280 No money for jobs? How the Bank of Canada found (made) money for World War II

(1) Debt Wars, as EU Countries sink into Depression - Michael Hudson
(2) No money for jobs? How the Bank of Canada found (made) money for World War II
(3) S.E.C. Accuses Goldman of Fraud in Mortgage Deal
(4) Big Banks Mask Risk Levels
(5) India spared Financial Crisis because Indira Gandhi nationalized the banks

(1) Debt Wars, as EU Countries sink into Depression - Michael Hudson

The Coming European Debt Wars

EU Countries sinking into Depression

by Prof. Michael Hudson

Global Research
April 9, 2010

http://www.globalresearch.ca/index.php?context=va&aid=18545
http://dandelionsalad.wordpress.com/2010/04/09/the-coming-european-debt-wars-by-prof-michael-hudson/

Government debt in Greece is just the first in a series of European debt bombs that are set to explode. The mortgage debts in post-Soviet economies and Iceland are more explosive.  Although these countries are not in the Eurozone, most of their debts are denominated in euros. Some 87% of Latvia’s debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. So their government borrowing by non-euro members has been to support exchange rates to pay these private-sector debts to foreign banks, not to finance a domestic budget deficit as in Greece.

All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression. Now that real estate prices are plunging, trade deficits are no longer financed by an inflow of foreign-currency mortgage lending and property buyouts. There is no visible means of support to stabilize currencies (e.g., healthy economies). For the past year these countries have supported their exchange rates by borrowing from the EU and IMF. The terms of this borrowing are politically unsustainable: sharp public sector budget cuts, higher tax rates on already over-taxed labor, and austerity plans that shrink economies and drive more labor to emigrate.

Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that can’t (or won’t) pay may be their problem, not that of their debtors. No one wants to accept the fact that debts that can’t be paid, won’t be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies, but many legal experts find debt agreements calling for repayment in euros unenforceable. Every sovereign nation has the right to legislate its own debt terms, and the coming currency re-alignments and debt write-downs will be much more than mere “haircuts.”

There is no point in devaluing, unless “to excess” – that is, by enough to actually change trade and production patterns. That is why Franklin Roosevelt devalued the US dollar by 75% against gold in 1933, raising its official price from $20 to $35 an ounce. And to avoid raising the U.S. debt burden proportionally, he annulled the “gold clause” indexing payment of bank loans to the price of gold. This is where the political fight will occur today – over the payment of debt in currencies that are devalued.

Another byproduct of the Great Depression in the United States and Canada was to free mortgage debtors from personal liability, making it possible to recover from bankruptcy. Foreclosing banks can take possession of collateral real estate, but do not have any further claim on the mortgagees. This practice – grounded in common law – shows how North America has freed itself from the legacy of feudal-style creditor power and the debtors’ prisons that made earlier European debt laws so harsh.

The question is, who will bear the loss? Keeping debts denominated in euros would bankrupt much local business and real estate. Conversely, re-denominating these debts in local depreciated currency will wipe out the capital of many euro-based banks. But these banks are foreigners, after all – and in the end, governments must represent their own home electorates. Foreign banks do not vote.

Foreign dollar holders have lost 29/30th of the gold value of their holdings since the United States stopped settling its balance-of-payments deficits in gold in 1971. They now receive less than a thirtieth of this, as the price has risen to $1,100 an ounce. If the world can take that, why shouldn’t it take the coming European debt write-downs in stride?

There is growing recognition that the post-Soviet economies were structured from the start to benefit foreign interests, not local economies. For example, Latvian labor is taxed at over 50% (labor, employer, and social tax) – so high as to make it noncompetitive, while property taxes are less than 1%, providing an incentive toward rampant speculation. This skewed tax philosophy made the “Baltic Tigers” and central Europe prime loan markets for Swedish and Austrian banks, but their labor could not find well-paying work at home. Nothing like this (or their abysmal workplace protection laws) is found in the Western European, North American or Asian economies.

It seems unreasonable and unrealistic to expect that large sectors of the New European population can be made subject to salary garnishment throughout their lives, reducing them to a lifetime of debt peonage. Future relations between Old and New Europe will depend on the Eurozone’s willingness to re-design the post-Soviet economies on more solvent lines – with more productive credit and a less rentier-biased tax system that promotes employment rather than asset-price inflation that drives labor to emigrate. In addition to currency realignments to deal with unaffordable debt, the indicated line of solution for these countries is a major shift of taxes off labor onto land, making them more like Western Europe. There is no just alternative. Otherwise, the age-old conflict-of-interest between creditors and debtors threatens to split Europe into opposing political camps, with Iceland the dress rehearsal.

Until this debt problem is resolved – and the only way to resolve it is to negotiate a debt write-off – European expansion (the absorption of New Europe into Old Europe) seems over. But the transition to this future solution will not be easy. Financial interests still wield dominant power over the EU, and will resist the inevitable. Gordon Brown already has shown his colors in his threats against Iceland to illegally and improperly use the IMF as a collection agent for debts that Iceland doesn’t legally owe, and to blackball Icelandic membership in the EU.

Confronted with Mr. Brown’s bullying – and that of Britain’s Dutch poodles – 97% of Icelandic voters opposed the debt settlement that Britain and the Netherlands sought to force down the throat of Allthing members last month. This high a vote has not been seen in the world since the old Stalinist era.

It is only a foretaste. The choice that Europe ends up making will likely drive millions into the streets. Political and economic alliances will shift, currencies will crumble and governments will fall. The European Union and indeed, the international financial system will change in ways yet to be seen. This will be especially the case if nations adopt the Argentina model and refuse to make payment until steep discounts are made.

Paying in euros – for real estate and personal income streams in negative equity, where the debts exceed the current value of income flows available to pay mortgages or for that matter, personal debts – is impossible for nations that hope to maintain a modicum of civil society. “Austerity plans” IMF and EU style is an antiseptic, technocratic jargon for life-shortening and killing impact of gutting income, social services, spending on health on hospitals, education and other basic needs, and selling off public infrastructure for buyers to turn nations into “tollbooth economies” where everyone is obliged to pay access prices for roads, education, medical care and other costs of living and doing business that have long been subsidized by progressive taxation in North America and Western Europe.

The battle lines are being drawn regarding how private and public debts are to be repaid. For nations that balk at repayment in euros, the creditor nations have their “muscle” waiting in the wings: the credit rating agencies. At the first sign a nation is balking in paying in hard currency, or even at the first hint of it questioning a foreign debt as improper, the agencies will move in to reduce a nation’s credit rating. This will increase the cost of borrowing and threaten to paralyze the economy by starving it for credit.

