[asia-apec 696] Chossudovsky on the Financial Crisis

[GABRIELA]

>From: Michel  Chossudovsky <chossudovsky at sprint.ca>
>Subject: financial crisis
>
>FINANCIAL WARFARE 
>
>by Michel Chossudovsky
>
>Professor of Economics, University of Ottawa, author of "The Globalisation
>of Poverty, Impacts of IMF and World Bank Reforms", Third World Network,
>Penang and Zed Books, London, 1997. 
>
>Copyright by Michel Chossudovsky Ottawa 1998. All rights reserved. To
>publish or reproduce this text, contact the author at
>chossudovsky at sprint.ca  or fax 1-514-4256224  
>
>*  *  *
>
>"Practices of the unscrupulous money changers stand indicted in the court
>of public opinion, rejected by the hearts and minds of men". (Franklin D.
>Roosevelt's First Inaugural Address, 1933) 
>
>	
>Humanity is undergoing in the post-Cold War era an economic crisis of
>unprecedented scale leading to the rapid impoverishment of large sectors of
>the World population. The plunge of national currencies in virtually all
>major regions of the World has contributed to destabilising national
>economies while precipitating entire countries into abysmal poverty. 
>
>The crisis is not limited to Southeast Asia or the former Soviet Union. The
>collapse in the standard of living is taking place abruptly and
>simultaneously in a large number of countries. This Worldwide crisis of the
>late twentieth century is more devastating than the Great Depression of the
>1930s. It has far-reaching geo-political implications; economic dislocation
>has also been accompanied by the outbreak of regional conflicts, the
>fracturing of national societies and in some cases the destruction of
>entire countries. This is by far the most serious economic crisis in modern
>history.  
> 
>The existence of a "global financial crisis" is casually denied by the
>Western media, its social impacts are downplayed or distorted;
>international institutions including the United Nations deny the mounting
>tide of World poverty: "the progress in reducing poverty over the [late]
>20th century is remarkable and unprecedented..."1. The "consensus" is that
>the Western economy is "healthy" and that "market corrections" on Wall
>Street are largely attributable to the "Asian flu" and to Russia's troubled
>"transition to a free market economy".
>
>Evolution of the Global Financial Crisis
>
>The plunge of Asia's currency markets (initiated in mid-1997) was followed
>in October 1997 by the dramatic meltdown of major bourses around the World.
>In the uncertain wake of Wall Street's temporary recovery in early 1998
>--largely spurred by panic flight out of Japanese stocks-- financial
>markets backslided a few months later to reach a new dramatic turning-point
>in August with the spectacular nose-dive of the Russian ruble. The Dow
>Jones plunged by 554 points on August 31st (its second largest decline in
>the history of the New York stock exchange) leading in the course of
>September to the dramatic meltdown of stock markets around the World. In a
>matter of a few weeks (from the Dow's 9337 peak in mid-July), 2300 billion
>dollars of "paper profits" had evaporated from the U.S. stock market.2 
>
>The ruble's free-fall had spurred Moscow's largest commercial banks into
>bankruptcy leading to the potential take-over of Russia's financial system
>by a handful of Western banks and brokerage houses. In turn, the crisis has
>created the danger of massive debt default to Moscow's Western creditors
>including the Deutsche and Dresdner banks. Since the outset of Russia's
>macro-economic reforms, following the first injection of IMF "shock
>therapy" in 1992, some 500 billion dollars worth of Russian assets
>--including plants of the military industrial complex, infrastructure and
>natural resources-- have been confiscated (through the privatisation
>programmes and forced bankruptcies) and transferred into the hands of
>Western capitalists.3 In the brutal aftermath of the Cold War, an entire
>economic and social system is being dismantled. 
