Friedman’s dogma of monetarism was the theoretical expression of the new revolution, or more accurately, counter-revolution. The decisive year in the economic counter-revolution was 1979 when David Rockefeller got President Carter to name his protege, Paul Volcker, to become Chairman of the Federal Reserve. In October 1979 Volcker imposed the most radical monetarist policy in the history of the Federal Reserve as he allowed interest rates to soar by more than 300% into the 20% range, and held them high until the resulting inevitable Third World debt crisis erupted by August 1982, prompting him to reverse the rate policy. The year 1979 was what some economists called the year of the neoliberal Coup. 37 Rockefellers, Volcker and their wealthy allies in the Wall Street Money Trust had been able to use the issue of runaway inflation -- an inflation for which their own 1973 Bilderberg oil pricing decision had been initially responsible -- to justify a monetary ‘shock therapy’ that allegedly would ‘squeeze inflation out of the system,’ as Volcker liked to phrase it. In reality the high interest policy was imposed by the wealthiest members of theestablishment as part of their long-term strategy of clawing back the concessions forced from them during the Great Depression in terms of the creation of the Keynesian social welfare state, social security, and Government support for labor union organization. The ‘Post-Industrial’ world of Wall StreetConfronted with stagnating domestic markets, declining abolute profits and the need to invest huge sums in order to bring their domestic US industries up to world standards, the Rockefeller circles opted instead to walk away from renewing their domestic US economic base, leaving it to become what their think-tanks called a ‘post-industrial society.’ Volcker‘s interest rate policy led to ‘real’-- that is, corrected-for-inflation -- interest rates of 68%, a staggering windfall boon for wealthy bond holders, the center of the financial system. It also created a recession and with it, a rising wave of unemployment in Europe and in the United States, which created the conditions for a new crackdown on labor implemented by both Reagan and Thantcher in the early 1980s, dramatically weakening the influence of trade unions on wage levels for decades to come. The 1970s were a transition decade for the development of the American Century. As was noted, by the late 1960s, chronic deficits of the balance of trade appeared for the first time in the United States since World War II, related to the on-going postwar economic recovery by Europe and Japan. Surplus dollars were accumulating in the rest of the world and, thus, the threat of conversion of those foreign dollar earnings into gold was increasing. The dollar had to be devalued with respect to gold and other major currencies. The United States put an end to the convertibility of the dollar in 1971, introducing floating exchange rates. By 1973 with the regime of floating exchange rates confirmed as permanent, Washington and its allies in London, and through the Bilderberg conference of May 1973, decided on the drastic, oil price inflation to support the falling dollar. By 1979, boosted by the Volcker Federal Reserve coup, they were able to reap staggering profits on their bond and other assets amid a rising dollar. After 1980 when Republican Ronald Reagan took office, the US implemented this deliberate deficit policy with a vengeance. Reagan’s tenure initiated what became the most dramatic and permanent trade and budget deficits in US history.
In hammering out its position in the multinational negotiations in 1973 to make floating exchange rates a permanent fact, Washington made clear it would use its military dominance within NATO and in Asia to extract maximum concessions from its trading partners. In its bilateral negotiations with South Korea in 1973, the US demanded terms that made it “obligatory for South Korean exporters to the American market to import a certain amount of raw materials from the United States.” 38
By 1973 the US trade position with respect to its major allies in Western Europe and Japan was taking form. The terms of the ‘grand bargain’ would be that the US would open its borders to almost unlimited Japanese or European imports of products such as cars, steel, and later, electronics. In return, the foreign countries would agree to purchase US defense equipment, US agricultural products and US aircraft for its national airlines.
But the most far-reaching aspect of the new regime implemented after 1973 by Washington and adhered to by every Administration since then was the idea that, because of the unique role of the dollar as world foreign exchange reserve under a floating-rate exchange regimen -- and the fact that the dollar could no longer be redeemed for gold -- foreign nations that built up a surplus of dollars exporting to the United States, especially Japan and Germany, would be forced to reinvest those dollar trade surpluses in US Government debt, in order to earn interest and hold them in a safe repository.
Washington, leaving nothing to chance, made certain in its bilateral trade negotiations with countries such as Japan or Germany to make clear that they should invest their dollar trade surpluses in US Treasury bonds or bills. 39
That began the perverse dependency of the exporting world on the US as ‘importer of last resort.’ The United States, led by Wall Street banks that held the monopoly on buying and selling US Treasury debt, would emerge as the world’s greatest capital market during the 1980s, as US deficits exploded and its internal industry went into malign neglect as a result of the decision. Wall Street bond brokers reaped the gains. Ronald Reagan’s Presidency was chosen by the establishment to implement this ‘greatest rip-off.’