The most recent shot was fired n April 6 when Moody’s downgraded Iceland’s debt from stable to negative. “Moody’s acknowledged that Iceland might still achieve a better deal in renewed negotiations, but said the current uncertainty was hurting the country’s short-term economic and financial prospects.”[1]

The fight is on. It should be an interesting decade.

Prof. Micheal Hudson is Chief Economic Advisor to the Reform Task Force Latvia (RTFL). His website is michael-hudson.com.

© Copyright Michael Hudson, Global Research, 2010

[1] THE ASSOCIATED PRESS, “Moody’s Downgrades Iceland Outlook,” The New York Times, April 7, 2010.

(2) No money for jobs? How the Bank of Canada found (made) money for World War II

To see the graphs that go with this article, email david_pidcock@hotmail.com

From: Israel Shamir <adam@israelshamir.net> Cc: david_pidcock@hotmail.com Date: 17.04.2010 09:26 PM

"The Devil Deficit Made Me Do It!"

The Myths about Government Debt Exploded & Debunked

by Harold Chorney             

Assoc. Professor of Political Economy and Public Policy
Concordia University, Montreal

John Hotson
Professor of Economics
University of Waterloo

Mario Seccareccia
Assoc. Professor of Economics
University of Ottawa

CCPA Popular Economics Series
Editor: Ed Finn
Canadian Centre For Policy Alternatives
ISBN 0-88627-118-5  

In 2010 - Scanned, Re-Set and Re-Issued
by David M Pidcock.

Forum For Stable Currencies –  Robin Hood Cross Party Alliance 
The Forge, 2 Denby Street, Sheffield S2 4QH
England.
Tel: 00-44-771-5678955

david_pidcock@hotmail.com

"The Deficit Made Me Do It!"

Harold Chorney
John Hotson
Mario Seccareccia

Editor: Ed Finn

ISBN # 0.88627-118.5                                                                                        May 1992

INTRODUCTION

Governments these days find it easy to defend cuts in services and programs.

All they have to do is point to their annual deficits and their total accumulated debts.

In the case of the federal government, the annual projected deficit is about $30 billion and its net accumulated debt about $420 billion.

This public debt provides the politicians with a convenient excuse for cutting spending or raising taxes or both.

“We're broke,” they tell us plaintively. “We can't afford to increase public services, or even keep them at their present level.”

The same excuse is used to defend a failure to stimulate the economy and create more jobs.

That would sink us even further into debt, they protest. “We can't let the deficit get any larger.”

In their obsession with the monetary deficit, however, the politicians are ignoring the much more serious deficits that we are running up in our human capital and public infrastructure. It will benefit Canadians not at all if the price we pay for getting the financial deficit under control is the decline of our health care, our education, our social programs, and our public sector. These are the "deficits' we really should be concerned about!

The rise of the public debt over the past few decades has not been caused by excessive government spending. It has been caused by excessive interest rates that now siphon off one in every three dollars of our taxes. Spending on social programs has actually gone down in relative terms, as a share of GDP. So if controlling the deficit is necessary, it should be done primarily through interest rate reduction, not by underfunding and slashing the public sector.

Unfortunately, most Canadians either don't realize that the deficit is interest-rate driven, or if they do, believe that interest rates are set by uncontrollable economic and market forces. In any event, they are intimidated by all the dire warnings they hear about the dangers of deficit financing. They accept "the big lie" that governments must get out of debt, even if that means cutting services or raising taxes in the midst of a deep recession.

For too long government monetary policies have been excluded from public scrutiny and debate. The political and bureaucratic "high priests" who set these policies would have us believe they're too .complicated for average Canadians to understand. In fact, they are not at all difficult to grasp, when they're properly explained.

It's time to debunk the myths that have been spread about government indebtedness. It's time to question the politicians feeble excuse that "the deficit made us do it "--or, more commonly, "the deficit won't let us do it.”

This booklet not only demystifies the deficit. It challenges the "logic" of current government priorities. It provides us with facts and figures justifying our demand that governments abandon the economic fallacies of the 19305 and start alleviating the economic misery of the 1990s.

The political and financial "high priests" who set monetary policy would have us believe it's too complicated for average Canadians (Brits and others) to understand.  In fact, the ways that governments collect, borrow and spend money are not at all difficult to grasp, when properly explained.

"THE BIG LIE"

As the deep recession dragged into 1992, Finance Minister Don Mazankowski said he couldn't do anything about it. His hands were tied, he said. The federal government was broke. The cupboard was bare. The deficit and accumulated national debt were so enormous that his first priority had to be to reduce them--even if that meant prolonging the recession and making it even worse.

So his budget contained almost nothing to revive the sick economy. With interest payments on the debt gobbling up one-third of tax revenue, his response was to keep taxes high and axe more public services and agencies.

Like Martin Luther before him, Mazankowski in effect proclaimed: 'Here stand I. I cannot do otherwise."

But it doesn't take an economist to see that in fact he could. All you have- to do is imagine what the government would do if it got involved in another Gulf War--or if that war were still raging. Would Mazankowski have brought down the same kind of budget? Would he have said, 'We'd like to keep on fighting, but we're broke, so we're calling our troops back"? Not on your life!

Did Canada surrender half way through World War II because the national debt had grown even larger than the Gross Domestic Product? Of course not! Somehow the extra money was found. If it wasn't by raising taxes or borrowing from the private banks, why, the Bank of Canada simply created all the money the government needed - and at near-zero interest rates, too!

When World War II ended, the national debt relative to the national income was more than twice as large as it is now. But was the country ruined? Did we have to declare national bankruptcy? Far from it! Instead, Canada's economy boomed and the country prospered for most of the post-war period.

Why isn't the same thing happening today? Why was a much larger national debt shrugged off in 1945, while today's much smaller debt (as a percentage of GDP) is being used as an excuse to let the economy stagnate?

The answer can be found at the Bank of Canada. During the war, and for 30 years afterward, the government could borrow what it needed at low rates of interest, because the government’s own bank produced up to half of all the new money. That forced the private banks to keep their interest rates low, too.

When World War II ended, Canada's national debt relative to national Income was twice as high as It Is today. Yet the economy boomed and the country prospered for most of the post-war period

Since the mid – 1970s however; the Bank of Canada, with government consent, has been creating less and, less of the new money while letting the private banks create more and more. Today our bank creates a mere 2% of each year's new money supply, while allowing the private banks to gouge the government--and of course you and me, as well--with outrageously high interest rates. And it is these extortionate interest charges that are the principal cause of the rapid escalation of the national debt. If the federal government were paying interest at the average levels that prevailed from the 1930s to the mid 1970s, it would now be running an operating surplus of about $13 billion!

Mazankowski and the Tory government he represents are engaging in a colossal flim-flam. He knows as well as we do that a sovereign government can always find money to do whatever it really wants to do: such as fight a costly war; or dispense billion-dollar handouts to profitable corporations. So what he was really telling us in his budget speech was that his government was willing to spend the money required to save Kuwait, but is not willing to spend the money needed to save the Canadian economy.