>
>"Financial Warfare"
>
>The Worldwide scramble to appropriate wealth through "financial
>manipulation" is the driving force behind this crisis. It is also the
>source of economic turmoil and social devastation. In the words of renowned
>currency speculator and billionaire George Soros (who made 1.6 billion
>dollars of speculative gains in the dramatic crash of the British pound in
>1992) "extending the market mechanism to all domains has the potential of
>destroying society".4 This manipulation of market forces by powerful actors
>constitutes a form of financial and economic warfare. No need to recolonise
>lost territory or send in invading armies. In the late twentieth century,
>the outright "conquest of nations" meaning the control over productive
>assets, labour, natural resources and institutions can be carried out in an
>impersonal fashion from the corporate boardroom: commands are dispatched
>from a computer terminal, or a cell phone. The relevant data are instantly
>relayed to major financial markets -- often resulting in immediate
>disruptions in the functioning of national economies. "Financial warfare"
>also applies complex speculative instruments including the gamut of
>derivative trade, forward foreign exchange transactions, currency options,
>hedge funds, index funds, etc. Speculative instruments have been used with
>the ultimate purpose of capturing financial wealth and acquiring control
>over productive assets. In the words of Malaysia's Prime Minister Mahathir
>Mohamad: "This deliberate devaluation of the currency of a country by
>currency traders purely for profit is a serious denial of the rights of
>independent nations".5 
>
>The appropriation of global wealth through this manipulation of market
>forces is routinely supported by the IMF's lethal macro-economic
>interventions which act almost concurrently in ruthlessly disrupting
>national economies all over the World. "Financial warfare" knows no
>territorial boundaries; it does not limit its actions to besieging former
>enemies of the Cold War era. In Korea, Indonesia and Thailand, the vaults
>of the central banks were pillaged by institutional speculators while the
>monetary authorities sought in vain to prop up their ailing currencies. In
>1997, more than 100 billion dollars of Asia's hard currency reserves had
>been confiscated and transferred (in a matter of months) into private
>financial hands. In the wake of the currency devaluations, real earnings
>and employment plummeted virtually overnight leading to mass poverty in
>countries which had in the post-War period registered significant economic
>and social progress. 
>
>The financial scam in the foreign exchange market had destabilised national
>economies, thereby creating the preconditions for the subsequent plunder of
>the Asian countries' productive assets by so-called "vulture foreign
>investors".6 In Thailand, 56 domestic banks and financial institutions were
>closed down on orders of the IMF, unemployment virtually doubled
>overnight.7  Similarly in Korea, the IMF "rescue operation" has unleashed a
>lethal chain of bankruptcies leading to the outright liquidation of
>so-called "troubled merchant banks". In the wake of the IMF's "mediation"
>(put in place in December 1997 after high-level consultations with the
>World's largest commercial and merchant banks), "an average of more than
>200 companies [were] shut down per day (...) 4,000 workers every day were
>driven out onto streets as unemployed".8 Resulting from the credit freeze
>and "the instantaneous bank shut-down", some 15,000 bankruptcies are
>expected in 1998 including 90 percent of Korea's construction companies
>(with combined debts of $20 billion dollars to domestic financial
>institutions).9  South Korea's Parliament has been transformed into a
>"rubber stamp". Enabling legislation is enforced through "financial
>blackmail": if the legislation is not speedily enacted according to IMF's
>deadlines, the disbursements under the bail-out will be suspended with the
>danger of renewed currency speculation.
>
>In turn, the IMF sponsored "exit programme" (ie. forced bankruptcy) has
>deliberately contributed to fracturing the chaebols which are now invited
>to establish "strategic alliances with foreign firms" (meaning their
>eventual control by Western capital). With the devaluation, the cost of
>Korean labour had also tumbled: "It's now cheaper to buy one of these [high
>tech] companies than buy a factory -- and you get all the distribution,
>brand-name recognition and trained labour force free in the bargain"...10 
>
>The Demise of Central Banking
>
>In many regards, this Worldwide crisis marks the demise of central banking
>meaning the derogation of national economic sovereignty and the inability
>of the national State to control money creation on behalf of society. In
>other words, privately held money reserves in the hands of "institutional
>speculators" far exceed the limited capabilities of the World's central
>banks.  The latter acting individually or collectively are no longer able
>to fight the tide of speculative activity. Monetary policy is in the hands
>of private creditors who have the ability to freeze State budgets, paralyse
>the payments process, thwart the regular disbursement of wages to millions
>of workers (as in the former Soviet Union) and precipitate the collapse of
>production and social programmes. As the crisis deepens, speculative raids
>on central banks are extending into China, Latin America and the Middle
>East with devastating economic and social consequences. 
