From Volume 6, Issue 51 of EIR Online, Published Dec. 18, 2007

Global Economic News

Banks Are Insolvent, So Ease the Rules, Auditor Says

Dec. 15 (EIRNS)—Auditors are in a tough spot in these post-Enron days, with the demise of accounting firm Arthur Andersen on their minds. If the auditors refuse to rubber-stamp the banks' fictitious valuations, the banks collapse—but if the auditors allow the fiction, they run the risk of being severely punished for malfeasance down the road. Hence, the suggestion by Ernst & Young Item Club's Peter Spencer in the Dec. 15 London Daily Telegraph, that the British "government must suspend a set of key banking regulations at the heart of the current financial crisis, or risk seeing the economy spiral towards a future that could 'make 1929 look like a walk in the park.'"

Spencer tries to blunt the clear meaning of his statement, by claiming that the banks are refusing to lend to each other, not because they are insolvent, but rather because of overly restrictive government regulations! The regulations he blames are the capital requirements set by the international Basel agreements, which require the banks to have an 8% capital reserve, which Spencer said should be cut to about 6%.

In reality, the idea that a mere 2% reduction in capital requirements would head off a crisis that would make 1929 look like a "walk in the park," is absurd, as both Spencer and the Telegraph know. What the auditors are really saying, is that the banks are already insolvent, and that the capital requirements must be lowered so that the auditors can continue to certify their books.

Hedge Funds' Policies Will Drive Up Hunger

Dec. 15 (EIRNS)—As agricultural prices continue to inflate, and financial markets to implode, hedge funds and other hungry investors are eyeing previously unattractive investment opportunities, such as rice futures, with new interest; which was proudly announced by The Wall Street Journal, on Dec. 15. Rice, like wheat and corn earlier, is soaring in price, and spiked to $13.125 this month from last year's price of $9.87—close to a 20-year high.

Since rice is the major source of calories for much of Asia, and also parts of Africa, this pits the profit motive of rich investors directly against the food security of hundreds of millions of the world's poor. Poor harvests, rising demand, and rising prices have led ending stocks of rice to plunge to the lowest level in 24 years. Many countries are hoarding supplies rather than exporting, and importers are finding supplies hard to find. The price of rice in Thailand, the major exporter of rice in the world, rose 20% this year. Vietnam and India have imposed export restrictions on their rice this year.

This confluence of events has priced rice out of the reach of many food-importing countries, leading to further food insecurity. Countries relying on such agencies as the UN World Food Program (WFP) for food donations will feel the pinch as well. According to the WFP, food costs for the agency have risen by 50% in the last five years; that means less food to distribute to needy nations, which means more people are going to go hungry.

One reason that rice was not such an object of speculation earlier, is that little rice moves in world trade—only about 7%. The great majority is consumed by subsistence farmers on the spot. The fact that speculation on only 7% of world rice, could drive world prices up about 30%, shows that it is greedy speculation that determines the prices of gasoline, wheat, and other commodities, and not British Liberal philosopher Adam Smith's "law of supply and demand."

Bankers Frantically Trying To Wake the Dead System

Dec. 14 (EIRNS)—The global financial system may have died last Summer, but that hasn't stopped the bankers from trying to revive it:

* The biggest effort is that coordinated by the major Western central banks to pump liquidity into the banking system and to take worthless paper in as collateral. Already on Oct. 19, Lyndon LaRouche had ridiculed U.S. Treasury Secretary Henry Paulson's superfund bailout plan: "The whole thing stinks. It's fishy as hell." Now there's more:

* Five French banks are launching their own version of Paulson's ill-fated bailout plan, creating a fund to hold $1.5 billion of asset-backed securities, as if putting the paper into a different pocket in any way solves the problem of its being worthless.

* In England, there is growing talk of nationalizing the bankrupt Northern Rock, which is already on life support via a credit line from the Bank of England. In the U.S., the newly installed leaders at Citigroup have decided to do what they repeatedly said they would not, and take what remains of their structured investment vehicle (SIV) exposure back onto their own books, and the prospect of a merger appears to be more likely each day.

* Countrywide, the overexposed mega-mortgage lender, is going fast, despite cash infusions from Bank of America and Paulson's latest scheme to stabilize mortgage-related securities; its foreclosure rate doubled last month, the level of late payments is soaring, and its stock price is tanking. Countrywide's lending practices are under investigation by the State of Illinois, and U.S. Sen. Charles Schumer (D-N.Y.) is trying to stop the Federal Home Loan Bank from subsidizing Countrywide and other bankrupt lenders.

* Even in Switzerland, where the gnomes are known for their conservative approach to banking, top bank UBS announced a 19.4 billion Swiss franc recapitalization, on the heels of a $10 billion write-off and expectations of more. The New York Post portrayed Countrywide CEO Angelo Mozilo as a turkey on a rotisserie, and that image also works for the system as a whole. This turkey is dead and isn't coming back to life, no matter how much cash they shove up its aperture.

Banking Insider: It's 'Unbelievably Bad'

Dec. 14 (EIRNS)—A senior European financial source told EIR today that the coordinated bailout action by European central banks was taken only as an emergency stopgap to prevent a banking crash between now and the Christmas/New Year holiday. The action does not address the banking crisis and was not intended to do that.

The source described the credit crunch as "worsening by the hour," and the situation as "unbelievably bad." Although he may be overly optimistic, EIR views the analysis by this source as in the right direction.

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