The finance minister, of course, would argue that, yes, the additional money could be found to stimulate the economy, but it would be inflationary. Having plunged the country into a deep recession in order to 'wring inflation out of the economy, the Tory government says it doesn’t want to trigger another rise in living costs.

So the war on inflation is another war the government thinks is worth fighting, even after it's won. Even if its continuing anti-inflation measures have the effect of raising taxes and interest rates, while pushing down personal incomes and corporate profits (bank profits excepted. of course), and. throwing hundreds of thousands of  Canadians out of work.

The toll of economic ruin and human deprivation exacted by the federal government and the Bank of Canada will become even more devastating if the counterproductive policies of restraint are pursued much longer.

 If the federal government had been paying interest at the levels that prevailed prior to the 1980s, it would now be running an operating surplus of about $13 billion.

THE MYTH OF GOVERNMENT

"OVERSPENDING"

Whenever an economic downturn requires more government spending, the hue and cry over "the deficit" breaks out anew. And this despite the obvious responsibility of the state, in times of low demand and high unemployment, to restore demand and create more jobs. In the process, unavoidably, the government deficit increases because its tax revenue drops during a recession while it must spend more to help the recession's victims.

Such was the situation during the Great Depression of the 19305. Such was the situation in the recession of 1981-82, and now again in the much worse downturn of 1991-92.

The entire history of public indebtedness incurred to finance public activities is linked with the rise in our living standards over the last 100 years. Most of the credit is given to the private enterprise system. Far less appreciated is the fact that society has also benefited enormously from the roads, hospitals, schools, and other public facilities and programs that are provided by government--and which business needs as much as private citizens do.

Nevertheless, the myth priests that the public sector does not contribute to--but rather subtracts from--the overall wealth of the nation. It's a myth that underlies the fierce opposition of most business executives to deficit financing.

Their real objection is not so much to the deficit, per se, but to the expansion of the public sector that deficits permit. Lest there be any doubt about that, simply ask yourself whether the same outcry is raised about the growing reliance on credit (deficit financing by another name) on the part of both business and consumers.

In fact, the explosion of private credit has been far greater than the increase of public debt. Total private sector debt has soared by more than 1496 a year over the past decade, compared with a much more modest growth of 696 annually in total public sector debt. Indeed, the combined debts of about $1,600 billion owed by households, corporations and financial institutions are nearly triple the debts owed by all levels of government!

Because of its far more vulnerable nature, this kind of private debt is much more risky and potentially serious than public debt. Still, apart from an occasional murmur about the overextension of credit to companies and individuals, hardly any criticism is heard. Certainly nothing to compare with the torrents of abuse and hysteria about the "evils" of public debt and the "dangers" of growing government deficits.

We are constantly warned by business people and media commentators that government deficits are now .out of control" and have reached historic heights. "I1ds is patently untrue. Measured against either personal income in the case of the provinces, or the GDP in the case of the federal government, the accumulated public debt is nowhere near the levels it reached during the 1930s or in the immediate post-war period. The current ratio of accumulated federal debt to the GDP, for example is 61%, which is just a little over half the ratio of 110% reached during World War II.

 The increase of private credit has been far greater than the increase of public debt. The combined debts of households, corporations and financial Institutions are nearly triple the debts owed by all levels of government.

REPLAYING THE 1930s

The attack against deficit finance is essentially an attack against government, and it has been going on for the last hundred years or more. Literally thousands of artic1es and editorials in the commercial press since the early 1900s have decried government deficits and called for cuts in public services along with balanced budgets.

The media have been filled with horror stories about the disastrous consequences of 'uncontrolled government spending.' Ironically this anti-deficit uproar is even more pronounced during economic slumps than during times of prosperity. A review of the business press over the past 75 years makes this point very clearly. The predictable business response to a recession is to call for less, not more government spending. 'That was its response to the Great Depression of the 1930s, and the same corporate chorus of restraint and deficit reduction is being heard today.

Too many business leaders learned nothing from the 1930s. Their ideology remains unchanged. Their stubborn and doctrinaire refusal to consider opposing views make them no better guides to wise economic policy today than they were 60 years ago

Unfortunately, it is their strident call for cutbacks and belt-tightening measures that is being heeded again by most governments--even 'though, in tough economic times, it is the worst possible course to follow. It is in fact a lethal prescription for recreating the widespread unemployment and suffering of the 1930s.

(The 11.1 % unemployment rate early in 1992 was not that far below the average 13% rate that prevailed from 1930 to 1939.)

What was so drastically false in the 1930s.is no less false today. It's not the deficit that causes recessions, high interest rates, and unemployment. Rather the converse is true. As unemployment rises, tax revenue declines even as the demand for government aid increases. And of course the higher that interest rates are pushed up, the more government revenue has to be dispensed in interest payments to support the debt.

 Business leaders learned nothing from the Great Depression. Their demand for deficit reduction is a lethal prescription for recreating the widespread unemployment and suffering of the 1930s.

EXORBITANT INTEREST RATES

Real long-term and short-term rates of interest, though lower than they were in the 1980s are still far too high, given the decline in the inflation rate.

The unnatural and unjustified levels of these rates are exposed when we compare them with the average rate of real interest over the period from 1933 to 1985--1.4%.

There's a direct correlation between high real interest rates and high unemployment. For example, during the 19305, the long-term real interest rate averaged 5.696, and during the 1980s and early 19905 they've averaged 5.396. Both of those decades were periods of high unemployment. In contrast the real rate of interest during the 1940s was only 1.896, during the 1950s 1.296 and during the 1960s 3.2%. These were all decades of low unemployment. Coincidence? Hardly

When the federal government has to pay interest on its debt of more than 6% in real terms, as compared with the historic level of 1.4% its costs are tremendously inflated and controlling the deficit becomes much more difficult. Indeed, a reduction to the traditional rate of 1.4% would save the federal government $6 billion in debt charges in the first year and $10 billion by the third year.

Thousands of years of sad experience with the concentration of wealth and debt slavery caused all the ancient books of wisdom--including the Bible and the Koran--to condemn the charging of immoderate rates of interest.

But today we have a monetary system where money is a piece of paper or a byte in a computer's memory--a system where the money supply can be increased simply by borrowing it into existence from a bank. In such a system, inflation and the over concentration of wealth can only be avoided by charging a low rate of interest.

The conventional wisdom, however, is that inflation is the greatest threat to the economy and must be restrained by raising interest rates. This flies in the face -of the common-sense observation that rising prices (inflation) are caused by rising costs, and that Interest rates are costs. So raising them will raise prices, not lower them.

