From Volume 6, Issue 34 of EIR Online, Published August 21, 2007

U.S. Economic/Financial News

Fed Lowers Rate in Futile Effort To Save Bankrupt Bankers

Aug. 17 (EIRNS)—The Federal Reserve lowered the discount rate this morning by 0.5%, from 6.25% to 5.75%. Lyndon LaRouche forecast on the previous day that there would be drastic measures taken to prevent a market crash on Friday, so that the weekend would not become a cauldron for panic around the world.

LaRouche also noted that such drastic measures at this time, with the financial system effectively out of control, can only come at the behest of very powerful people who are bankrupt, and are demanding that their personal demands be met.

Following the Fed rate cut, Edward Marrinan, head of high-grade credit strategy at JPMorgan in New York, admitted to Reuters: "Markets got what they were hoping for.... The main beneficiaries in credit markets of this announcement are financial institutions, which have been under such intense pressure over the last three weeks."

The more closely watched Fed funds rate, which sets a benchmark for interbank lending, was not officially lowered from its current 5.25%, but the pumping of tens of billions of dollars into the system over the past week by the Fed has effectively lowered the rate anyway. David Wessel of the Wall Street Journal wrote today: "In recent days, the rate has traded well below the Fed's target at some points of the day—even coming close to zero at times." The Journal's lead editorial praised Treasury Secretary Henry Paulson for orchestrating the $11.5 billion bailout of Countrywide Aug. 16, but screamed that the LBO giant Kohlberg Kravis Roberts (KKR) deserves the same Federal largesse. KKR is not only holding $80 billion in scheduled buyouts, with little hope of finding the needed credit to finance them, but they also were stuck this past week with $5 billion of asset-backed commercial paper which creditors would not roll over, leaving KKR begging for a six-month delay.

The Journal, now owned by Bank of England agent Rupert Murdoch, is demanding that the Fed, the European Central Bank, and the Commonwealth banks in Canada and Australia bail out the system, with disdain for the real economies, and real people, who are being decimated in the process.

Capital Flows Into U.S. Plunge, with Mortgage Meltdown

Aug. 15 (EIRNS)—The U.S. Treasury Department's figures for net capital flows into the United States in June, released today, show serious implications for the future of the current international banking crisis, and what it will mean for the U.S. economy. Foreign purchases of U.S. corporate paper of all kinds dropped very sharply in June, even before the U.S. mortgage bubble burst, with all the securities backed by mortgages becoming unsaleable and choking up banks and hedge funds. This drop pulled down the overall flow of capital into the United States to about $58 billion for that month, "barely enough to cover the U.S. trade deficit."

Clearly, during the last few years of $1 trillion-plus annual investment subsidy for the U.S. economy from the rest of the world, a huge portion of that flow has gone into the "toxic waste" of the mortgage bubble—subprime mortgage-backed securities, their derivatives like CDOs, and the speculative debt paper of hedge funds and private equity funds.

In June, these huge flows of purchases of U.S. corporate bonds and securities collapsed by two-thirds, from $68.6 billion net in May to $22.2 billion net (purchases of stocks also fell sharply). Thus, despite the very large foreign purchases of long-term U.S. Treasury and agency (Fannie Mae, Freddie Mac) bonds, the total net inflow of capital dropped from $107.3 billion in May to $58.8 billion in June.

This drop will have continued further in July. The sheer size of this "debt speculation subsidy," before the bubble burst, indicates why the U.S. mortgage meltdown has now become a European and Asian banking crisis. These banks, were buying and financing the toxic waste of the asset-backed loan and securities markets built up on Alan Greenspan's mortgage bubble.

Now, the United States will have to "fund itself," after 15 years of big global subsidies—and do so with Federal credits for investment, infrastructure, and productivity.

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