On Feb. 26, Bloomberg News announced that
they had hired the firm used by the US Federal Reserve to do "stress tests"
on the largest banks, to do a stress test on the Fed itself. The result was
what Lyndon LaRouche and EIR have warned for nearly 6 years --- the Fed is
drastically bankrupt in fact. This demonstrates once again that nothing but a
full Glass Steagall reform and the return to a national banking creditary system
can reverse the current global collapse into hell.
The PDF version has powerful
graphics on the financial collapse and the economic destruction of
Europe and the U.S.. (see:
Mike Billington
The Game Is Up: The
Fed Is Bankrupt
by Dennis
Small
March 5—In
late February, the cat was let out of the bag: The Federal Reserve System of the
United States is bankrupt. When the Fed's epitaph is written, it may well cite
the cause of death as "the undue diversion of funds into speculative
operations." The same applies to the thoroughly bankrupt U.S. banking system,
guided by the Fed, and to the British Empire's entire trans-Atlantic financial
system as well. As we will show below, the policy of endless hyperinflationary
bailouts has finally come to the end of the line.
The public
announcement of defunction came on Feb. 26. On that date, Bloomberg News
reported that the New York-based risk analysis company MSCI had just completed a
stress test on the U.S. Federal Reserve System, which found that, under the
"adverse" scenario of a Fed "exit" from quantitative easing (QE)—i.e., selling
off the $3 trillion in assets that the Fed has accumulated as part of QE—the
mark-to-market loss on the Fed's asset book would be some $547 billion over
three years. That is many times the value of the Fed's capital, and it means
that the Fed is in fact bankrupt, by any honest accounting
measure.
MSCI is the
same high-roller company which the Fed itself uses to perform stress tests on
the 19 largest U.S. banks. The current study, commissioned by Bloomberg News,
applied the same criteria it uses on the banks, to study the Fed's own solvency.
"The potential losses are unprecedented in the Fed's 100-year history,"
Bloomberg wrote in its wire.
The release
of the MSCI study was impeccably timed to coincide, almost to the hour, with Fed
Chairman Ben Bernanke's annual appearance before the Senate Banking Committee
and the House Financial Services Committee, Feb. 26 and Feb. 27, respectively.
None of the Congressmen or Senators on the committees were sufficiently
emboldened to raise the issue of returning to Franklin Roosevelt's 1933
Glass-Steagall Act as the obvious solution to the looming
catastrophe.
A few did
take note, however, of the huge losses that would be suffered as the Fed unwinds
its QE purchases, and Sen. Bob Corker (R-Tenn.) went so far as to shoot off an
open letter to Bernanke the same day he testified before the Senate, demanding
to know:
"If
interest rates were to rise and your securities portfolio were marked to
market, is it not possible that you could be rendered insolvent, at least on a
balance-sheet basis? And if so, what kind of risk would that
present?"
When a
ranking Senator of the United States publicly asks the chairman of the Fed if
the Federal Reserve Bank is not "insolvent," you know that things have gone very
far.
The report of
the Fed's bankruptcy comes as a shock only to those who have not followed Lyndon
LaRouche's writings over the years (see box). But that reality now finally
appears to be dawning on large numbers of major players within the
trans-Atlantic financial community—including the Fed itself, the Wall Street
banking crowd, and their British senior partners—namely, that the Fed itself is
flat-out bankrupt.
Easing Your Way into
Bankruptcy
The Fed is
now reaping what it itself has sowed, at London's insistence, with its policy of
hyperinflationary quantitative easing, in response to the 2008 blowout of the
world financial bubble. From 2008, through the end of 2012, the Fed issued over
$2.5 trillion in new funds simply pumped into the banking system. In 2013, the
Fed is on course to pump in an additional $1 trillion, through QE. (The total
bailout of the banks is much larger than that, by an order of magnitude; the QE
is simply the new cash that the Fed has pumped in directly).
The argument
put forth by the Obama Administration for public consumption to justify these
bailouts, has been along the lines of: "Hey, we have to help out the banks, so
that they can in turn resume lending to businesses and consumers." But that was
neither the result, nor the real intention. Over the same period in which U.S.
QE totaled over $2.5 trillion, bank deposits did in fact rise by nearly $1.7
trillion. But was this money then lent out by the banks? Of course not: It went
to feed the speculative cancer. As a result, total bank lending
contracted by nearly $1 trillion between 2008 and 2012, at the same
time that QE rose by $2.5 trillion.