Also raised by this policy, of course, is the income of the money-lenders, which explains why they subscribe so fervently to the perverse doctrine that high interest rates are somehow anti-inflationary. Certainly the world’s bankers and other money-lenders have gained much from the nonsensical notion that, while giving workers a big raise is inflationary, giving money-lenders a big raise is not.

Many economists rail against "wage push." and it's true that wages have risen by 2,700% over the past 50 years. But in the same period government tax revenue went up by 3,400% and net interest by 26, OOO%! Yet most of the economic textbooks that deplore rising wages don't even mention the tax and interest pushes. And it's not because they are complex ideas-rather, they are simple and obvious--but because it would be so embarrassing for economists to admit they've made a boner of such magnitude: that their theory of monetary policy violates basic principles of scientific logic.

The bankers have gained much from the nonsensical notion that, while giving workers a raise in pay is inflationary, giving money lenders a raise in interest rates is not.

THE CREATION OF MONEY

One of the most pervasive myths about the government deficit is that governments which spend more than they receive in revenue must borrow the difference, thus increasing the public debt.

In fact a government can choose to create the needed additional money instead of borrowing it from the banks, the public, or foreigners.

Business and the conservatives in politics and the media are horrified by the suggestion that the government exercise its right to create more money. They claim it would precipitate another ruinous bout of inflation.

But money creation is money creation - whether by a private bank or the Bank of Canada; and a government in debt only to the government own bank is not really in debt at all. If it wants to go through the rigmarole of having the Treasure "borrow" from the central bank and, later pay interest that is a minor matter of bookkeeping. As long as the central bank's profits are returned to the Treasury, the results are much the same as if the Treasury had created the money itself.

When the Bank of Canada was brand new back in the 1930s, it produced most of the money supply from 1935 to 1939 and 62% of new money during the last years of World War II. This policy gave Canada the highest employment rate it has ever had, very low interest rates, and very low inflation.

After the war years, and up to the mid1970s, the Bank of Canada traditionally created enough new money to absorb (or "monetize") between 20% and 30% of the federal government deficit. Since the bank's conversion to monetarism in 1975, however, it has steadily reduced its share of the deficit, and therefore the broadly defined money stock. The ratio is now down to 7.5%

There is no reason why the growth of Canada's money supply (averaging about $22billion annually in recent years) could not be more substantially created by the Bank of Canada. If that policy had been followed, the federal government would not have been obliged to add to its debts to pay interest on its old debts. Instead the Bank of Canada has produced barely 2% of the money added in recent years, while the chartered banks added the rest as they made loans to households, businesses and all levels of government.

At the very least, the Bank of Canada and the chartered banks should share the privilege of creating money on a 50-50 basis.

Those who dismiss such a proposal as' "inflationary" should be required to explain why it would be more inflationary for the government's bank to create $11 billion and the private banks $11 billon, rather than the present practice of having the government's bank create $0. 7 billion and the private banks $21.3 billion!

Clearly the current problem of the Canadian government's deficit is not its absolute size, or its size relative to the GDP, but the insane way it is being financed. A return to the policies of the World War II era, when the Bank of Canada produced almost one-half of the new money at near-zero interest would do wonders for the economy while greatly shrinking the deficit.

In light of these facts why do so many people still believe that large deficits cause economics problems, rather than being caused by economic stagnation and inordinately high interest rate? No doubt this widely held misconception reflects the success of the sustained business attack on the deficit, but one would expect by now that many Canadians would begin to question the business community's infallibility.

LOWER INTEREST RATES = LOWER DEFICIT

According to the Mulroney government, there are only two ways to control the deficit. One is to raise taxes, and the other is to cut government spending.

But in fact there is a third way to reduce the interest rate. The Bank of Canada can set the rate of interest at which it lends to the chartered banks at any number it chooses, and it can peg the rate on government bonds, too. This was evident during World War II when it set the rate on Treasury bills at as little as 0.36%, and on longer term bonds at less than 2.5%. And this was at a time when government deficits were as much as 27% of Canada's GDP and the money supply was increasing at a 20% rate each year.

At present the deficit is less than 5% of GDP, and would not even exist at all if the Central Bank had not raised interest rates beyond all reason. In doing so, the Bank forced Ottawa to pay as much as 20.8% on three month. Treasury bills when the bank was perfectly capable of creating all the money the government needed at just 0.36%, as it did in the 1940s.

Canada has been compared to a Third World country such as Mexico that must continue to borrow just to make its interest payments. But our federal government finds itself forced to borrow from private Canadian banks and citizens to meet interest payments set at needlessly high rates by another arm of government the Bank of Canada.

This is an outrageously artificial state of affairs. The Third World countries at least face a real obstacle, since the financial terms and conditions for their debts have been set by outside banking institutions such as the International Monetary Fund and the World Bank., over which they have no control. In Canada, on the other hand, the current “crisis” of our federal deficit has been manufactured by none other than the high interest-rate policy of the Bank of Canada.

In its early years, the Bank did a fairly good job of holding down interest rates and serving the public interest. But, over the past few decades, the Bank has become the "wholly controlled subsidiary" of the private banks, rather than their overseer. That is why it now lets the private banks create all but a tiny fraction of the nation's money supply, and let their income from interest grow many times faster than any other form of income.

To illustrate just how inexcusable the misconduct of Bank of Canada officials has been, economist Jan Kregel suggests comparing the Bank with the Coca Cola Company. This is a company run by executives who obviously know what needs to be done to earn a high rate of return for their shareholders. They've got a secret cola formula that guarantees their product will account for at least half of all soft drink sales world wide.

Now imagine a new management taking over Coca Cola. This new bunch gives the secret formula to Pepsi, free. They tell soft drink consumers that Pepsi is better for them, anyway. Then they shut down most of their bottling plants. Not surprisingly, their market share plummets from 50% to 2%.

 The size and repayment of Third World countries' debts are determined outside their borders by the International Monetary Fund and the World Bank. In Canada, on the other hand, the size and repayment of our government debts are determined by the Bank of Canada.

This scenario, of course, would never play itself out. Long before the new gang of management wreckers could go this far to destroy Coca Cola, the stockholders would have thrown the rascals out, and probably have them jailed for breach or trust.

A far-fetched analogy? Not at all. We, the citizens of Canada are the “stockholders” of the Bank of Canada, and we should be just as outraged by the Bank's antics in recent years as our hypothetical Coca Cola shareholders would have been. Because the Bank of Canada was set up and for many years operated on our behalf to keep interest rates at a reasonable level. It was an efficient low – cost “money machine” before it was subverted by the inefficient high – cost private banks it was supposed to regulate.

The first order of business for a post Mulroney-era government must be to regain effective control of the Bank of Canada and make it the primary source of money creation.

