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

World Economic News

ECB Chief Trichet: 'Financial System Is Going Mad'

PARIS, Aug. 16 (EIRNS)—European Central Bank President Jean-Claude Trichet has been privately repeating, "for months," that "the international financial system is going mad," reports Le Canard Enchaîné. "To justify that diagnosis, he underlined the gap between two figures which make it easier to understand the current madness. Indeed, the world GDP grows 5% on average. Yet, at the same time, the financial markets require that investments return 15% profit, and the mass of credits—i.e., M3 for the distinguished economists—issued by banks and other establishments is increasing by more than 15%—a situation with such a strong imbalance that it could only lead to a financial crash."

Carry Trade Dries Up as 'Traders Dash for the Exits'

Aug. 16 (EIRNS)—Headlines from London to Seoul warned today of the "End of the Yen Carry Trade," that insane "free yen" mechanism which world central banks had arranged to pump hundreds of billions into speculators and hedge funds in recent years. "Carry traders dash for the exits," the Financial Times wrote. The Daily Telegraph called it a "panic flight from emerging markets," Recognition is setting in that that party is over. "We are calling the end of the global currency carry trade," BNP Paribas's Hans Redeker told the Financial Times this morning.

Publicly, most people estimate that the hedge funds hold some $200 billion worth of yen loans for the carry trade, but a more realistic estimate is that the size of the carry trade is anywhere from 450 billion to 1 trillion dollars. Whatever the figure, the rise in the value of the yen has turned those billions into losses. Hedge funds are scrambling to sell off assets, quick, to bail out of their yen loans before they lose more. This, in turn, is driving the yen through the roof, further squeezing those who borrowed in yen.

Developing sector currencies, propped up by speculators who were turning monstrous profits from investing their freebie yen loans into those high-yield currencies, are now crashing, as speculative capital leaves. The New Zealand and Australian dollars are "in free fall," a trader told the Financial Times. The South Korean won, the South African rand, the Brazilian real, the Turkish lira, Iceland's krona, favorites of the carry trade, not to mention the "monster bubble" of Eastern Europe, are following New Zealand and Australia's downward path.

Thus, the two great generators of liquidity for the bubble in recent years—the mortgage securities scam and the yen carry trade—are both disappearing simultaneously, just as the hedge funds and banks are desperate for cash to pay off all the promissory notes they signed for their leveraged buyout scams. This squeeze between the two "book-ends" of the crisis, is exactly what Lyndon LaRouche pointed to on Aug. 4, when he admonished people to stop looking at the various crises as local affairs, and face the reality that we have "a general, systemic breakdown of the system.... The whole thing is one, big bubble," LaRouche emphasized. "And when the speculator is caught with his pants down, that is, he cannot pay to maintain his continued speculation, then—boom!"

Canadian ABCP Agreement Is No Solution

Aug. 17 (EIRNS)—The "agreement" worked out among eight Canadian banks and pension funds to convert C$120 billion of maturing asset backed commercial paper (ABCP) into long-term notes is being viewed in some circles as a "solution" to the commercial paper crisis. By contrast, the U.S. market for ABCP stands at over $1 trillion, at least nine times larger, not to mention the subprime and Countrywide crises. Columnists in the Financial Times point out that this type of arrangement is not a solution for the U.S. crisis, and could have "horrible" consequences for the Canadian crisis.

The FT's Gillian Tett points out that, "it is one thing to get two dozen banks to agree to a swap; it is quite another to arrange a restructuring with the 6,200 financial institutions that deal with the ECB (or those interacting with the Fed)."

Even for Canada, the FT's Lex column writes, the plan "is risky. It requires everyone to accept some pain and risk: banks would have to agree not to make margin calls, vehicles issuing the paper would have to cease accumulating assets. None of this is straightforward. Investors such as money market funds, for instance, may not be able to hold such a big chunk of long-term paper. But if the plan fails, the crisis in confidence would be really horrible."

French Economist: 'Nobody Knows Who Owes What to Whom!'

Aug. 15 (EIRNS)—EIR's Paris bureau reports that French economist Jacques Attali has attacked the deregulation of banking and financial sectors over recent years, as central to the current banking crisis.

Interviewed by the French daily Libération, the former advisor to President François Mitterrand called for immediate regulatory and transparency measures, because "Nobody knows who owns what and who owes money to whom!" Attali said that "this crisis reveals to the world a situation that many observers have believed untenable for a long time. The essential point is the fact that the United States ... no longer has savings and is entirely financing its public and private investments by lending policies" which are "accelerating the deindustrialization of the country. The traditional activities have given way to finance, simply because industry did not offer the sufficient profits for a growing financial system, excessive and unchecked. As a result, the U.S. economy is pushed towards ever more speculative and risky investments, such as real estate.

"What we see now is a jolt—and certainly not the final collapse—of the casino economy." But, said Attali, "Should the markets start to turn, as now in real estate, it's the whole system that threatens to collapse."

On immediate government regulatory measures over the banking system, Attali said, "The banks, as fast as they can, get rid of their loans by reselling them to less scrupulous players.... The banks, the funds of all kinds, the firms, no one knows any more to whom they owe money and from whom they can make claims. It's total chaos, and logically, nobody controls anything. Emergency action would be to impose immediate transparency on the proprietor of each claim." He added that each financial center has been competing to remove regulations on banking and finance, in order to "attract investors."

Attali observed that, "By injecting liquidity, the central banks for the moment only made the patient worse, not taken care of him."

European Union Investigate Rating Agency Whores

Aug. 16 (EIRNS)—As Europe's banks tank along with the subprime mortgage market, the European Commission has announced that it will open an investigation into how credit ratings agencies such as Standard & Poor's, Moody's Investors Service, and Fitch Ratings operate. European governments and the EU are charging conflict of interest, because these rating agencies—which rated subprime mortgage paper as AAA until but a few months ago—are paid by the banks and institutions that they rate for credit-worthiness.

Now, faced with the threat of government investigations, the agencies are trying to defend themselves from mounting legal prosecutions with the remarkable claim that their ratings are merely opinions, covered in the United States by the Constitutional right to free speech!

Now, like Enron's accountants before them, the noose is tightening, however. "If the rating agencies believe this is going to be business as usual, they are very wrong," a European Commission official told the Financial Times, in an interview published today. "The securitized subprime mortgage market would not have grown to the extent it did without the favorable ratings given by some agencies." The threat of government regulation of these agencies has even been raised, as one remedy.

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