>
>This ongoing pillage of central bank reserves, however, is by no means
>limited to developing countries. It has also hit several Western countries
>including Canada and Australia where the monetary authorities have been
>incapable of stemming the slide of their national currencies. In Canada,
>billions of dollars were borrowed from private financiers to prop up
>central bank reserves in the wake of speculative assaults. In Japan --where
>the yen has tumbled to new lows-- "the Korean scenario" is viewed
>(according to economist Michael Hudson), as a "dress rehearsal" for the
>take over of Japan's financial sector by a handful of Western investment
>banks. The big players are Goldman Sachs, Morgan Stanley, Deutsche Morgan
>Gruenfell among others who are buying up Japan's bad bank loans at less
>than ten percent of their face value. In recent months both US Secretary of
>the Treasury Robert Rubin and Secretary of State Madeleine K. Albright have
>exerted political pressure on Tokyo insisting "on nothing less than an
>immediate disposal of Japan's bad bank loans--preferably to US and other
>foreign "vulture investors" at distress prices. To achieve their objectives
>they are even pressuring Japan to rewrite its constitution, restructure its
>political system and cabinet and redesign its financial system... Once
>foreign investors gain control of Japanese banks, these banks will move to
>take over Japanese industry..."11 
>
>Creditors and Speculators
>
>The World's largest banks and brokerage houses are both creditors and
>institutional speculators. In the present context, they contribute (through
>their speculative assaults) to destabilising national currencies thereby
>boosting the volume of dollar denominated debts. They then reappear as
>creditors with a view to collecting these debts. Finally, they are called
>in as "policy advisors" or consultants in the IMF-World Bank sponsored
>"bankruptcy programmes" of which they are the ultimate beneficiaries. In
>Indonesia, for instance, amidst street rioting and in the wake of Suharto's
>resignation, the privatisation of key sectors of the Indonesian economy
>ordered by the IMF was entrusted to eight of the World's largest merchant
>banks including Lehman Brothers, Credit Suisse-First Boston, Goldman Sachs
>and UBS/SBC Warburg Dillon Read.12 The World's largest money managers set
>countries on fire and are then called in as firemen (under the IMF "rescue
>plan") to extinguish the blaze. They ultimately decide which enterprises
>are to be closed down and which are to be auctioned off to foreign
>investors at bargain prices.  
>
>Who Funds the IMF Bailouts?
>
>Under repeated speculative assaults, Asian central banks had entered into
>multi-billion dollar contracts (in the forward foreign exchange market) in
>a vain attempt to protect their currency.  With the total depletion of
>their hard currency reserves, the monetary authorities were forced to
>borrow large amounts of money under the IMF bailout agreement. Following a
>scheme devised during the Mexican crisis of 1994-95, the bailout money,
>however, is not intended "to rescue the country"; in fact the money never
>entered Korea, Thailand or Indonesia; it was earmarked to reimburse the
>"institutional speculators", to ensure that they would be able to collect
>their multi-billion dollar loot. In turn, the Asian tigers have been tamed
>by their financial masters . Transformed into lame ducks-- they have been
>"locked up" into servicing these massive dollar denominated debts well into
>the third millennium. 
>
>But "where did the money come from" to finance these multi-billion dollar
>operations? Only a small portion of the money comes from IMF resources:
>starting with the Mexican 1995 bail-out, G7 countries including the US
>Treasury were called upon to make large lump-sum contributions to these IMF
>sponsored rescue operations leading to significant hikes in the levels of
>public debt.13 Yet in an ironic twist, the issuing of US public debt to
>finance the bail-outs is underwritten and guaranteed by the same group of
>Wall Street merchant banks involved in the speculative assaults. 
>
>In other words, those who guarantee the issuing of public debt (to finance
>the bailout) are those who will ultimately appropriate the loot (eg. as
>creditors of Korea or Thailand) --ie. they are the ultimate recipients of
>the bailout money (which essentially constitutes a "safety net" for the
>institutional speculator). The vast amounts of money granted under the
>rescue packages are intended to enable the Asian countries meet their debt
>obligations with those same financial institutions which contributed to
>precipitating the breakdown of their national currencies in the first
>place. As a result of this vicious circle, a handful of commercial banks
>and brokerage houses have enriched themselves beyond bounds; they have also
>increased their stranglehold over governments and politicians around the
>World. 