Endnotes:
1 Michael Hudson, Super Imperialism: The Origins and Fundamentals of US World Dominance (London:Pluto Press, 2003), p. xiii. Hudson’s account is part of his brilliant expose of postwar US financial manipulations that used staggering levels of US Treasury debt combined with chronic trade deficits to do what no other country could, by virtue of the fact the dollar was world reserve currency and the rest of the world was dependent on US military security. They had little choice but to buy hundreds of billions of dollars of US Treasury debt with its surplus trade dollars, in effect, as Hudson had pointed out to Kahn, forcing those countries to finance US wars and other exploits that were to the disadvantage of those nations buying the US debt. The decoupling of the dollar from gold in August 1971 was the critical step making that possible, although as Hudson points out, at first the policy circles in Washington and Wall Street did not realize it. The entire book is available online. 2See F. William Engdahl, A Century of War: Anglo-American Oil Politics and the New World Order (London: Pluto Press, 2004), p. 114.3 Marcello De Cecco, International Financial Markets and US Domestic Policy Since 1945, International Affairs. July 1976, London, pp. 381-399. 4F. William Engdahl, op. Cit., p. 386. 5Marcello de Cecco, op. cit. 6Ibid. p. 398. 7 R.T. Naylor, Hot Money and the Politics of Debt (London: Unwin Paperbacks, 1988), p. 33. 8 Ibid.pp. 33-35. 9 Naharnet, Roger Tamraz Arrested in Morocco, Jan 29, 2009, Lebanese Forces Official Website, accessed in http://www.lebanese-forces.org/regional/Roger-Tamraz-Arrested-in-Morocco1002728.shtml. 10Raúl Salinas de Gortari [brother of former Mexican President Carlos Salinas de Gortari] was alleged to have laundered up to $130 million in drug money through Citibank and various Swiss banks during the time his brother was President of Mexico. Raul Salinas was later convicted of murder and sentenced to prison. See Citibanker for Salinas had been Star U.S. witness, Money Laundering Alert, April 1996, accessed inhttp://www.pbs.org/wgbh/pages/frontline/shows/mexico/family/citibankaffair.html. 11Ibid, pp. 127-128. 12 Richard Duncan, The Dollar Crisis (Singapore: John Wiley & Sons-Asia, 2003), p., Figure 1.1. 13 See David E. Spiro, The Hidden Hand of American Hegemony: Petrodollar Recycling and International Markets, (Ithaca: Cornell University Press, 1999), p.147 ff. 14 Ibid, Anonymous, Saltsjoebaden Conference, Bilderberg meetings, 11-13 May 1973. Robert D Murphy prepared the agenda for the 1973 Bilderberg meeting. Significantly, Murphy was the man who in 1922, as US Consul in Munich, had sought a meeting with then unknown Adolf Hitler and sent back favorable recommendations to his superiors in Washington. Murphy later shaped US occupation policy in postwar Germany as Political Adviser. 15 Saltsjoebaden Conference, Bilderberg meetings, 11-13 May 1973. The author obtained an original copy of the official discussion from this meeting. The normally confidential document was bought in a Paris used bookstore and it bore the signature of Bilderberg insider, Shepard Stone. Walter Levy, who delivered the Saltsjoebaden energy report at the meeting, was intimately tied to the fortunes of big oil. In 1948 as oil economist for the Marshall Plan Economic Co-operation Administration, Levy had tried to block a government inquiry into allegations that the oil companies were overcharging. 16Mark Hulbert, Interlock: The Untold Story of American banks, oil interests, the Shah’s money, debts and the astounding connections between them (New York: Richardson & Snyder, 1982), pp. 71-87. 17See footnote 9, below. 18 Robert Lacey, The Kingdom: Arabia and the House of Saud (New York: Avon Books, 1981), pp. 398-399. 19 Matti Golan, The Secret Conversations of Henry Kissinger: Step-by-step diplomacy in the Middle East (New York: Bantam Books Inc., 1976). 20Henry A. Kissinger, Years of Upheaval (Boston: Little, Brown & Co., 1982). 21The account of this extraordinary exchange between His Excellency Sheikh Zaki Yamani and the Shah was relayed to the author in a personal discussion between the author and Sheikh Yamani in London in September 2000. Sheikh Yamani had been, in 1974, Saudi Oil Minister and spokesman for OPEC during the embargo. 22Mark Hulbert, op. Cit. 23 Jack Bennett, Memorandum, reproduced in International Currency Review, Vol. 20, no. 6. January 1991. London. p. 45. 24 Ann Crittenden, Managing OPEC’s Money, The New York Times, June 24, 1979. 25 Sheikh Zaki Yamani, in a September 2000 private conversation with the author, cited above. 26James Akins, interview regarding his tenure as Director of Fuels & Energy Office of US State Department at that time, later Ambassador to Saudi Arabia. 27For more on the Trilateral Commission founding and members see F. William Engdahl, op. cit, Appendix I, p. 285. 28 The Trilateral Commission, An Outline for Remaking World Trade and Finance (New York University Press, 1975).29 C. Fred Bergsten, Interdependence and the Reform of International Institutions, International Organization, Vol. 30, No. 2 (Spring, 1976), pp. 361-372. 30 John D. Rockefeller III, The Second American Revolution, 1973, Harper & Row, New York, pp. 103-112. 31 Lawrence H. Shoup, Jimmy Carter and the Trilateralists: Presidential Roots, excerpted from the book, Trilateralism, edited by Holly Sklar (Boston: South End Press, 1980), accessed in http://www.thirdworldtraveler.com/Trilateralism/JimmyCarter_Trilat.html. 32 Cyrus Vance, from a private discussion relayed in 1975 to the author in New York. 33 Gérard Duménil and Dominique Lévy, The Neoliberal (Counter) Revolution, contained in Neoliberalism: A Critical Reader, edited by Alfredo Saad-Filho and Deborah Johnston (London: Pluto Press, 2004). 34Milton Friedman, Free to Choose (New York: Penguin Books, 1979), p. 271. 35International Chamber of Commerce, Policy and Business Practices, accessed on ICC official website, http://www.iccwbo.org/policy/trade/. 36Gérard Duménil and Dominique Lévy, op. cit. 37Ibid.38 Ibid., p. 369. 39 Ibid., p. 363.