But the real
problem is even worse than that, because a quick rule of thumb is that perhaps
half, at most, of bank lending in any given year is actually productive. The
other half is speculative by it nature, consisting of interbank lending, placing
bets on mortgages, and so on.
Nor is this
policy limited to the United States. The British Empire's entire trans-Atlantic
financial system has been hollowed out by this same speculative
lunacy.
In the United
Kingdom, over the same period, the Bank of England has likewise issued some $590
billion in QE, and bank deposits have also risen—by a dramatic $1.1 trillion, a
42% jump. Bank lending predictably fell in the U.K. during this period,
just as it did in the U.S., in this case, by some £80 billion (or $125 billion,
at the current exchange rate), a 5% drop.
The same
holds true for the policy of the European Central Bank (ECB) for continental
Europe. Over this same period, the European equivalent of QE—quaintly known as
LTRO, or Long-Term Refinancing Operations—has weighed in with over $1.3 trillion
in new funny money, to try to bail out the bankrupt European banking giants,
while bank lending continues to stagnate across Europe.
The combined
picture for the entire trans-Atlantic financial system is summarized in
(Figure 1). Cumulative QE hyperinflated the financial system to
the tune of $4.4 trillion by the end of 2012, and is soaring towards $5.5-$6
trillion in 2013. And all the while, bank lending has declined by about
$1 trillion.
As LaRouche
has repeatedly warned:
"The entire
world system is in a crisis. It's a general breakdown crisis which is centered
in the trans-Atlantic community.... [This is] a systemic rupture in the entire
trans-Atlantic financial and monetary facade."
Derivatives:
Double-or-Nothing Gambling
The last five
years of QE hyperinflation, comes on top of the unleashing of the derivatives
bubble with the 1999 repeal of Glass-Steagall, and that in turn was the
follow-up to the 1971 demise of the Bretton Woods system and the systematic
takedown of the productive economy in the wake of the Kennedy
assassination.
The
derivatives aspect of the problem deserves a moment's attention, since the most
common question that comes up when angry citizens try to grapple with what is
happening, is: "So what the hell are derivatives, anyway?"
That is a
very good question.
Financial
derivatives are, by far, the largest component of all financial aggregates in
the world. Figure 2 shows the growth of these aggregates from
1980 to 2005, which, at that point, totaled just shy of $1 quadrillion (a
thousand trillion), according to EIR's best estimate. Today the total
is probably closer to $1.5 quadrillion—although the number is essentially
meaningless, as are the derivatives themselves.
The point is,
that the total financial aggregates are not made up principally of all
of the stock markets in the world (overvalued as they are), nor of all the
government, corporate, and personal debt in the world (as overvalued as that
is). The lion's share—more than 80% of the total—is financial
derivatives.
So, again:
What the hell are derivatives, anyway?
Derivatives
have been described, accurately, as essentially a way to lie and cover up a loss
that has already occurred. Rather than facing up to the loss, and recognizing,
"I guess I have to pay up or declare bankruptcy if I can't pay the debt," the
speculator instead borrows more money in order to place a bet (a derivative) to
cover up the loss by speculating on some hypothetical future gain. When that
second loss comes due, he again covers the loss by a further bet, in the hopes
that eventually he won't have to pay the increased loss.
Another way
of describing derivatives, is the case of the gambling addict who is always
losing at the roulette table, and rather than pay up and call it a day (and face
the wrath of his wife, or his boss), instead says: "No, let's play
double-or-nothing!" And when he loses again, he again insists frenetically:
"Double-or-nothing! Double-or-nothing!"
In short,
derivatives are double-or-nothing speculative bets designed to cover up massive
losses, de facto bankruptcy, that are being suffered throughout the
economy.
But at a
certain point, the game is up, and reality asserts itself. That point is
now.
Reality Strikes Wall
Street and London
That
realization is behind the public barroom brawl over financial policy that has
broken out in world banking centers, from Great Britain, to the United States,
to Japan and China, over how to address the hyperinflation "meteorite" that is
about to strike Planet Earth.
In the U.K.,
Moody's, on Feb. 22, downgraded the government's debt rating from AAA to AA1, in
the wake of a stronger-than-usual vote in the Ban
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