>
>Strong Economic Medicine 
>
>Since the 1994-95 Mexican crisis, the IMF has played a crucial role in
>shaping the "financial environment" in which the global banks and money
>managers wage their speculative raids. The global banks are craving for
>access to inside information. Successful speculative attacks require the
>concurrent implementation on their behalf of "strong economic medicine"
>under the IMF bail-out agreements. The "big six" Wall Street commercial
>banks (including Chase, Bank America, Citicorp and J. P. Morgan) and the
>"big five" merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley
>and Salomon Smith Barney) were consulted on the clauses to be included in
>the bail-out agreements. In the case of Korea's short-term debt, Wall
>Street's largest financial institutions were called in on Christmas Eve (24
>December 1997), for high level talks at the Federal Reserve Bank of New
>York.14
>
>The global banks have a direct stake in the decline of national currencies.
>In April 1997 barely two months before the onslaught of the Asian currency
>crisis, the Institute of International Finance (IIF), a Washington based
>think-tank representing the interests of some 290 global banks and
>brokerage houses had "urged authorities in emerging markets to counter
>upward exchange rate pressures where needed...". 15 This request
>(communicated in a formal Letter to the IMF) hints in no uncertain terms
>that the IMF should advocate an environment in which national currencies
>are allowed to slide.16 Indonesia was ordered by the IMF to unpeg its
>currency barely three months before the rupiahs dramatic plunge. In the
>words of American billionaire and presidential candidate Steve Forbes: "Did
>the IMF help precipitate the crisis? This agency advocates openness and
>transparency for national economies, yet it rivals the CIA in cloaking its
>own operations. Did it, for instance, have secret conversations with
>Thailand, advocating the devaluation that instantly set off the
>catastrophic chain of events?" (...) Did IMF prescriptions exacerbate the
>illness? These countries' moneys were knocked down to absurdly low
>levels".17  
>
>Deregulating Capital Movements
>
>The international rules regulating the movements of money and capital
>(across international borders) contribute to shaping the "financial
>battlefields" on which banks and speculators wage their deadly assaults. In
>their Worldwide quest to appropriate economic and financial wealth, global
>banks and multinational corporations have actively pressured for the
>outright deregulation of international capital flows including the movement
>of "hot" and "dirty" money.18 Caving in to these demands (after hasty
>consultations with G7 finance ministers), a formal verdict to deregulate
>capital movements was taken by the IMF Interim Committee in Washington in
>April 1998. The official communique stated that the IMF will proceed with
>the Amendment of its Articles with a view to "making the liberalization of
>capital movements one of the purposes of the Fund and extending, as needed,
>the Fund's jurisdiction for this purpose". 19 The IMF managing director,
>Mr. Michel Camdessus nonetheless conceded in a dispassionate tone that "a
>number of developing countries may come under speculative attacks after
>opening their capital account" while reiterating (ad nauseam) that this can
>be avoided by the adoption of "sound macroeconomic policies and strong
>financial systems in member countries". (ie. the IMF's standard "economic
>cure for disaster").20 
>
>The IMF's resolve to deregulate capital movements was taken behind closed
>doors (conveniently removed from the public eye and with very little press
>coverage) barely two weeks before citizens' groups from around the World
>gathered in late April 1998 in mass demonstrations in Paris opposing the
>controversial Multilateral Agreement on Investment (MAI) under OECD
>auspices. This agreement would have granted entrenched rights to banks and
>multinational corporations overriding national laws on foreign investment
>as well derogating the fundamental rights of citizens. The MAI constitutes
>an act of capitulation by democratic government to banks and multinational
>corporations. 
>
>The timing was right on course: while the approval of the MAI had been
>temporarily stalled, the proposed deregulation of foreign investment
>through a more expedient avenue had been officially launched: the Amendment
>of the Articles would for all practical purposes derogate the powers of
>national governments to regulate foreign investment. It would also nullify
>the efforts of the Worldwide citizens' campaign against the MAI: the
>deregulation of foreign investment would be achieved ("with a stroke of a
>pen") without the need for a cumbersome multilateral agreement under OECD
>or WTO auspices and without the legal hassle of a global investment treaty
>entrenched in international law. 