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Newsletter 45: Greenspan Sets Wall Street Loose Dear readers, I want to take this issue of my complimentary newsletter to present an excerpt from my book, The Gods of Money: Wall Street and the Death of the American Century (2010). The book traces American history from roughly the 1860’s Civil War through to the present, showing how, step-by-careful-step, the powerful international banks and their allies in Congress moved to de facto transform the United States from a national economy and a political system responsive to its citizens to one responsive to those Gods of Money and their private interests. Anyone wishing to better understand the problems of America today should examine that monetary history as what it has been-- a political bankers’ coup. Here in what follows from the book we go into the actions of the Federal Reserve System and specifically the long-serving chairman Alan Greenspan, to give a case example of precisely how the Fed directly controls just when they will create a market crash to serve the interests of Wall Street. This is one of the most well-hidden purposes of the Fed, very much why it was created by Wall Street in 1913 in the first place. In late 2018 US President Trump quite accurately identified Fed interest rate policy as deliberately causing economic and financial weakness with repeated rate hikes. That sent shock waves as a President broke a tabu, and accurately called out the Fed game. The selection below will give a better context to grasp how major that intervention by the President was. If you find this excerpt interesting, consider buying the book, The Gods of Money: Wall Street and the Death of the American Century. As well I would be delighted if you consider a support via PayPal on my homepage so that I am able to continue to offer my content, especially now with looming EU and US censorship laws or actions on Internet content and the infringement of political free speech for independent researchers as myself. Best regards F. William Engdahl www.williamengdahl.com 18-04-19 Readers are raving about Gods of Money: "Awesome…“ -- New Dawn Magazine "Warning - This Book May Cause Nightmares“ -- Afia "…a truly epic work…“ -- Ila France Porcher, Author of The Shark Sessions "…eye opening…“ -- Amazon Customer "WOW and double WOW“ -- W. Palmer "I wish I had read this book 2 years ago“ -- Paul Majchrowicz "Should be required reading in schools.“ -- NomadicLuxury "Engdahl doesn't produce less than a 5-star work.“ -- Dr. T Click here to buy the book: Chapter Sixteen: Greenspan’s ‘Revolution in Finance’ Goes Awry ‘As we move into the twenty-first century, the remnants of nineteenth-century bank examination philosophies will fall by the wayside…affiliation with banks need not--indeed, should not--create bank-like regulation of affiliates of banks.’ --Alan Greenspan, 1999, calling for deregulation of banks 1 A long-term Greenspan agenda Seven years of Volcker monetary shock therapy had ignited a payments crisis across the Third World. Billions of dollars in recycled petrodollar debts, loaned by major New York and London banks to finance oil imports after the oil price increases of the 1970s, suddenly became non-payable. In August 1987, just a year away from the 1988 Presidential elections, in which George H.W. Bush was determined to succeed Reagan as President, Bush persuaded Reagan to name a new chairman of the Federal Reserve, a man more amenable to bowing before Wall Street. Bush did not trust Paul Volcker to be sufficiently partisan and feared he would choke off economic growth for fear of inflation just in time to deprive Bush of election victory; he preferred Alan Greenspan. Greenspan would rarely disappoint his Wall Street patrons during the 18 years when he controlled the Fed with an almost iron grip. Those 18 years were marked by financial deregulation, successive speculation bubbles and instability. With Greenspan at the helm, and after the large New York banks had looted all that was of value in the domestic US savings banks, the stage was set for the next phase in the Rockefeller financial deregulation agenda.. The next phase would entail nothing less than a revolution in the very nature of money—the Greenspan ‘New Finance’ Revolution. A carefully cultivated public relations fest in the US media persuaded most Americans to believe that Alan Greenspan was essentially just a dedicated public servant who might make mistakes, but in the end always saved the day and the nation’s economy and banks through extraordinary feats of financial crisis management, winning the appellation, “Maestro.”2 The truth was somewhat different. Maestro serves the Money Trust Alan Greenspan, like every Chairman of the Board of Governors of the Federal Reserve System, was a carefully picked, institutionally loyal servant of the actual owners of the Federal Reserve. The Federal Reserve owners, it will be recalled, consisted of the network of private banks, insurance companies, and investment banks which had created the Fed in December 1913 by rushing its statutory authorization through an almost empty Congress the day before Christmas recess. In Lewis v. United States, the United States Court of Appeals for the Ninth Circuit confirmed the true nature of the misnamed Federal Reserve when the court stated that “the Reserve Banks are not federal instrumentalities…but are independent, privately owned and locally controlled corporations.” 3 Greenspan’s entire tenure as Fed chairman was dedicated to advancing the interests of American world financial domination in a nation whose domestic economic base had been essentially destroyed in the years following 1971. Greenspan knew who buttered his bread and as Federal Reserve head he loyally served what the US Congress in 1913 had termed “the Money Trust,” in reference then to the cabal of bankers behind the 1913 creation of the Federal Reserve. Not surprisingly, many of the same banks which were pivotal in the securitization revolution of the 1990s and into 21st Century, including Citibank and J.P. Morgan had been at the center of the 1913 Money Trust as well. Both had share ownership of the key New York Federal Reserve Bank, the heart of the system. The real goal of the Money Trust whether in 1913 or in 1987 was to consolidate their control over major industries, economies and ultimately, over the economy of the entire world through what would be called the globalization of finance. Alongside well-known institutions like J.P. Morgan and Citicorp and AIG, another shareholder of the New York Fed was a little-known company called Depository Trust Company (DTC), the largest securities depository in the world. Based in New York, the DTC held in custody more than 2.5 million US and non-US equity, corporate, and municipal debt securities issues from over 100 countries, valued at over $36 trillion. DTC and its affiliates handled over $1.5 quadrillion in securities transactions a year. That was to say, $1,500,000,000,000,000 -- a lot of responsibility in the hands of a company that most people never heard of. The Depository Trust Company had a monopoly on the debt securities depository business in the USA. They had become in effect the back office of the world financial system. DTC advertised itself as a safe way for buyers and sellers of securities to make their exchange, and thus "clear and settle" transactions. It also provided custody of securities. They had simply bought up all other contenders, becoming in the process an essential part of New York’s continued dominance of global financial markets, long after the American economy had become largely a hollowed-out, ‘post-industrial’ wasteland. While free market purists and dogmatic followers of Greenspan’s close friend ‘self interest’ ideologue Ayn Rand accused the Fed Chairman of hands-on interventionism, in reality there was a common thread running through each major financial crisis during Greenspan’s near two decades reign as head of the world’s most powerful financial institution. As Federal Reserve chairman, Greenspan managed to use each successive financial crisis to advance and consolidate the influence of US-centered finance over the global economy, almost always to the severe detriment of the US domestic economy and general welfare of the American public. In each crisis, Greenspan used the situation to advance an agenda of globalization of risk and liberalization of market regulations to allow unhindered operation of the major financial institutions. Whether it was the October 1987 stock crash, the 1997 Asia Crisis, the 1998 Russian state default and ensuing collapse of Long Term Capital Management, or his refusal to make technical changes in Fed-controlled stock margin requirements to cool the dot.com stock bubble, or his encouragement of ARM variable rate mortgages (when he knew rates were at the bottom), Greenspan’s manipulations of each crisis had the same goal. Moreover, most of the crises had been spawned or triggered by his widely read commentaries and publicly announced rate policies in the first place, as we will see. When Alan Greenspan arrived in Washington in 1987, he had been hand picked by Wall Street and the big banks to implement their Grand Strategy. Greenspan was a Wall Street consultant whose clients included J.P. Morgan Bank, among others. Before taking the post as head of the Federal Reserve, Greenspan had also sat on the boards of some of the most powerful corporations in America, including Mobil Oil Corporation, Morgan Guaranty Trust Company and JP Morgan & Co. Inc. Greenspan had also served as a director of the Council on Foreign Relations since 1982. As Federal Reserve Chairman his first test in October 1987 would be the manipulation of stock markets using the then-new derivatives markets. The 1987 Greenspan derivatives paradigm In October 1987, Greenspan led a bailout of the stock market after the spectacular October 20 crash by pumping huge infusions of liquidity to prop up stocks. He simultaneously engaged in behind-the-scene manipulations of the market via purchases of Chicago stock index derivatives backed quietly by Fed liquidity guarantees. It was an unprecedented step by the central bank to intervene to manipulate stock markets covertly, something whose legality, should it be discovered, would have been highly questionable. Since that October 1987 event, the Fed had made abundantly clear to major market players that they were, to use Fed jargon, TBTF—Too Big To Fail. No worry if a bank risked tens of billions speculating in Thai baht or dot.com stocks on margin. If push came to liquidity shove, Greenspan made clear he would be there to bail out his banking friends. The October 1987 crash saw the sharpest one day fall in the Dow Industrials in history—508 points. The depth of the one day fall was exacerbated by new computer trading models based on the so-called Black-Scholes Options Pricing theory, whereby stock share derivatives were now being priced and traded just as hog belly futures had been before. As former Wall Street trader and author Michael Lewis described it, A new strategy known as portfolio insurance, invented by a pair of finance professors at the University of California at Berkeley, had been taken up in a big way by supposedly savvy investors. Portfolio insurance evolved from the most influential idea on Wall Street, an options-pricing model called Black- Scholes. The model is based on the assumption that a trader can suck all the risk out of the market by taking a short position and increasing that position as the market falls, thus protecting against losses, no matter how steep. 4 The Black-Scholes model had recently come out of the university onto major Wall Street trading floors at the time of the 1987 crash. During the 1970s, academic economists Fischer Black and Myron Scholes designed a model that appeared to give a scientific basis to predict the price of an option on financial products in the future based on the price of the actual or underlying stock, currency, or other financial commodity such as oil. The new instruments, which were sold to Wall Street and then to corporate America as a form of cheap “financial insurance” against sharp price swings, were priced in a relation to -- i.e., derived from -- an underlying product such as crude oil, hence the term “derivatives.” The use of such financial derivatives has been compared to “trying to replicate a fireinsurance policy by dynamically increasing or decreasing your coverage as fire conditions wax and wane. one day, bam, your house is on fire, and you call for more coverage?" 5 The 1987 crash and the role of financial derivatives for the first time in a major market crisis made clear was that there was no real liquidity in the markets when it was needed. All fund managers tried to do the same thing at the same time: to sell short the derivatives -- stock index futures in this case -- in a futile attempt to hedge their stock positions. But the selling spree triggered an automated trading spiral – in effect, a computer-driven freefall. Financial derivatives, in effect sophisticated bets on the future direction of stock prices, had made their debut on Wall Street by helping trigger the largest one-day fall in the stock market’s history. It was a shaky start and not by any means the last crisis to be fed by the exotic new financial derivatives. Stephen Zarlenga, then a trader who was in the New York trading pits during the crisis days in 1987, gave a first hand trader’s view of the impact of the new derivatives on stock prices: They created a huge discount in the futures market…The arbitrageurs who bought futures from them at a big discount, turned around and sold the underlying stocks, pushing the cash markets down, feeding the process and eventually driving the market into the ground. Some of the biggest firms in Wall Street found they could not stop their preprogrammed computers from automatically engaging in this derivatives trading. According to private reports, they had to unplug or cut the wiring to computers, or find other ways to cut off the electricity to them (there were rumors about fireman's axes from hallways being used), for they couldn’t be switched off and were issuing orders directly to the exchange floors. The New York Stock Exchange at one point on Monday and Tuesday seriously considered closing down entirely for a period of days or weeks and made this public…It was at this point…that Greenspan made an uncharacteristic announcement. He said in no uncertain terms that the Fed would make credit available to the brokerage community, as needed. This was a turning point, as Greenspan’s recent appointment as Chairman of the Fed in mid 1987 had been one of the early reasons for the market’s sell off. 6 What was significant about the October 1987 one-day crash was not the size of the fall, some 23%. It was the fact that the Fed, unannounced to the public, intervened through Greenspan’s trusted New York bank cronies at J.P. Morgan and elsewhere on October 20 to manipulate a stock recovery through use of the new financial instruments, the derivatives. The visible or presumed cause of the October 1987 market recovery seemed to occur when the Chicago-based MMI (Major Market Index) future price of select New York Stock Exchange blue chip stocks began suddenly to trade at a premium to