From Volume 38, Issue 7 of EIR Online, Published Feb. 18, 2011

Global Economic News

IMF Internal Report Admits Failure To Foresee Financial Crisis

Feb. 10 (EIRNS)—The Independent Evaluation Office (IEO) of the bankrupt and incompetent International Monetary Fund, today issued a 50-page report which documents how the IMF not only failed to see the 2008 crisis coming, but promoted the very policies of deregulation and "unconstrained financial innovation" which helped create the crisis in the first place. (See InDepth for analysis by Helga Zepp-LaRouche, in the Economics section.)

Although by no means getting to the actual historical roots of the problem the way the Angelides Commission Report does, the IEO report does admit that the IMF "praised the United States for its light-touch regulation and supervision that permitted the rapid financial innovation that ultimately contributed to the problems in the financial system. Moreover, the IMF recommended to other advanced countries to follow the U.S./U.K. approaches to the financial sector as a means to help them foster greater financial innovation."

Elsewhere, the report says: "During the run-up to the crisis, the banner message of IMF surveillance was characterized by overconfidence in the soundness and resiliency of large financial institutions.... The risks associated with housing booms and financial innovations were downplayed, as was the need for stronger regulation to address these risks."

The IEO also castigates the internal environment within the IMF, "including a high degree of groupthink; intellectual capture; and a general mindset that a major financial crisis in large advanced economies was unlikely."

Trichet: Ireland and Greece Must Not Restructure Their Debt

Feb. 8 (EIRNS)—Because the "entire world" has allegedly approved the Irish and Greek bailout plans, these must be implemented to the letter, and therefore, there can be no restructuring of those nations' debt, according to European Central Bank President Jean-Claude Trichet.

Speaking before a European Parliament committee in his capacity as head of the European Systemic Risk Board, Trichet said: "We have plans. The plans have to be executed, have to be implemented—as has been the case the world over, and it is very, very important, in my opinion, not to confuse things.... We have a program, approved by the international community, approved by the IMF board, the entire world, approved the European [Union], approved and financed by the IMF and the European Union."

Trichet said that under no circumstances should the debts be restructured, because that would reward those who have short positions on this debt and "punish those who have been investing in the bonds."

Trichet's ECB is holding the bag on EU76.5 billion worth of Greek, Portuguese, Irish, and other bonds, which it has been secretly purchasing in what it claims is an attempt to "stabilize" the bond market. This, on top of its "unlimited liquidity" offers to Euroland banks, runs into the hundreds of billions. With a tiny EU10 billion in paid-up capital, Trichet's ECB is a good as bankrupt.

China Drought Raises International Food Alerts

Feb. 8 (EIRNS)—The UN Food and Agriculture Organization (FAO) issued an alert today, that a severe drought threatens the wheat crop in China. The FAO said that 5.16 million hectares of China's 14 million hectares of wheat fields have been affected by the drought, and that 2.57 million people and 2.79 million head of livestock faced shortages of drinking water.

The wheat crop threat itself is not "news"; Chinese farmers and officials have been closely watching the aridity, temperature, and conditions in the wheat provinces. Last week President Hu Jintao and Prime Minister Wen Jiabao made separate visits to wheat-producing provinces.

What the new FAO alert on China does is to spotlight how crazy it is to expect good crop weather in all farmbelts all at the same time, and, on that basis, for nations to lessen their food security. Yet, on NPR radio in the U.S. today, FAO Senior Economist Abdolreza Abbasian referenced this fantasy in his explanation for record food-price inflation: "The most important factor was weather development in 2010." (NPR, Feb. 7 interview).

If proper infrastructure had been built in recent decades, there would be no need to fear simultaneous harvest disasters for any crop, as occurred for wheat this year, with crop losses in Russia, Australia, Canada, Europe, Pakistan, and elsewhere.

China accounts for over 17% of annual world wheat production. In 2009-10, it produced 115.12 million metric tons, out of the world total production of 682.6 mmt. But in the current crop year 2010-11, world output is projected to be way down, at 646.51 mmt., with China's output doubtful to reach 114 mmt. Committed to food self-sufficiency and a grain reserve, China grew and consumed its crops, with negligible wheat imports. Now, all that is in question.

German Supreme Court Looking into Deutsche Bank's Crimes

Feb. 9 (EIRNS)—The arrogance and criminal energy of top bankers, exposed to a large extent in the Angelides Report, was displayed yesterday in a court case in Germany, in which Deutsche Bank AG, Germany's largest bank, is being sued by the Ille paper products company—the first case heard by the country's top civil court over an interest-rate swap the bank sold not only to Ille but to several hundred companies and local governments in Germany.

The bank had a conflict of interest here, because it was present on both sides of the deals, as investment consultant and swap salesman at the same time, violating its duties when advising the Ille Papier Service GmbH firm on a swap purchase, Federal Court of Justice Presiding Judge Ulrich Wiechers said at a hearing today. The swap that the bank sold had an initial negative market value, so that the bank should never have advised the company to buy it, he said. "When advising in financial matters, the bank must guard the interests of its customer alone," Wiechers said.

Deutsche Bank decided to try blackmail of the court. "If the court really intends to require banks to disclose fees built into a swap, it would open a new door," said Reiner Hall, a lawyer for the bank, at today's hearing. "This would shake up the whole market, because it would require banks to disclose their profit from a deal. Such a ruling could even cause a new financial crisis." A ruling requiring all lenders to disclose the profit calculated into financial products they sell could cost the banking business "billion of euros," Hall added. The judges withdrew for further consultations, with the court to reconvene on March 22.

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