Deficit as % of Gross Domestic Product

THE "MERCHANTS OF DEBT"

Some of the severest critics of government deficits are themselves “merchants of debt.” Take bankers, for instance. Not only is society perpetually in debt to them, but they are also perpetually in debt to society. Even in the best of times, only some 5% of the assets of a bank are matched by the bank's equity. The rest is debt-financed-money owed to depositors. '

A banker who forecloses on a farmer who can't pay his bills, while the banker is himself insolvent, is in a dubious moral position. How to lessen his guilt? Why, denounce the national debt and he'll feel better.

Never mind that the government has a far better asset-to-liability ratio than the private sector. Never mind that the national debt grows more slowly than other forms of debt except during wars and depressions. Never mind that the only way to prevent depressions when private borrowing dries up is for the government to spend more than taxes are bringing in. Never mind that a banker lecturing the rest of us against debt is like an arsonist warning us against playing with matches, Make a speech demanding that the government stop going into debt to fund public services, and you're sure to be applauded by your business, political and media soul-mates.

{graph} Composition of Annual Deficits ($Billions)
85/86
86/87
87/88
88/89
89/90
90/91
91/92
92/93
93/94
94/95 {end}

THE "CROWDING OUT" MYTH

Another business - supported myth is that high deficits "crowd out" private investment. There might be a grain of truth in that claim if large-scale government borrowing and spending took place during economic boom times, thus eating up money that private investors might otherwise use to expand production.

Our current debt situation, however, occurs in an environment of large-scale unemployment, low consumer demand, and the underutilization of people and resources. As such, there is no way that government indebtedness or spending can displace private initiatives, because such initiatives are not being taken. Rather, the wise infusion of government funds in such hard times can stimulate economic activity and benefit both the unemployed and the private sector.

Closely tied to this fallacy is another one – that deficits damage the economy by reducing national savings. But there is no evidence to support that allegation, either. On the contrary, past experience points in the opposite direction.

Large deficits in the 1980s were accompanied by high rates of savings, while small deficits (and even surpluses) in the 1960s were accompanied by low rates of savings. Even though the current savings rate of 10% is down from a high of 18% reached in the early 1980s, it is still at a comparatively high level, even with the deficit.

Nor is Canada's savings rate unreasonably low by international standards. Over a recent seven year period, the net savings rate by households in Canada was 9.7% of net national income, compared with 6.296 in the U. S., 4.5% in Britain, and 8.9% in Germany.

Savings of course, have a worthwhile social function. They permit households to invest in consumer durables and housing, and thus boost the economy and create jobs. However, savings that are not invested for this purpose - such as those in bank deposits - are going to waste. They're unproductive.

A banker lecturing a government about debt is like an arsonist warning us against playing with matches.

Any country in which unemployment rises as high as it is now in Canada is trying to save too much through the acquisition of financial assets. It is trying to save more than investors and other spenders are willing to spend in order to achieve full employment.  In such circumstances, there is only one way that the economy can be stimulated so that the needed additional jobs are opened up Governments must step in and fill the spending vacuum.

A private debt that generates future wealth is considered justifiable.  So should a public debt that is incurred to create jobs.

PUBLIC DEBT, PRIVATE DEBT: THE DIFFERENCE

One of the most enduring deficit myths is that there is no difference between private debt and public debt, or the "burdens" they impose. In fact, the two forms of indebtedness are entirely different.

In the case of an individual or a company, for example, the debt is owed to outsiders and therefore can legitimately be considered a burden, since it must be repaid out of future income. Default can lead to bankruptcy.

In the case of Canada as a country, on the other hand, most of the debt incurred is not owed to outsiders, but to its own citizens and financial institutions, who consider the government's debt an asset. Furthermore, unlike an individual or a company, a country like Canada just doesn't go bankrupt.

The other often-overlooked aspect of government debt is that its "burden" is largely offset by the government's own assets. Debts secured by assets are investments in the future wealth of the economy. Our network of highways, transit systems, hospitals, ports, airports, power plants, universities, schools, public buildings, Crown lands and natural resources all represent enormous wealth-producing assets. Yet the government's public accounts value these assets at the nominal value of $1.00. Clearly this is absurd - just as absurd as the often heard claim that “the government is broke.”

If households or corporations kept their accounts like that, it would mean that people could never borrow to buy a home, or companies borrow to invest in new plant and equipment.

Did you ever hear of a corporation that doesn't have large outstanding debts? Of course not. It makes no sense not to borrow if you are making capital investments. If the federal government followed the sound accounting practices that business firms and households do, it would only deduct each year's depreciation charges, not the full amount of new capital spending.

The only sense in which private debt and public debt are comparable is that in both cases the future cost of debt repayment can be measured against the future stream of benefits.

A private debt that generates future wealth is considered justifiable. But so is a public debt that is incurred to create jobs. If the debt is not incurred, a government's future income will be lowered by the extent to which it is necessary to meet the needs of those left jobless by the lack of social capital investments.

Every road, school, hospital or airport that is neglected today simply guarantees a more expensive burden for the future.

Critics of the deficit often bemoan the "legacy of public debt" that we are bequeathing to future generations. Those future generations, however, will be much worse off if, instead of a deficit, we leave them a country plagued by ill-health, poverty, joblessness, decrepit schools, and a crumbling infrastructure. A balanced budget will not be viewed as an adequate substitute for social and economic security.

Critics of the deficit say it’s unfair to pass our debts on to future generations. Those future generations, however, will be much worse off if instead of a deficit, we bequeathe them a country plagued by ill-health, poverty, joblessness, poor education, and crumbling highways.

HOW BIG IS THE DEFICIT, REALLY?

The size of the federal deficit is grossly exaggerated by the failure to make the necessary adjustments for inflation, for “double counting” and for the normal ebb and flow of the business cycle. If the deficit or even the accumulated federal debt of $420 billion--were properly accounted for, it would be considerably smaller.  Our concern should be with the real debt--that is, the debt adjusted for inflation.

It stands to reason that the deficit should be reduced by the annual rate of inflation, since the repayment in each succeeding year is mad~ in deflated dollars.

The deficit should also be reduced by separating from it all the debt held by the Bank of. Canada and other federal government bodies ($23 billion), as well as the debt held by provincial governments and municipalities ($22 billion). It makes no sense to count as a burden interest payments made to other branches of the Crown. .

Adjusting the deficit to the business cycle reflects the inevitable drop in government tax revenue that is caused by a recession, its consequent rise in unemployment, and the need for more government spending for social assistance.

It is misleading to judge the size of the deficit without taking these factors into account. Some economists say that, if these adjustments were all made, as they should be, the real deficit would be down from $31 billion to less than $ 10 billion. And the remaining deficit could be converted into a sizeable surplus if the many tax concessions and handouts to profitable companies and wealthy individuals were eliminated, and interest rates brought down to a reasonable level.