the underlying actual stocks, midday Tuesday, at a time when one after another Dow stock had been closed down for trading. That was interpreted as a sign that “smart money” knew a rebound was about to happen. Brokers cautiously began buying the real stocks. The meltdown began to reverse. Arbitrageurs, high-risk securities gamblers, bought the underlying stocks, re-opening them, and sold the MMI futures at a premium. The New York stock market had magically and for no clear reason begun a dramatic recovery. It was created in the trading pits of the Chicago MMI futures exchange, far from view of most of the public. Greenspan and his New York financial cronies had successfully engineered a stock market recovery using the same derivatives trading models in reverse, to drive the price of stocks sharply higher just as they had driven the same stocks to the bottom only days earlier. It was the dawn of the era of financial derivatives, a world of potential manipulation beyond belief. For most mundane Wall Street traders, financial derivatives gradually became accepted as a highly profitable new instrument to make money out of money. A few savvy financial insiders realized that those who could gain control of the market for the new financial derivatives, and control of their exchanges, had the potential to make or break entire financial markets. It was the start of one of the most colossal projects in the history of finance—the derivatives revolution. Historically, so most people were led to believe, the role of the Federal Reserve as the Comptroller of the Currency, among others things, was to act as independent supervisor of the largest banks to insure stability of the banking system and prevent a repeat of the bank panics of the 1930s by serving as ‘lender of last resort.’ Under the Greenspan regime, after October 1987, the Fed increasingly became the ‘lender of first resort,’ as the Fed widened the circle of financial institutions worthy of the Fed’s rescue. It was the birth of an insider game sold to the public during the late 1980s as the ‘democratization’ of capital, using the argument that because millions of Americans were investing their pension funds into mutual funds and money market funds, that meant that ‘the people’ actually controlled finance, not the financial oligarchs of old like J.P. Morgan or John D. Rockefeller. Nothing was farther from the truth. The Greenspan Federal Reserve’s laissez faire policy towards supervision and bank regulation after 1987 was crucial to implementing the broader deregulation and financial securitization agenda that Greenspan had hinted at in his first Congressional testimony in 1987. On November 18, 1987, only three weeks after the October stock crash, Alan Greenspan told the US House of Representatives Committee on Banking that, “repeal of Glass-Steagall would provide significant public benefits consistent with a manageable increase in risk.” 7 Greenspan would repeat this mantra until Glass-Steagall, the law that had required separation of investment and commercial banking, was finally repealed in 1999. The support of the Greenspan Fed for unregulated treatment of financial derivatives after the 1987 crash was instrumental in the explosion of derivatives trading worldwide. The global derivatives market grew by 23,102% between 1987 and the end of 2006 when it was a staggering $370 trillion. The volumes were incomprehensible. Destroying Glass-Steagall Restrictions One of Greenspan’s first acts as Chairman of the Fed had been to call for repeal of the Glass- Steagall Act, something that his old friends at J.P.Morgan and Citibank had ardently campaigned for. 8 Glass-Steagall, officially the Banking Act of 1933, had introduced the separation of commercial banking from Wall Street investment banking and insurance. Glass- Steagall originally was intended to curb the practices that had caused the severity of the 1930s wave of bank failures and depression. One problem that Glass-Steagall was designed to address was that, prior to 1929, banks had been investing their own assets in securities, with consequent risk to commercial and savings depositors in the event of a stock crash. Unsound loans were made by the banks in order to artificially prop up the price of select securities or the financial position of companies in which a bank had invested its own assets. A bank's financial interest in the ownership, pricing, or distribution of securities inevitably tempted bank officials to press their banking customers into investing in securities which the bank itself was under pressure to sell. It was a colossal conflict of interest and invitation to fraud and abuse. That era was appropriately dubbed the ‘Roaring Twenties’ as the stock market roared to new inflated highs. Banks that offered investment banking services and mutual funds were subject to conflicts of interest and other abuses, thereby harming their customers, including borrowers, depositors, and correspondent banks. The Glass-Steagall Act of 1933 was specifically intended to prevent this. After the law was repealed in 1999, with no more Glass-Steagall restraints, banks offered securitized mortgage obligations and similar products via wholly owned Special Purpose Vehicles they created to get the risk ‘off the bank books.’ They were directly and knowingly complicit in what will go down in history as the greatest financial swindle of all times—the sub-prime securitization fraud. Commenting on the origins of the 1930’s Glass-Steagall act, Harvard economist John Kenneth Galbraith noted, Congress was concerned that commercial banks in general and member banks of the Federal Reserve System in particular had both aggravated and been damaged by stock market decline partly because of their direct and indirect involvement in the trading and ownership of speculative securities. The legislative history of the Glass-Steagall Act shows that Congress also had in mind and repeatedly focused on the more subtle hazards that arise when a commercial bank goes beyond the business of acting as fiduciary or managing agent and enters the investment banking business either directly or by establishing an affiliate to hold and sell particular investments. ….During 1929 one investment house, Goldman, Sachs & Company, organized and sold nearly a billion dollars' worth of securities in three interconnected investment trusts--Goldman Sachs Trading Corporation; Shenandoah Corporation; and Blue Ridge Corporation. All eventually depreciated virtually to nothing.9 Deregulation means ‘Too Big To Fail’ From the 1980s Reagan era through the 1990s, major banks and Wall Street institutions consolidated unprecedented power over the United States and its economic life. The deregulation agenda proposed in 1973 by the Rockefellers was the driver of the power consolidation. For most of the period the consolidation took place under the watchful eye of the Greenspan Federal Reserve. In the United States, between 1980 and 1994, more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) had been closed or had received FDIC financial assistance. That was far more than in any other period since the advent of federal deposit insurance in the 1930s. It was part of a process of concentration into giant banking groups that would continue into the next century. In 1984 the largest bank insolvency in US history seemed imminent. Chicago’s Continental Illinois National Bank, the nation’s seventh largest, and one of the world’s largest banks, was on the brink of failure. To prevent such a large failure the Government, through the Federal Deposit Insurance Corporation, stepped in to bail out Continental Illinois by announcing 100% deposit guarantee instead of the limited guarantee provided by FDIC insurance. This came to be called the doctrine of “Too Big to Fail” (TBTF). The argument was that certain very large banks, because they were so large, must not be allowed to fail for fear it would trigger a chain-reaction of failures across the economy. It didn’t take long before the large banks realized that the bigger they became through mergers and takeovers, the more certain they were to qualify for TBTF treatment. So-called ‘Moral Hazard’ was becoming a prime feature of US big banks. 