>
>Creating a Global Financial Watchdog
>
>As the aggressive scramble for global wealth unfolds and the financial
>crisis reaches dangerous heights, international banks and speculators are
>anxious to play a more direct role in shaping financial structures to their
>advantage as well as "policing" country level economic reforms. Free market
>conservatives in the United States (associated with the Republican Party)
>have blamed the IMF for its reckless behaviour. Disregarding the IMF's
>intergovernmental status, they are demanding greater US control over the
>IMF. They have also hinted that the IMF should henceforth perform a more
>placid role (similar to that of the bond rate agencies such as Moody's or
>Standard and Poor) while consigning the financing of the multi-billion
>dollar bail-outs to the private banking sector.21 
>
>Discussed behind closed doors in April 1998, a more perceptive initiative
>(couched in softer language) was put forth by the World's largest banks and
>investment houses through their Washington mouthpiece (the Institute of
>International Finance). The banks proposal consists in the creation of a
>"Financial Watchdog --a so-called "Private Sector Advisory Council"-- with
>a view to routinely supervising the activities of the IMF. "The Institute
>[of International Finance], with its nearly universal membership of leading
>private financial firms, stands ready to work with the official community
>to advance this process." 22  Responding to the global banks initiative,
>the IMF has called for concrete "steps to strengthen private sector
>involvement" in crisis management --what might be interpreted as a "power
>sharing arrangement" between the IMF and the global banks.23 The
>international banking community has also set up it own high level "Steering
>Committee on Emerging Markets Finance" integrated by some of the World's
>most powerful financiers including William Rhodes, Vice Chairman of
>Citibank and Sir David Walker, Chairman of Morgan Stanley. The hidden
>agenda behind these various initiatives is to gradually transform the IMF
>--from its present status as an inter-governmental body-- into a full
>fledged bureaucracy which more effectively serves the interests of the
>global banks. More importantly, the banks and speculators want access to
>the details of IMF negotiations with member governments which will enable
>them to carefully position their assaults in financial markets both prior
>and in the wake of an IMF bailout agreement. The global banks (pointing to
>the need for "transparency") have called upon "the IMF to provide valuable
>insights [on its dealings with national governments] without revealing
>confidential information...". But what they really want is privileged
>inside information.24  
>
>The ongoing financial crisis is not only conducive to the demise of
>national State institutions all over the World, it also consists in the
>step by step dismantling (and possible privatisation) of the post War
>institutions established by the founding fathers at the Bretton Woods
>Conference in 1944. In striking contrast with the IMF's present-day
>destructive role, these institutions were intended by their architects to
>safeguard the stability of national economies. In the words of Henry
>Morgenthau, US Secretary of the Treasury in his closing statement to the
>Conference (22 July 1944): "We came here to work out methods which would do
>away with economic evils --the competitive currency devaluation and
>destructive impediments to trade-- which preceded the present war. We have
>succeeded in this effort"25
>
>	NOTES
>
>1. United Nations Development Program, Human Development Report, 1997, New
>York, 1997, p. 2.
>
>2. Robert O'Harrow Jr., "Dow Dives 513 Points, or 6.4", Washington Post, 1
>September 1998, page A. 
>
>3. Bob Djurdjevic, Return looted Russian Assets, Aug. 30, Truth in Media's
>Global Watch, Phoenix, 30 August 98.
>
>4. See "Society under Threat- Soros", The Guardian, London, 31 October 1997. 
>
>5. Statement at the Meeting of the Group of 15, Malacca, Malaysia, 3
>November 1997, quoted in the South China Morning Post, Hong Kong, 3
>November 1997.
>
>6. See Michael Hudson and Bill Totten, "Vulture speculators", Our World,
>No. 197, Kawasaki, 12 August 1998.
>
>7. Nicola Bullard, Walden Bello and Kamal Malhotra, "Taming the Tigers: the
>IMF and the Asian Crisis", Special Issue on the IMF, Focus on Trade No. 23,
>Focus on the Global South, Bangkok, March 1998. 
>
>8. Korean Federation of Trade Unions, "Unbridled Freedom to Sack Workers Is
>No Solution At All", Seoul, 13 January 1998. 