Attempts to revive the private sector by savaging the public sector are equivalent to the ancient medical practice of bleeding to "cure" the patient.

"RESTORING CONFIDENCE"

The federal government tries to defend its spending restraints during a recession by arguing that deficit reduction is necessary to 'restore business confidence" in the economy.

The premises of such a policy are that (a) only by restoring business confidence can the economy be revitalized; and (b) any cuts in public services or employees that flow from such spending restraints would be good for the private sector.

These two assumptions are myths.

Let's concede that business confidence is important. No one denies that. But consumer confidence is equally important. It would be futile for business to produce more unless consumers were willing .to buy more, no matter how “confident” business might become as the result of a lower deficit.

Public sector cutbacks do not build consumer confidence. They may appease the government's business supporters, but they make average citizens and workers very uneasy--particularly if they involve the layoff of public employees.

In our mixed capitalist economy, the public sector employs up to 25% of the work force. Government restraint that leads to job losses in schools, hospitals, municipalities, and other public institutions are rapidly spread through the whole economy, causing a multiplier-effect loss of private sector jobs. Thus, for every increase in business confidence that may follow public sector cutbacks, there will be an equal or greater offsetting loss of consumer confidence.

Moreover, because of the interdependence of the public and private sectors in Canada, cuts in one inevitably spill over into the other, both through direct job loss and reduced spending. Attempts to revive the private sector by savaging the public sector are equivalent to the medieval practice of bleeding to "cure" the patient.

Business people don't seem to realize that income support programs such as pensions, unemployment insurance, and social assistance are essential to sustain a strong demand for private sector goods and services. In opposing such government programs, they help to bring about the very decline in their own profits which they so piteously lament.

Restoring business confidence in the economy is important. But it would be futile for business to produce more unless consumers were willing and able to buy more no matter how “confident” business might become as the result of a lower deficit.

BIG BUSINESS - BIG BROTHER

The only "reason" left for us to be concerned about the deficit is because most of the big corporations want us to be concerned about it. By deluding us that the deficit is a serious problem, they legitimize their broader attack on the public sector and public services--which are their real targets.

Instead of-attacking the role of government head on, the neoconservative leadership of the business community seeks to reduce the role of government and slash social programs by convincing us that otherwise the deficit will soar out of control and the sky will fall.

(In the United States, incidentally, David Stockwell and other officials with the Reagan administration now openly admit that, at the behest of their corporate friends, they deliberately increased the deficit so that it would justify later cuts in social program funding!)

The case for spending cuts rests on the dubious claim that Canada can no longer afford to retrain its workers, to relieve poverty, to improve education, to keep its people healthy, to protect the environment, or maintain its public infrastructure.

Yet, for want of such government spending, children go hungry, students drop out of school, workers lack needed skills, people without jobs turn to crime, pollution poisons our air and water, and congestion chokes our cities.

The deficit in public spending the failure to invest in social capital--will in the long run be much more serious and impose a much greater burden on our children and grandchildren than will the federal deficit that politicians and executives so shrilly denounce.  Indeed, it will not only degrade the quality of life for millions of Canadians, but it will have a crippling effect on Canada's productivity and competitiveness.

Productivity, we're continually reminded by business after-dinner speakers, depends on growth in capital per worker. But three kinds of capital are needed to ensure that workers are productive: private capital, such as factories and machines; human capital, such as education and training; and public capital, such as roads, airports, schools, and other parts of the infrastructure.

Human and public capital--which business tends to overlook--are surely just as important as private capital. In fact, in a global economy, where private capital transcends national boundaries, there are only two competitive advantages any country can give itself--a highly skilled work force, and an efficient public infrastructure.

The case for spending cuts rests on the dubious claim that Canada can no longer afford to keep its people healthy: well-educated, and gainfully employed.

FACT: OUR PUBLIC SPENDING IS TOO LOW!

Why all the panic about government spending in Canada, anyway? By international standards, our public spending is quite modest--and our spending on social programs disgracefully inadequate.

According to the latest available data, Canada's social spending accounted for 21.5% of GDP. This compares with a 25.6% average for the major industrialized nations, and with a 30% average among the countries of the European Community.

At its present downward slide, social spending in Canada will fall even further to just 17.3% of GDP by the year 2000. That would be the second lowest among the Group of Seven countries, only marginally above the projected U.S. level of 16.4%.

By contrast, France and Germany are predicted to be spending nearly twice that percentage on their public facilities and social programs by the end of the decade.

Canada's inadequate social spending is reflected in its poverty rate, which is among the worst among the Western nations. While 12% of Canadians are officially poor, the rate in Germany, Sweden, Norway and most other European countries is less than 6%.

The most shameful figure, of course, is that over half of Canadian children in one-parent - families live in poverty--which is from three to five times more than the comparable rates in Europe.

In the new global economy, there are only two competitive advantages any country can give itself – a highly skilled work force and an efficient Infrastructure.

HOW TO LOWER THE DEFICIT

No one denies that the deficit and the level of public indebtedness is a cause for concern. What has to be clearly understood, however, is that it's a problem caused mainly by unjustifiably h1~hinterest rates.

To illustrate the key role of interest rates, all we have to do is compare the effects of borrowing $1 million at 2% and borrowing the same amount at 10%. At 2% it would take 36 years of compound interest for the $1 million to double to $2 million. But at 10% interest, the same loan would generate a $1 million return in just seven years! And in 36 years it would double and redouble five times to $32 million!

The folly of the federal government's current high-interest rate policy may be grasped by calculating what the deficit would be like today if interest rates had been held to just a few points above the, Cost of Living Index, which was its historic level before the Bank of Canada launched its “holy war” against inflation. This year's deficit would not only be completely eliminated, but the government would actually have a $13 billion surplus!

It is ludicrous for the government to put billions of dollars into circulation by borrowing from the private banks, when it can create the extra money it needs, virtually free.

We have to keep in mind that our monetary economy only grows when the money supply grows. Under the present debt-driven system, the only way we can increase the money supply is by borrowing it into existence from the private banks, thereby increasing our indebtedness to, them.

It can't be stressed too much that the private banks, unlike non-bank lenders, create the money they lend.  They do not--as is so widely imagined, even by the bankers themselves--lend their depositors' money. The amount of new money created by a bank loan, however, is only sufficient to pay back the principal. No money is created to pay the interest, except that which is paid to the holders of bank deposits. That's why debts must continually grow faster and faster in order for each layer of additional debt and interest to be paid. Indeed, the higher the rate of interest, the faster the money supply must grow if the economy is not to stall. If the system ever stops growing, or even drastically slows down, it crashes.

The latest available data show that spending on social services in Canada accounts for 21.5% of our GOP. This compares with a 25.6% average for the major industrialized nations, and a 30% average among the countries of the European Community.