10 The TBTF doctrine, during Greenspan’s tenure as Chairman of the Federal Reserve, would be extended to cover very large hedge funds (LTCM), very large stock markets (NYSE), and virtually every large financial entity in which the US financial establishment had a strategic stake. Its consequences would be devastating. Few outside the elite circles of the largest institutions of the financial community even realized the TBTF doctrine had been established. Once the TBTF principle was made clear, the biggest banks scrambled to get even bigger. The traditional separation of banking into local S&L mortgage lenders, on the one hand, and large international money center banks like Citibank or J.P. Morgan or Bank of America, on the other – as well as the prohibition on banking in more than one state -- were systematically dismantled. It was a new version of ‘leveling the playing field,’ whereby the biggest banks simply bulldozed and swallowed up the smaller ones, thereby creating financial cartels of unprecedented dimensions. By 1996 the number of independent banks had shrunk by more than one-third from the late 1970s -- from more than 12,000 to fewer than 8,000. The percentage of banking assets controlled by banks with more than $100 billion doubled to one-fifth of all US banking assets. The trend was just beginning. The banks’ consolidation was formalized in the 1994 Interstate Banking and Branch Efficiency Act which removed geographic restrictions on bank branching and holding company acquisitions by the individual states. Under the rubric of more efficient banking a Darwinian struggle for ‘survival of the biggest’ ensued. The biggest were by no means, however, the fittest. The consolidation was to have significant consequences a decade or so later as securitization exploded at a scale beyond even the banks’ wildest imagination. Operation Rollback: Enter Greenspan The major New York money center banks had long had in mind the rollback of that 1933 Congressional restriction, Glass-Steagall. And Alan Greenspan as Fed Chairman was their man. The major US banks, led by Rockefeller’s influential Chase Manhattan Bank and Sanford Weill’s Citicorp, spent over one hundred million dollars lobbying and making campaign contributions to influential Congressmen to get deregulation of the Depression-era restrictions on banking and stock underwriting. Within two months of taking office, on October 6, 1987, just days before the greatest one-day crash on the New York Stock Exchange, Greenspan told Congress that US banks, victimized by new technology and ''frozen'' in a regulatory structure developed more than 50 years ago, were losing their competitive battle with other financial institutions and needed to obtain new powers to restore a balance: ''The basic products provided by banks - credit evaluation and diversification of risk - are less competitive than they were 10 years ago.'' As the New York Times noted, “Mr. Greenspan has long been far more favorably disposed toward deregulation of the banking system than was Paul A. Volcker, his predecessor at the Fed.” 11 Greenspan’s first testimony to Congress as Chairman of the Fed was of signal importance to understand the continuity between the policies he implemented right from that moment up to the securitization revolution after 2001 -- the New Finance securitization revolution. Again quoting the New York Times account, Mr. Greenspan, in decrying the loss of the banks' competitive edge, pointed to what he said was a ‘too rigid’ regulatory structure that limited the availability to consumers of efficient service and hampered competition. But then he pointed to another development of ‘particular importance’ - the way advances in data processing and telecommunications technology had allowed others to usurp the traditional role of the banks as financial intermediaries. In other words, a bank's main economic contribution - risking its money as loans based on its superior information about the creditworthiness of borrowers - is jeopardized. The Times quoted Greenspan on the challenge in 1987 to modern banking posed by technological change: ‘Extensive on-line data bases, powerful computation capacity and telecommunication facilities provide credit and market information almost instantaneously, allowing the lender to make its own analysis of creditworthiness and to develop and execute complex trading strategies to hedge against risk,’ Mr. Greenspan said. This, he added, resulted in permanent damage ‘to the competitiveness of depository institutions and will expand the competitive advantage of the market for securitized assets,’ such as commercial paper, mortgage pass-through securities and even automobile loans. He concluded, ‘Our experience so far suggests that the most effective insulation of a bank from affiliated financial or commercial activities is achieved through a holding-company structure.’ 12 However, in a bank holding company, the Federal Deposit Insurance fund, a pool of contributions to guarantee bank deposits at that time up to $100,000 per account, would only apply to the core bank, not to the various subsidiary companies created to engage in exotic hedge fund or other off-the-balance-sheet activities. The upshot was that in a crisis such as the unraveling post-2007 securitization meltdown, the ultimate Lender of Last Resort, the insurer of bank risk, becomes the taxpaying American public. The issues provoked a hard fight in Congress that lasted until the final repeal of Glass- Steagall – the Gramm-Leach-Bliley Act -- was signed into law by Clinton in November 1999. Clinton presented the pen he used to sign the repeal as a gift to Sanford Weill, the powerful chairman of Citicorp, a curious gesture for a Democratic President, to say the least. It seemed Clinton, too, knew how to follow the money. Alan Greenspan had played the decisive role in moving Glass-Steagall repeal through Congress. Testifying before the House Committee on Banking and Financial Services on February 11, 1999, Greenspan declared, …[W]e support, as we have for many years, major revisions, such as those included in H.R. 10, to the Glass-Steagall Act and the Bank Holding Company Act to remove the legislative barriers against the integration of banking, insurance, and securities activities. There is virtual unanimity among all concerned--private and public alike--that these barriers should be removed. The technologically driven proliferation of new financial products that enable risk unbundling have been increasingly combining the characteristics of banking, insurance, and securities products into single financial instruments.13 In his same 1999 testimony Greenspan made clear that repeal meant less, not more, regulation of the newly allowed financial conglomerates, opening the floodgate to the fiasco that occurred less than a decade later: As we move into the twenty-first century, the remnants of nineteenth-century bank examination philosophies will fall by the wayside. Banks, of course, will still need to be supervised and regulated, in no small part because they are subject to the safety net. My point is, however, that the nature and extent of