[asia-apec 719] Chossudovsky 28 Sept - FINANCIAL WARFARE

[Bob Olsen]

	FINANCIAL WARFARE 

	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. 

	..... 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.

	This ongoing pillage of central bank reserves, however, is by
	no means limited to developing countries. 


 Ottawa economist, Michel Chossudovsky speaks
 Ottawa economist, Michel Chossudovsky speaks

   Monday Sept 28, 7:30pm
   Monday Sept 28, 7:30pm

   St. Lawrence Centre, 27 Front St. E, Toronto
   St. Lawrence Centre, 27 Front St. E, Toronto


The following recent article by Professor Chossudovsky was forwarded
to me by David Wilson.  Forgive me if you have already seen it.
Please pass it on, even if you are a few thousand miles from Toronto.

Thanks............................................!!!!!!


Date: Wed, 23 Sep 1998 07:29:25 -0400
Subject: Chossudovsky: Financial crisis
From: James_Wilson at ridley.on.ca (James Wilson)


**********************************************

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 
 --------------------------------------





 Bob Olsen	Toronto		bobolsen at aracnet.net   (:-)