If that strikes you as a very dumb and dangerous way to operate a monetary system, you're right. C1early it would be much safer and more sensible to have at least a large amount of the needed new money spent into circulation debt free by the federal government--or lent by it interest free to, the junior levels of government which lack the power to create money.

Reform of the monetary system is therefore the key to controlling the deficit and lowering the public debt. It would also help to increase government revenue.

Can this be done without adding to the tax burden on low- and middle income Canadians?  Certainly! We have an extremely inequitable tax system that allows the wealthiest individuals and business firms to escape paying their fair share of taxes. A truly fair tax system would correct this inequity. It would add billions to the government's coffers without penalizing Canadian workers.

A wealth tax, for example, would net the federal government $3 billion a year. Repealing the capital gains; tax deductions would bring in another $3 billion.

Repealing the 5% tax credit to manufacturing rums, the fast write-offs of capital investments, the tax subsidies for real estate developers, the subsidies for business me entertainment, the subsidy for business lobbying and advertising--these would yield a combined $ 7 billion to the federal Treasury.

The kind of fair tax system created by these and other reforms would not only make profitable corporations and the rich pay taxes on the same basis as the rest of us. It would also help immensely to get rid of the public debt that corporations and the rich are always complaining about!

A truly fair tax system would not only make the rich pay their fair share of taxes; It would also help immensely to get rid of the public debt the rich are always complaining about.

(3) S.E.C. Accuses Goldman of Fraud in Mortgage Deal

From: John Cameron <blackheathbooks@internode.on.net> Date: 17.04.2010 07:06 PM

April 16, 2010, 10:46 AM

http://dealbook.blogs.nytimes.com/2010/04/16/s-e-c-sues-goldman-over-housing-market-deal/?src=busln

1:56 p.m. | Updated Goldman Sachs, which emerged relatively unscathed from the financial crisis, was accused of securities fraud in a civil suit filed Friday by the Securities and Exchange Commission, which claims the bank created and sold a mortgage investment that was secretly devised to fail, The New York Times’s Louise Story and Gretchen Morgenson report. (Read the S.E.C.’s lawsuit after the jump.)

The move marks the first time that regulators have taken action against a Wall Street deal that helped investors capitalize on the collapse of the housing market. Goldman itself profited by betting against the very mortgage investments that it sold to its customers.

The suit also named Fabrice Tourre, a vice president at Goldman who helped create and sell the investment.

Goldman’s shares fell as much as 15 percent on Friday after the S.E.C. announced its lawsuit and led a sell-off in financial stocks. By mid-afternoon, Goldman’s shares were still down about 12 percent.

Goldman denied the S.E.C.’s allegations. “The S.E.C.’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman said in a statement.

The instrument in the S.E.C. case, called Abacus 2007-AC1, was one of 25 deals that Goldman created so the bank and select clients could bet against the housing market. Those deals, which were the subject of an article in The New York Times in December, initially protected Goldman from losses when the mortgage market disintegrated and later yielded profits for the bank.

As the Abacus deals plunged in value, Goldman and certain hedge funds made money on their negative bets, while the Goldman clients who bought the $10.9 billion in investments lost billions of dollars.

According to the complaint, Goldman created Abacus 2007-AC1 in February 2007, at the request of John A. Paulson, a prominent hedge fund manager who earned an estimated $3.7 billion in 2007 by correctly wagering that the housing bubble would burst.

Goldman let Mr. Paulson select mortgage bonds that he wanted to bet against — the ones he believed were most likely to lose value — and packaged those bonds into Abacus 2007-AC1, according to the S.E.C. complaint. Goldman then sold the Abacus deal to investors like foreign banks, pension funds, insurance companies and other hedge funds.

But the deck was stacked against the Abacus investors, the complaint contends, because the investment was filled with bonds chosen by Mr. Paulson as likely to default. Goldman told investors in Abacus marketing materials reviewed by The Times that the bonds would be chosen by an independent manager.

(4) Big Banks Mask Risk Levels

Quarter-End Loan Figures Sit 42% Below Peak, Then Rise as New Period Progresses; SEC Review

APRIL 9, 2010

By KATE KELLY, TOM MCGINTY and DAN FITZPATRICK

http://online.wsj.com/article/SB10001424052702304830104575172280848939898.html

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

Excessive borrowing by banks was one of the major causes of the financial crisis, leading to catastrophic bank runs in 2008 at firms including Bear Stearns Cos. and Lehman Brothers. Since then, banks have become more sensitive about showing high levels of debt and risk, worried that their stocks and credit ratings could be punished.

That practice, while legal, can give investors a skewed impression of the level of risk that financial firms are taking the vast majority of the time.

"You want your leverage to look better at quarter-end than it actually was during the quarter, to suggest that you're taking less risk," says William Tanona, a former Goldman analyst who now heads U.S. financials research at Collins Stewart, a U.K. investment bank.

Though some banks privately confirm that they temporarily reduce their borrowings at quarter's end, representatives at Goldman, Morgan Stanley, J.P. Morgan and Citigroup declined to comment specifically on the New York Fed data. Some noted that their firm's financial filings include language saying borrowing levels can fluctuate during the quarter.

"The efforts to manage the size of our balance sheet are appropriate and our policies are consistent with all applicable accounting and legal requirements," a Bank of America spokesman said.

An official at the Federal Reserve Board noted that the Fed continuously monitors asset levels at the large bank-holding companies, but the financing activities captured in the New York Fed's data fall under the purview of the Securities and Exchange Commission, which regulates brokerage firms. The New York Fed declined to comment.

The data highlight the banks' levels of short-term financing in the repurchase, or "repo," market. Financial firms use cash from the loans to buy securities, then use the purchased securities as collateral for other loans, and buy more securities. The loans boost the firms' trading power, or "leverage," allowing them to make big trades without putting up big money. This amplifies gains—and losses, which were disastrous in 2008.

According to the data, the banks' outstanding net repo borrowings at the end of each of the past five quarters were on average 42% below their peak in net borrowings in the same quarters. Though the repo market represents just a slice of banks' overall activities, it provides a window into the risks that financial institutions take to trade.

The SEC now is seeking detailed information from nearly two dozen large financial firms about repos, signaling that the agency is looking for accounting techniques that could hide a firm's risk-taking. The SEC's inquiry follows recent disclosures that Lehman used repos to mask some $50 billion in debt before it collapsed in 2008.

The practice of reducing quarter-end repo borrowings has occurred periodically for years, according to the data, which go back to 2001, but never as consistently as in 2009.

The repo market played a role in recent accusations leveled by an examiner in Lehman's bankruptcy case. But rather than reducing quarter-end debt, Lehman took steps to hide it.

