From Volume 36, Issue 49 of EIR Online, Published Dec. 18, 2009

U.S. Economic/Financial News

Volcker: Derivatives Have Not Produced Anything Good

Dec. 9 (EIRNS)—At a conference in Sussex, England, former U.S. Federal Reserve chairman Paul Volcker stunned an audience of bankers by challenging them to come up with one example of a positive effect of derivatives. At the conference "Future of Finance Initiative," organized by the Wall Street Journal, Volcker noted ironically that the "single most important" contribution of the financial sector in the last 25 years has been automatic teller machines, which, he said, had at least proved "useful." He said that credit default swaps and collateralized debt obligations had taken the economy "right to the brink of disaster" and added that the economy had grown "at greater rates of speed" during the 1960s without such products.

When one banker suggested that Volcker did not really mean that bond markets and securitizations had contributed "nothing at all," he replied: "You can innovate as much as you like, but do it within a structure that doesn't put the whole economy at risk."

Volcker said that banks do have a vital role to play as holders of deposits and providers of credit. This meant that they should be "regulated on one side and protected on the other." He said that riskier financial activities should be limited to hedge funds, to which society can say: "If you fail, fail. I'm not going to help you. Your stock is gone, creditors are at risk, but no one else is affected."

Volcker challenged the audience: "I would like one of you to give me the example of one single so-called innovative financial product that has produced benefits for economic development. I am sorry, but the answers you offered seem to me inadequate."

Senators Sign On for Fiscal Dictatorship

Dec. 11 (EIRNS)—Thirty-one Senators, 13 of them Democrats, have signed on to Sen. Kent Conrad's Bipartisan Task Force for Responsible Fiscal Action bill (S. 2853), the vehicle being promoted for cutting the deficit, especially entitlements. Should this bill be enacted, it will do nothing at all to solve the fiscal crisis of the United States, but would be a declaration of intent for a Schachtian dictatorship.

The whole concept of the bill is fraudulent, because the reality is, the international financial-monetary system is bankrupt. The answer is very simply: Under our Constitution, we put the U.S. components of this international system into financial reorganization, and we apply Glass-Steagall standards for commercial banks, to the reorganization of the system. The effect of this will be to wipe out many essentially fictitious claims, so the Congress will no longer have to worry about paying fictitious claims, and, with a credit system in place, we'll be back to generating wealth.

Instead, Conrad et al.—who are trying to hold the rise in the debt ceiling hostage to their bill—call for establishing an 18-member commission with super-audit powers over the government, with the mandate to complete a report on conclusions and recommendations for legislative action, by the period of Nov. 3-9, 2010. The report is then to be submitted to the Houses by Nov. 15, and voted on—under strict rules prohibiting points of order, substitutions, filibusters, amendments, and likely by no later than Dec. 23, 2010. A 60% majority of what, it will be noted, is a lameduck Congress, is required for passage.

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