||This article appears in the September 14, 2007 issue of Executive Intelligence Review.
Congress `Surprised' by Crash
Or Cowed by Hedge-Fund Money?
by Paul Gallagher
[PDF version of this article]
On the 110th Congress's Sept. 5 return from a month's recess, it was starkly confronted by the reality of a banking and credit crisis, and a collapsing real economy and employment, which knocked into a cocked hat the Democrats' planned Sept. 5-6 committee hearings on tax policy, and other tertiary matters. While they were debating how much to tax private equity and hedge funds, a global seize-up in lending among banks was threatening a bank collapse within "days or weeks," as one top European banker warned. And the Bureau of Labor Statistics on Sept. 7 delivered the shocking report of a net loss of employment in the American economy in August, with 70,000 manufacturing and construction jobs, and 30,000 real-estate/financial jobs disappearing in a month. The biggest mortgage lender, Countrywide, added 10,000 more layoffs on the day of the report. The nationwide wave of home foreclosures continued to rise toward 1.5 million a year, while home sales plunged.
On Sept. 5, just as the first "economic" Congressional hearings began, the condition of the world credit markets was described to the Financial Times as "a heart attack" by Jörg Rudloff, chairman of Barclays Capital and of the International Capital Markets Association, who added, "If we stay stuck, the patient [the banking system] is going to die." And the same day, the chairman of Deutsche Bank, Josef Ackermann, said that the governments and banks had only "the next few days or weeks" to try to restore confidence, and head off collapse. On Sept. 6, the Fed, Bank of England, and European Central Bank pumped nearly $100 billion in liquidity into their banking systems, resuming a month-long attempt to revive bank lending and credit assets by such measures, which were clearly not working. Interbank lending interest rates kept rising, as banks, fearing their own growing losses, hoarded the cash instead of lending it; trade associations and financial commentators screamed in pain for an emergency cut of a half-percent, or even one full percent, in the Federal Reserve funds ratealso sure to be unsuccessful.
Citibank, the world's biggest, on Sept. 7, cut off all lending to mortgage companies.
Leading Congressmen in both parties immediately used Rep. Barney Frank's (D-Mass.) Financial Services Committee hearing on Sept. 5, to proclaim that they were "completely surprised" that the so-called subprime mortgage collapse had spread throughout the markets to become a general financial crisis. Frank himself opened the hearing, saying, "I think the far greater surprise was the extent to which the residential mortgage crisis had a negative impact on the market in general. I don't know anyone who was predicting that a problem in subprime was going to lead to a failure in selling commercial paper. Now, clearly, there has been a broader degree of impact from this crisis, and it does not seem to me that any of us, charged with responsibility for knowing what was going on, anticipated this.... I was not pleased, that so many of us were surprised at the impact that the subprime crisis had on the entire financial system.... It may be that there is a systemic problem here."
All of Frank's witnessestop officials from the Treasury, FDIC, Securities and Exchange Commission, and Office of the Comptroller of the Currencyechoed him with their expressions of surprise at the spreading bank/credit panic. Congressmen from both parties chimed in with their own pleas of innocent astonishment, until finally Democratic Rep. Gary Ackerman, with typical New York irony, remarked at how surprised he was, that all his colleagues were so surprised: "Anyone with an eye open could see there was trouble ahead."
While Frank urged expanding the big government mortgage enterprises, known as Fannie Mae and Freddie Mac, to buy up and refinance troubled mortgages, others, like Rep. Paul Kanjorski (D-Pa.), pointed to the seriousness of the crisis: "I hear people talking about ... Freddie Mac and Fannie Mae. People are suggesting we get these folks involved and have them empowered to buy some of this bad paper, or bad mortgages, or do the work-out process. I have great fear in doing that, because ... we could do that, put them at risk, certainly strain their positionsand then have the real estate market really go awry and have us go into a recession, and then hell's going to break loose and we're going to have a multi-trillion-dollar disaster or perhaps systemic failure on our hands."
What They Really Knew, or Should Have Known
The cries of alarm from the chairmen of Barclays and Deutsche Bank characterized the bank crisis as just as extreme, and just as short-term, as had Lyndon LaRouche in a Sept. 1 speech: The U.S. Congress, in particular, has until the beginning of October, and no longer, to take emergency action to halt the foreclosure "tsunami" and bring the bank crisis under control. Otherwise, "the patient will die," and social and financial chaos will ensue, with mass evictions of households and widespread failure of banks over coming months, which could have been prevented.