Anxious to maintain favorable credit ratings, Lehman engaged in an accounting device known within the firm as "Repo 105" to essentially park about $50 billion of assets away from Lehman's balance sheet, according to the examiner. The move helped Lehman look like it had less debt on its books, the examiner said.

Other Wall Street firms, including Goldman and Morgan Stanley, have denied characterizing their short-term borrowings as sales, the way Lehman did in employing Repo 105. Both of those firms also make standard disclaimers about debt.

For instance, Goldman disclosed in its 2009 annual report that although its balance sheet can "fluctuate," asset levels at the ends of quarters are "typically not materially different" from their levels in the midst of the quarter. Total assets at the end of 2009 were 7% lower than average assets during the year, the report states.

Some banks make big trades that don't show up in quarter-end balance sheets. That is what happened recently at Bank of America involving a trade designed to mature before the end of 2009's first quarter, people familiar with the matter say.

Two Bank of America traders bought $40 billion of mortgage-backed securities from clients for one month, while at the same time agreeing to sell the securities back before quarter's end, according to people familiar with the matter. This "roll" trade provided the clients with cash and the bank with fees.

Robert Qutub, then Bank of America's chief financial officer for global markets, told Michael Nierenberg, a former Bear Stearns trader who oversaw the traders who made the roll trade, to cap the size of the short-term transaction, people familiar with the matter say.

A week later, however, the amount tied to the trade shot up to $60 billion, these people say, before dropping to $25 billion, one of these people said, appearing to some at headquarters that the group had defied the order to cap the trade.

A bank spokeswoman said "the team was aware of and worked within its risk limits."

Write to Kate Kelly at kate.kelly@wsj.com, Tom McGinty at tom.mcginty@wsj.com and Dan Fitzpatrick at dan.fitzpatrick@wsj.com

(5) India spared Financial Crisis because Indira Gandhi nationalized the banks

From: Sandhya Jain <sandhya206@bol.net.in> Date: 06.04.2010 09:44 AM

http://www.vijayvaani.com/FrmPublicDisplayArticle.aspx?id=1166

When Geithner comes calling, hold on to your wallet

Ramtanu Maitra

6 April 2010

US Treasury Secretary Timothy Geithner and Federal Reserve Vice Chairman Donald Kohn will travel to India April 6-7 and are slated to meet Prime Minister Manmohan Singh in New Delhi. The ostensible reason for this visit of this the duo is to participate in economic and financial partnership discussions - in particular, infrastructure investments. And provide New Delhi some “insights” on how to generate “money” out of paper.

New Delhi must note that no matter what Geithner’s media campaign promotes his visit as, he does not know economics. He knows finance—more precisely, the kind of frauds that were perpetuated by Goldman Sachs, AIG, Citigroup, and other luminaries of Wall Street who are now surviving using taxpayers’ interest-free money handed out to them by President Bush and President Obama under the guidance of Geithner, Federal Reserve Chairman Ben “Helicopter” Bernanke - and which passes under the banner as “finance”.

This policy has made the United States by far the most indebted nation in the world. Notwithstanding what Montek Singh Ahluwalia, a bird of the same flock, may have to say about Geithner’s “financial wizardry”, only thing that Geithner is capable of is selling toxic assets and securities packaged in gift-wraps to fool the unsuspecting.

Federal Reserve: A private institution, not a Central Bank

Geithner will be accompanied by Donald Kohn of Federal Reserve, a privately-owned institution that presides over America’s financial system as the country’s central bank. In reality, the Fed, as it is widely identified as, prints money and works as the high-power agent of Wall Street. In 1913, President Woodrow Wilson signed the US Congress legislation to make into law the Federal Reserve Act. The objective at that point in time was apparently to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes. But over the years, Fed’s reach into US economic affairs has been systematically enhanced. Given half a chance, Geithner and his ilk will put the entire US Treasury under Fed’s control. The East India Company approach, eh?

Federal Reserve would like to promote through its website that it is not a private corporation, is not operated for profit, and is not funded by Congress. However, the facts like all “facts” about high finance associated with Wall Street, are entirely different from what the uninitiated are being told. The Fed is owned fully by private banks and 100 percent of its shareholders are private banks. The Fed claims it does not make profit, but it does from the interest, shown as operating expenses plus a guaranteed 6% return to its banker shareholders, it collects from the Treasury bonds it buys with newly-issued Federal Reserve Notes.

Geithner belongs to this milieu. This is what Wall Street is all about. The unfortunate fact is that Wall Street now owns not only Main Street but the White House as well. Therefore, do not judge Geithner by what he says, but try to fathom what he is implying by knowing his background and who and what he really represents. Then, one can figure out what he is aiming for. ...

One of the reasons why the Indian banks did not go into a tailspin when the world financial system collapsed is because of the monitoring by Reserve Bank of India (RBI) and the prudence it continues to exhibit. In October 2008, then-Indian Finance Minister P. Chidambaram had pointed out that most of the banks in US were facing closure due to the crisis, adding Indian banks, however, were well protected. "The farsightedness of late Indira Gandhi, who nationalized banks, is paying now. While the US administration is plowing money to save banks in that country, our banks are well protected due to the nationalization”, he said on that occasion. The private sector banks were also on a sound footing, he added.

Because of this control that RBI exercises, when banks and financial institutions around the world were massively lured into investing in assets, hedge funds and derivatives backed by US sub-prime mortgages, banks and financial institutions in India were largely kept out of them. Under the watchful eye of the RBI, only about $1 billion out of India's total banking assets of more than $500 billion slipped into toxic assets or related investments. When the crisis came and the financial institutions around the world found themselves writing off almost $1 trillion in assets from their books, Indian banks had at most a few hiccups. That is not to say that the Indian economy remained immune to the global financial collapse. What it encountered however is the withdrawal of investments by US firms abroad and the sharp decline in US demand for foreign goods and assets.

Brookings Institute of Washington pointed out in 2008 that the drying up of liquidity within the United States led US investors to withdraw their investments in the Indian economy at lightning speed. These withdrawals also indirectly caused a precipitous fall in equity prices, adding to the liquidity crunch. Finally, Indian corporations, which had been able to borrow at attractive rates in the United States and other markets in the past, could no longer do so and returned to borrow in the domestic market. The Indian government has acted to unfreeze liquidity by aggressively cutting interest rates, the cash reserve ratio, and the statutory liquidity ratio. It has also announced fiscal stimulus in two stages, though on a much smaller scale than in many other countries.

India’s economic growth, however, requires infusion of more capital and Geithner will hone in on that. He will urge India to raise money for the next phase of growth. This is the trap he is trying to lay out for the Indians to step into. He will try to dilute Government ownership by enticing New Delhi to raise money by investing in toxic assets and securities. This is where New Delhi must tell Geithner to get off.

The author is South Asian Analyst at Executive Intelligence Review News Services Inc.