>
>9. Song Jung tae, "Insolvency of Construction Firms rises in 1998", Korea
>Herald, 24 December 1997. Legislation (following IMF directives) was
>approved which dismantles the extensive powers of the Ministry of Finance
>while also stripping the Ministry of its financial regulatory and
>supervisory functions. The financial sector had been opened up, a Financial
>Supervisory Council under the advice of Western merchant banks arbitrarily
>decides the fate of Korean banks. Selected banks (the lucky ones) are to be
>"made more attractive" by earmarking a significant chunk of the bail-out
>money to finance (subsidise) their acquisition at depressed prices by
>foreign buyers, --ie. the shopping-spree by Western financiers is funded by
>the government on borrowed money from Western financiers. 
>
>10. Michael Hudson, Our World, Kawasaki, December 23, 1997. 
>
>11. Michael Hudson, "Big Bang is Culprit behind Yen's Fall", Our World, No.
>187, Kawasaki, 28 July 1998. See also Secretary of State Madeleine K.
>Albright and Japanese Foreign Minister Keizo Obuchi, Joint Press
>Conference, Ikura House, Tokyo, July 4, 1998 contained in Official Press
>Release, US Department of State, Washington, 7 July, l998. 
>
>12. See Nicola Bullard, Walden Bello and Kamal Malhotra, op.  cit. 
>
>13. On 15 July 1998, the Republican dominated House of Representatives
>slashed the Clinton Administration request of 18 billion dollar in
>additional US funding to the IMF to 3.5 billion. Part of the US
>contribution to the bail-outs would be financed under the Foreign Exchange
>Stabilisation Fund of the Treasury. The US Congress has estimated the
>increase in the US public debt and the burden on taxpayers of the US
>contributions to the Asian bail-outs.
>
>14. Financial Times, London, 27-28 December 1997, p. 3).
>
>15. Institute of International Finance, Report of the Multilateral Agencies
>Group, IIF Annual Report, Washington, 1997.
>
>16. Letter addressed by the Managing director of the Institute of
>International Finance Mr. Charles Dallara to Mr. Philip Maystadt, Chairman
>of the IMF Interim Committee, April 1997, quoted in Institute of
>International Finance, 1997 Annual Report, Washington, 1997.
>
>17. Steven Forbes, "Why Reward Bad Behaviour, editorial, Forbes Magazine, 4
>May 1998.
>
>18. "Hot money" is speculative capital, "dirty money" are the proceeds of
>organised crime which are routinely laundered in the international
>financial system.
>
>19. International Monetary Fund, Communiqué of the Interim Committee of the
>Board of Governors of the International Monetary Fund, Press Release No.
>98/14 Washington, April 16, 1998. The controversial proposal to amend its
>articles on "capital account liberalisation" had initially been put forth
>in April 1997.
>
>20. See Communique of the IMF Interim Committee, Hong Kong, 21 September
>1997.  
>
>21. See Steven Forbes, op cit. 
>
>22. Institute of International Finance, "East Asian Crises Calls for New
>International Measures, Say Financial Leaders", Press Release, 18 April 1998.
>
>23. IMF, Communiqué of the Interim Committee of the Board of Governors,
>April 16, 1998. 
>
>24. The IIF proposes that global banks and brokerage houses could for this
>purpose "be rotated and selected through a neutral process [to ensure
>confidentiality], and a regular exchange of views [which] is unlikely to
>reveal dramatic surprises that turn markets abruptly (...). In this era of
>globalization, both market participants and multilateral institutions have
>crucial roles to play; the more they understand each other, the greater the
>prospects for better functioning of markets and financial stability... ".
>See Letter of Charles Dallara, Managing Director of the IIF to Mr. Philip
>Maystadt, Chairman of IMF Interim Committee, IIF, Washington, 8 April 1998.
>
>25. Closing Address, Bretton Woods Conference, Bretton Woods, New
>Hampshire, 22 July 1944. The IMF's present role is in violation of its
>Articles of Agreement. 
>
>    Michel Chossudovsky
>    Department of Economics,
>    University of Ottawa, 
>    Ottawa, K1N6N5
>    Voice box: 1-613-562-5800, ext. 1415
>    Fax: 1-514-425-6224
>    E-Mail: chossudovsky at sprint.ca
>    Alternative fax: 1-613-562-5999 
>
>