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It's the fall of American empire and friends

by kishbeach on Sun Nov 23, 2008 10:41 AM PST

//www.globalresearch.ca/index.php?context=va&aid=10651

 

 

  Death of the American Empire America is self-destructing & bringing the rest of the world down with it

By Tanya Cariina Hsu

I believe that banking institutions are more dangerous to our liberties than standing armies. (Thomas Jefferson, US President; 1743 - 1826)

America is dying. It is self-destructing and bringing the rest of the world down with it.

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

The banking industry renamed insurance betting
guarantees as 'credit default swaps' and risky gambling wagers were
called 'derivatives'. Financial managers and banking executives were
selling the ultimate con to the entire world, akin to the snake-oil
salesmen from the 18th century but this time in suits and ties. And by
October 2008 it was a quadrillion-dollar (that's $1,000 trillion)
industry that few could understand.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Ironically, least affected by the crisis are Islamic banks.

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

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

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

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

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

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

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

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

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

But not before having paid a very high price.

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

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

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