that effort need to become more consistent with market realities. Moreover, affiliation with banks need not--indeed, should not--create bank-like regulation of affiliates of banks 14 (emphasis added—f.w.e.) Congress had passed Glass-Steagall in the first place precisely in order to break up the bank holding companies with their inherent conflicts of interest that had led tens of millions of Americans into joblessness and home foreclosures in the 1930s depression. In 1999, this protection vanished. ‘Strategies unimaginable a decade ago…’ The New York Times described the new financial world created by repeal of Glass-Steagall in a June 2007 profile of Goldman Sachs, just weeks prior to the eruption of the sub-prime crisis: “While Wall Street still mints money advising companies on mergers and taking them public, real money - staggering money - is made trading and investing capital through a global array of mind-bending products and strategies unimaginable a decade ago.” They were referring to the securitization revolution. The Times quoted Goldman Sachs chairman Lloyd Blankfein on the new financial securitization, hedge fund and derivatives world: “We've come full circle, because this is exactly what the Rothschilds or J. P. Morgan, the bankers were doing in their heyday. What caused an aberration was the Glass-Steagall Act.”15 Lloyd Blankfein, like most of Wall Street’s bankers and financial insiders, saw the New Deal as an aberration, openly calling for return to the early, unregulated heyday of J. P. Morgan and other tycoons, the ‘Gilded Age’ of abuses in the 1920s. Glass-Steagall, Blankfein’s ‘aberration,’ had been finally eliminated by Bill Clinton. Goldman Sachs had been a prime contributor to the Clinton campaign and even sent its chairman, Robert Rubin, to the Clinton Administration in 1993, first as “economic czar” then in 1995 as Treasury Secretary. In October 2007 Robert Kuttner, co-founder of the Economic Policy Institute, testified before US Congressman Barney Frank's Committee on Banking and Financial Services, evoking the specter of the Great Depression: Since repeal of Glass Steagall in 1999, after more than a decade of de facto inroads, super-banks have been able to re-enact the same kinds of structural conflicts of interest that were endemic in the 1920s - lending to speculators, packaging and securitizing credits and then selling them off, wholesale or retail, and extracting fees at every step along the way. And, much of this paper is even more opaque to bank examiners than its counterparts were in the 1920s. Much of it isn't paper at all, and the whole process is supercharged by computers and automated formulas. 16 Dow Jones Market Watch commentator Thomas Kostigen, writing in the early weeks of the unravelling sub-prime crisis, remarked about the role of Glass-Steagall repeal in opening the floodgates to fraud, manipulation and the excesses of credit leverage in the expanding world of securitization: Time was when banks and brokerages were separate entities, banned from uniting for fear of conflicts of interest, a financial meltdown, a monopoly on the markets, all of these things. In 1999, the law banning brokerages and banks from marrying one another — the Glass-Steagall Act of 1933 — was lifted, and voila, the financial supermarket has grown to be the places we know as Citigroup, UBS, Deutsche Bank, et al. But now that banks seemingly have stumbled over their bad mortgages, it’s worth asking whether the fallout would be wreaking so much havoc on the rest of the financial markets had Glass-Steagall been kept in place. …No one really questioned the new fad of collateralizing bank mortgage debt into different types of financial instruments and selling them through a different arm of the same institution. They are now…(emphasis added, f.w.e). ….Glass-Steagall would have at least provided what the first of its names portends: transparency. And that is best accomplished when outsiders are peering in. When every one is on the inside looking out, they have the same view. That isn’t good because then you can’t see things coming (or falling) and everyone is subject to the roof caving in. Congress is now investigating the subprime mortgage debacle. Lawmakers are looking at tightening lending rules, holding secondary debt buyers responsible for abusive practices and, on a positive note, even bailing out some homeowners. These are Band-Aid measures, however, that won’t patch what’s broken: the system of conflicts that arise when sellers, salesmen and evaluators are all on the same team. 17 (emphasis added--f.w.e.) Greenspan’s ‘Dot.com’ bubble Before the ink was dry on Bill Clinton’s signature repealing Glass-Steagall, the Greenspan Fed was fully engaged in hyping their next crisis—the deliberate creation of a stock bubble to rival that of 1929, a bubble which the Fed would then deliberately burst, just as it had in 1929. The 1997 Asian financial crisis and the ensuing Russian state debt default of August 1998 created a sea change in global capital flows to the advantage of the dollar. With Korea, Thailand, Indonesia and most emerging markets in flames following a coordinated, politically-motivated attack by a trio of US hedge funds, led by George Soros’ Quantum Fund, Julian Robertson’s Jaguar and Tiger funds and Moore Capital Management, according to Swiss and City of London financial insider reports, the Connecticut-based LTCM hedge fund of John Merriweather.18 The impact of the Asia Crisis on the dollar was notable and suspiciously positive. Andrew Crockett, the General Manager of the Bank for International Settlements, the Basle-based organization of the world’s leading central banks, noted that in 1996 the East Asian countries had been running a combined current account deficit of $33 billion. Then, as speculative hot money flowed in, “1998-1999, the current account swung to a surplus of $87 billion.” By 2002 the surplus had reached the impressive sum of $200 billion. Most of that surplus returned to the US in the form of Asian central bank purchases of US Treasury debt, in effect financing Washington policies, pushing US interest rates way down and fuelling an emerging ‘New Economy,’ the NASDAQ Dot.com IT boom. 19 During the extremes of Asia’s 1997-1998 financial crises, Greenspan refused to act to ease the financial pressures until after Asia had collapsed and Russia had defaulted in August 1998 on its sovereign debt, and deflation had spread from region to region. Then, when he and the New York Fed stepped in it was to rescue the huge LTCM hedge fund that had become insolvent as a result of risky bets it had made that came unstuck as a result of the Russian crisis. To save the big New York financial institutions that had given the credit lines to LTCM and other hedge funds, Greenspan made an unusually sharp cut in Fed Funds interest rates for the first time in his tenure as Fed chief, by 0.50%. That was followed a few weeks later by a 0.25% cut. That gave the nascent dot.com IT bubble in the stock market a nice little ‘shot of whiskey’ as cheap money poured into stocks, fueling a new bubble in prices unrelated to any long-term economic reality. The financial crises in Asia and Russia had, in effect, supplied the new cash for the Wall Street stock market casino to play the next round. Towards the end of 1998, amid successive cuts in Fed interest rates and pumping in of ample liquidity, the US stock markets, led by the NASDAQ and NYSE, went ballistic. In 1999 alone, as the New Economy bubble got into full swing, a staggering $2.8 trillion increase in the value of stock shares was registered. That was more than 25% of annual GDP, all in paper values. Gone were the