LaRouche and EIR representatives had told Congress as a whole, and briefed numerous offices in detail, in March, exactly what disaster was going to happen to the banking system and financial markets during the remainder of 2007, and what kind of actions they had to take to protect the underlying U.S. economy and population.
At that time, some Members of Congress, and experts on their staffs, flatly denied that the mortgage bubble meltdown would "become systemic." But they knew what the potential danger was, as Ackerman observed. And they understood the warnings from LaRouche and his colleagues. It was not that they didn't know what was occurring, but that they didn't want to know what their real responsibilities were: They were paralyzed by a combination of political cowardice, and an attachment to the hedge fund/private equity fund gang represented by "Democrat" Felix Rohatyn and "Republican" George Shultz.
In late February, a LaRouche memo for circulation and discussion with elected officials, "A Yen for Disaster," said: "The hedge funds' derivatives markets are moving toward an historic blowoutthe banks are reporting this warning to each other; and financial writers are pointing to the mortgage-based credit derivatives market, which has suddenly soared to as much as $27 trillion, from nothing in 2002. Economic reports on the U.S. economy in January showed that the underlying U.S. mortgage-bubble meltdown accelerated through the 'floor' the pundits were proclaiming; and industrial production fell, led by a drastic plunge in the auto sector." LaRouche stressed the British/Bank of England role in "steering" this crisis, and that of the hedge funds in stoking the coming explosion of debt and derivatives. Pointing to the yen carry trade and the U.S. mortgage bubble as the "bookends" of the crisis, LaRouche identified the hedge funds as the key problem. They had taken over many functions of the banks, were completely unregulated, and their "mathematics/computer trading strategies" had come to dominate the trading in all markets, from mortgage-backed securities (MBS), to commercial loan paper, to currency and commodity speculation, etc.guaranteeing that they would spread a blowup in one market, into all the rest.
Tax them; control them; ban them, LaRouche urged.
On March 9, California-based New Century Financial Corp, the second-largest lender of subprime mortgages and one of the U.S. biggest mortgage firms overall, started to collapse with $40-70 billion in subprime mortgages, and the huge HSBC bank reported big losses in MBS. EIR published and circulated a warning and explanation from LaRouche, that a "financial disintegration" was under way, which could not be timed precisely, but could collapse the financial system before the end of 2007. "The whole subprime mortgage-backed securities market is turning illiquid," EIR reported, "even Fannie Mae, Freddie Mac, and the biggest bank purchasers of these mortgages are becoming unable to re-issue them as securities.... By March 7, the contagion of rapidly rising 'risk premiums' on debt [was] spreading into other debt markets.... This contagion is the 'disintegration' of the financial system that LaRouche points to, as increasing categories of unpayable debt can't be rolled over into new debt securitiesand it is not stoppable except by a thoroughgoing bankruptcy reorganization, carried out by leading governments."
Then on March 23, EIR published a 10-page cover feature entitled, "How U.S. Mortgage Crisis Can Trigger Global Crash." This detailed analysis showed that the $18-19 trillion U.S. mortgage and MBS bubble, piling on top of previous bubbles blown up by Alan Greenspan's Federal Reserve, had come to account for 49% of all assets in the U.S. banking system. The rate at which that bubble was now collapsing, EIR showed, essentially guaranteed a banking system disintegration in the year to comethough not precisely predictable as to the moment of the eventand an explosion of home foreclosures across the country.
Which Side Is Your Congressman On?
This grave situationand LaRouche's proposed actions to protect the economy, reorganize chartered banks, and create new productive credit for infrastructure to replace the collapsing bank creditwere debated in detail in offices throughout the Congress in March and April, by EIR correspondents, LaRouche PAC organizers, and LaRouche Youth Movement leaders. Members of Congress knew then, in factothers should have knownwhat was coming this Fall.
"The entire financial system is coming down. What no one can determine," LaRouche was quoted in that March 23 feature, "is the rate at which this will happen. But this much is undeniable: It can not be stopped from collapsing under present policies. I could bring this collapse under control.... I would act to change the financial system; the existing, collapsing banking system must be put into bankruptcy reorganization, and a new financial system built on initiative from the United States. But so far, I'm not getting the support urgently needed from Congress, including the 2008 candidates for President. If that continues, the entire system is coming down."
Members of Congress are not fools and do know what is happening to homes, jobs, credit markets, and banking systems. What they now face, as LaRouche said on Sept. 7, "is the choice of whether to save the banks and housing, or to go with a grouping which would sacrifice both the banks and the housing, to the hedge funds," which have been liberally funding Presidential candidates and Congressional coffers alike. "So we have a fight: who's on one side, and who's on the other side."
Testimony to Congress