From the Vol.1 No.34 issue of Electronic Intelligence Weekly, Published October 28, 2002

THIS WEEK YOU NEED TO KNOW

Global Banking Collapse Will Shape Post-Nov. 5 World

Going into the Nov. 5 mid-term elections in the United States, we are facing the worst financial collapse within living memory, and an Administration in the thrall of Chickenhawks determined to take the country and the world into disastrous perpetual war, starting with Iraq. For the time being, the war drive is jammed up in the United Nations, thanks to the French and the Russians, who have so far rejected the most provocative features of the war resolution submitted to the UN Security Council by the United States and Great Britain.

As Lyndon LaRouche said in his Oct. 19 webcast, a dramatic change will occur as a result of the Nov. 5 elections. LaRouche emphasized that "we don't know exactly what's going to happen, except we know this Nov. 5 election will be a phase-shift in internal [U.S.] politics, and therefore, in international politics."

What is fundamentally driving this situation, is the onrushing global financial collapse—the most dramatic feature of which, as has emerged into consciousness of those watching the situation, is the simultaneous collapse of the banking systems of the United States, Germany, and Japan. As Richard Freeman reported in last week's issue of EIW:

"Never in post-World War II memory, have the banking-financial systems of the three major economic powers—the United States, Japan, and Germany—experienced such crises simultaneously. Combined, these banking systems possess between two-fifths and two-thirds of the assets of the world's banking system. The breakdown conjuncture of these nations' interconnected bank systems defines a crisis point of the world financial system...."

Freeman's article also cited the recently released data on bad debt in the U.S. banking system. Even though the U.S. government has been chronically faking its economic statistics, this particular set of data does give some idea of the depth of the present crisis. Is there still someone in the ranks of those grinding out these numbers, who still has a sense of honor? Or it is that things have just gotten to the point, where the government's data-crunchers can no longer fake all the data, all the time?

We are referring to the yearly debt report for the U.S.—"Shared National Credit Review"—published on Oct. 8 jointly by the bank regulatory agencies of the Federal Reserve, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Agency—which demonstrate a spectacular rate of increase in U.S. "troubled" bank loans. Between 2000 and 2002, the percentage of loans that are classified as troubled (or "adversely rated") has more than doubled. Of the $1.871 trillion in loan commitments that financial institutions have made in the United States, 12.6% are "troubled/adversely rated," compared with 5.1% in 2000.

You might want to keep the following fact in mind as well: That, of the world's 15 largest financial institutions today, two are Fannie Mae and Freddie Mac—dependent on the Great U.S. Housing Mortgage Bubble for their "solvency"!

EIW's reviews of the three dominant banking systems are featured in this issue, and we touch on the highlights here.

*United States. John Hoefle's review shows that the U.S. banks are hopelessly insolvent by any normal standard. They are counting trillions of dollars of worthless IOUs—derivatives, overblown assets, and unpayable debts—on their books, at face value, to hide their own actual bankruptcy. The major U.S. banking institutions have abandoned their traditional function—lending to businesses—to the point where their holdings of investment securities (corporate bonds, mortgage-backed instruments, etc.) now exceed their level of business loans. And on top of all this comes the spectacular growth of derivatives: As a whole, U.S. banks have notional derivatives holdings 81 times their equity capital, 13 times their loan portfolios, and over seven times their asset base.

*Japan. Kathy Wolfe's review shows, as background, that Japan's banking system has been in trouble for years, dating back to the infamous 1985 "Plaza Accords" in which Japan was forced to "upvalue" the yen, to bail out the collapsing and deficit-ridden U.S. economy. But now, the collapsing economy is turning once-good loans into bad loans faster than the banks can write them off. Bank of Japan Governor Masaru Hayami recently warned that public trust in Japan's giant banks has been "damaged," and he declared that the country's Central Bank will have to act as the lender of last resort. In September, Hayami had proposed that the Central Bank buy up as much as $100 billion in industrial stocks held by the major banks—which Japanese banks count as part of their capital. With the collapse of stock markets globally, this puts the very existence of the major Japanese banks in question. And, because of thersheer size of Japan's banking system, the collapse of any one of the major Japanese banks, could bring down the global financial system.

*Germany. Lother Komp's review describes how a crisis erupted in the German banking system in the last week of September, triggered by rumors of major derivatives losses by Commerzbank. The rumors were spread by Merrill Lynch, accompanied by a report on the German banks called "Turning Japanese." Risk premiums on the debt of German banks exploded in late September, as the creditworthiness of the entire German banking sector was called into question, and the crashing of bank stocks accelerated, typified by the 88% collapse of Commerzbank's stock over the past two years.

Accompanying this, is of course the impending default of Brazil, the ongoing default-collapse of Argentina, and now, the declaration that the European Union's "Stability Pact" is dead.

In an interview with Radio El Mundo of Buenos Aires, Argentina, on Oct. 20, Lyndon LaRouche put it this way:

"We are now in a world depression which is the worst world depression in the memory of any living person. Under these conditions, there's no possibility that the present world monetary financial system can survive. Now, to get out of this depression, as we look at the history of Argentina as an example, we've been going to hell for about 35 years. It will take a generation for us to build our way out of this mess. We cannot wait 35 years for the recovery to take full effect. Therefore, we're going to have to use state credit under a fixed-exchange-rate system, at 1-2% simple interest, in order to keep the structure of the economy functioning, to meet social requirements, and to devote ourselves to a generation of rebuilding the world econmy.

"So, what's been pushed from Italy and elsewhere, on my recommendation in Italy, is going back to the Bretton Woods agreements, as they operated between 1946 and 1958 approximately. This would not be an exact copy of those original Bretton Woods agreements, but the thinking of Franklin Roosevelt in 1944 around the idea of the Bretton Woods agreement, would be the model of reference for designing a new system.

"And there is no alternative to what I have proposed. If my proposal is not accepted, the world is going to hell, and nothing can stop it."

So for you, the reader, the relevant question is: Where were you, when LaRouche warned, repeatedly, year after year, of the coming financial and economic collapse? What was it that impelled you to brush off those warnings? Are you now ready to admit that LaRouche was right, and to face reality, before it's too late?