Glass-Steagall restrictions on savings & loan banks and investment banks promoting the stocks they had brought to market. The exact conflict of interest that Glass- Steagall had been designed to prevent was now the centerpiece of the New Economy. Wall Street stock promoters were earning tens of millions in bonuses for fraudulently hyping Internet and other stocks such as WorldCom and Enron. It was the ‘Roaring 1920s’ all over again, but with an electronic, computerized turbo-charged kicker. Blankfein and his Wall Street cronies were no doubt satisfied that the ‘aberration’ of regulation had given way to the ‘norm’ of free-wheeling speculative frenzy. The March 2000 speech In March 2000, at the very peak of the Dot.com stock mania, Alan Greenspan delivered an address to a Boston College Conference on the New Economy in which he repeated his standard mantra in praise of the IT revolution and its impact on financial markets. In this speech he went even beyond previous praises of the IT stock bubble and its putative “wealth effect” on household spending which he claimed had kept the US economy growing robustly: In the last few years it has become increasingly clear that this business cycle differs in a very profound way from the many other cycles that have characterized post-World War II America,” Greenspan noted. “Not only has the expansion achieved record length, but it has done so with economic growth far stronger than expected. He went on, waxing almost poetic as he built momentum: My remarks today will focus both on what is evidently the source of this spectacular performance--the revolution in information technology…When historians look back at the latter half of the 1990s a decade or two hence, I suspect that they will conclude we are now living through a pivotal period in American economic history…Those innovations, exemplified most recently by the multiplying uses of the Internet, have brought on a flood of startup firms, many of which claim to offer the chance to revolutionize and dominate large shares of the nation's production and distribution system. Then the Maestro revealed his real theme, the ability to spread risk by using technology and the Internet, a harbinger of his thinking about the unfolding securitization phenomenon, then in its infancy: The impact of information technology has been keenly felt in the financial sector of the economy. Perhaps the most significant innovation has been the development of financial instruments that enable risk to be reallocated to the parties most willing and able to bear that risk. Many of the new financial products that have been created, with financial derivatives being the most notable, contribute economic value by unbundling risks and shifting them in a highly calibrated manner. Although these instruments cannot reduce the risk inherent in real assets, they can redistribute it in a way that induces more investment in real assets and, hence, engenders higher productivity and standards of living. Information technology has made possible the creation, valuation, and exchange of these complex financial products on a global basis…. 20 Most notable about Greenspan’s euphoric paean to the benefits of the IT stock mania was its timing. He knew very well that the impact of the Fed’s six interest rate increases that he had instigated in late 1999 were sooner or later going to chill the buying of stocks on borrowed money. Sure enough, the dot-com bubble burst one week after Greenspan’s speech. on March 10, 2000, the NASDAQ Composite index peaked at 5,048, more than double its value just a year before. on Monday, March 13, the NASDAX fell by an eye-catching 4%. Then, from March 13, 2000 through to the market bottom, the market lost paper values worth more than $5 trillion, as Greenspan’s rate hikes brought a brutal end to a bubble he repeatedly claimed he could not confirm even existed until after the fact. In dollar terms, the 1929 stock crash was peanuts compared with Greenspan’s Dot.com crash. Greenspan had raised interest rates six times by March, a fact which had a brutal, chilling effect on the leveraged speculation in dot.com company stocks. … 1 Alan Greenspan, Testimony before the House Committee on Banking and Financial Services, February 11, 1999. 2 Bob Woodward, Maestro: Alan Greenspan's Fed and the American Economic Boom (New York: Simon & Schuster, 2000). Woodward’s book is an example of the charmed treatment Greenspan was accorded by the major media. Woodward’s boss at the Washington Post, Catharine Meyer Graham, daughter of the legendary Wall Street investment banker Eugene Meyer, was an intimate Greenspan friend. The book can be seen as a calculated part of the Greenspan myth-creation by the influential circles of the financial establishment. 3 Lewis v. United States, 680 F.2d 1239 (9th Cir. 1982). 4 Michael Lewis, Inside Wall Street's Black Hole, Portfolio.com, February 19, 2008, accessed in http://www.portfolio.com/news-markets/national-news/portfolio/2008/02/19/Black-Scholes-Pricing- Model/?print=true. 5 Ibid. 6 Stephen Zarlenga, Observations from the Trading Floor During the 1987 Crash, in http://www.monetary.org/1987%20crash.html. 7 Alan Greenspan, Testimony before the Subcommittee on Financial Institutions Supervision, US House of Representatives, Nov. 18, 1987. http://fraser.stlouisfed.org/historicaldocs/ag/download/27759/Greenspan_19871118.pdf. 8 Robert D. Hershey jr., Greenspan Backs New Bank Roles, The New York Times, October 6, 1987. 9 John Kenneth Galbraith, cited in Michael J. Laird, The Glass-Steagall Banking Act, its Demise, Managerial Auditing Journal, 1998, Vol.13, no. 9, pp. 509-514. 10 Federal Deposit Insurance Corporation, History of the 80s, Volume I: An Examination of the Banking Crises of the 1980s and Early 1990s, in www.fdic.gov/bank/historical/history/vol1.html, p.1. 11 Hershey, op.cit. 12 Ibid. 13 Alan Greenspan, Testimony before the House Committee on Banking and Financial Services, February 11, 1999. 14 Alan Greenspan, Statement by Alan Greenspan, Chairman, Board of Governors of the Federal Reserve System, before the Committee on Banking and Financial Services, U.S. House of Representatives, February 11, 1999, in Federal Reserve Bulletin, April 1999. 15 Jenny Anderson, Goldman Runs Risks, Reaps Rewards, The New York Times, June 10, 2007. 16 Robert Kuttner, Testimony of Robert Kuttner Before the Committee on Financial Services, Rep. Barney Frank, Chairman, U.S. House of Representatives, Washington, D.C., October 2, 2007 17 Thomas Kostigen, Regulation game: Would Glass-Steagall save the day from credit woes?, Dow Jones MarketWatch, Sept. 7, 2007, in http://www.marketwatch.com/news/story/would-glass-steagall-save-day-credit. 18 Various market traders in private telephone discussion with the author during the 1997-98 Asia crisis reported on the first hand knowledge of the three hedge funds in executing coordinated military-like attacks on the various Asian currencies. one source, a Swiss financial regulator, speaking off-record in 2002, told the author he had been present in the office of the President of Thailand’s largest bank when a call came from the head of one of the three mentioned hedge funds telling him of a planned coordinated assault on the Thai currency and of the futility of trying to resist. 19 F. William Engdahl, Hunting Asian Tigers: Washington and the 1997-98 Asia Shock, reprinted in http://www.jahrbuch2000.studien-von-zeitfragen.net/Weltfinanz/Hedge_Funds/hedge_funds.html. 20 Alan Greenspan, The Revolution in Information Technology, before the Boston College Conference on the New Economy, Boston, Massachusetts, March 6, 2000.
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