The Guardians of the Economy make their move: Part 2 of From Economic Collective to Police State

TOO LATE

Photo caption: Protesters outside the Cypriot parliament voice their disgust with the original bailout (Reuters)

This post follows on Part 1 of From Economic Collective to Police State ... (August 12, 2013)

What is the sound of one pebble clapping?

On March 16, a Saturday, the Cypriot government, under pressure from the Troika, ordered without warning the country's bank accounts frozen. (I'm still not clear on whether this directive applied to every single bank on the bank-laden island nation or only to the largest banks.) The astounding event didn't make a ripple in the American mainstream television news media. By Monday, however, the media had rallied. "Russian oligarchs. International tax cheats." explained a correspondent for CNN. "International criminal moneylaunderers," chimed in Fox news. Nothing for Americans to worry about; everybody move along.

The Beeb wasn't so sure it was nothing to worry about. That evening "BBC World News America" anchor Katty Kay interviewed a former World Bank chief economist and U.S. treasury secretary named Larry Summers, who at that time was on President Barack Obama's short list of nominees for the next Federal Reserve board chairman (and still is).

Katty wanted him to explain the import, if any, of the Troika's action for American savings depositors.

At first it sounded as if Larry was answering the question with a koan. He replied softly, "Little pebbles."

When Katty registered no response he said more softly, "Sarajevo."

Katty, not being the Zen type, prodded Larry to proceed to his point.

After a pregnant pause Larry said that the Asian Financial Crisis, which had started in 1996, didn't immediately morph into a global one. The crisis seemed to end in one country, he noted, then materialized in another and after it seemed to end there suddenly popped up in another country, and so it went.

This discourse brought Katty's back up. She curtly pressed her original question: How was the public supposed to interpret a supposedly democratic government confiscating money in people's savings accounts?

After another pregnant pause Larry replied in voice like dead leaves rustling against a gravestone, "In a world where my spending is your income -- if every person, if every nation, tries to save more, it lowers everyone's income."

With that the clock ran out on the allotted interview time, leaving an exasperated Katty Kay to glare good-bye at her guest.

A new template for a new, improved world order

If Larry's talk about savings and income sounds familiar; yes, it would, for readers who followed my tip on July 18 to bone up on the Paradox of Thrift. To review, from Wikipedia's article:

"The paradox states that if everyone tries to save more money during times of economic recession, then aggregate demand will fall and will in turn lower total savings in the population because of the decrease in consumption and economic growth. The paradox is, narrowly speaking, that total savings may fall even when individual savings attempt to rise, and, broadly speaking, that increase in savings may be harmful to an economy."

There's a little more to it but the point is that it's a paradox so it's not supposed to make sense, much less guide American fiscal and monetary policies for more than a half century but that's the way the cookie crumbles.

Larry was voicing the cant that spun off from the paradox. The cant helped unseat American republicanism by substituting the consumer for the citizen and the economy for the republic.
The question was whether Larry's blithering indicated that the cant had finally unseated democracy itself.  Certainly there were indications this had already happened in Cyprus.

Massive street protests were seemingly managing to embarrass the government into agreeing to a less draconian confiscation of Cypriots' deposits than was originally announced. The question for Cypriot wage earners and pension fund managers was whether the terms of the confiscation deal that the Troika and the Cyprus government would finally settle on were always the target terms, to be presented to the Cypriot public as a compromise with having every euro they had on deposit in their banks expropriated.

The question for Americans with money on deposit in U.S. banks was whether a similar type of expropriation was planned for them.

Nah, said the Talking Heads hauled onto American news talk shows to explain the confusing situation in Cyprus. It was a local thing, having to do with the Eurozone's seemingly endless 'sovereign debt' crises. As to the rest, well, the Troika was just getting tough with Russian oligarchs, tax cheats and international moneylaunderers. (You will notice Larry said nothing to Katty about oligarchs, tax cheats, etc.)

Even American gold investor extraordinaire and gold monetarist guru Jim Sinclair, notoriously jumpy about government moves, wasn't spooked at first by the events in Cyprus. He told his readers (paraphrasing here): Bah, they're just trying to scare big money out of its cash position in the big banks. This in his view was the central planners' last frantic bluff before gold restored sanity to the monetary system. Jim told other gold investors to sit tight; gold was nearing $1,600 and once it crossed that line it would never see $1,600 an ounce again. (After Jim learned the real story about the Cyprus situation he changed his tune. Then it was, paraphrasing here, Holy smokes, run for your lives!  I trust by now he's achieved a kind of equilibrium.)

Eight days after Larry Summers's fling at playing Zen Master, and with rumors flying on the Internet that there was much more to the Cyprus situation than reported, stock market investor extraordinaire and former U.S. government official Larry Kudlow hauled one of the opinion experts at the Council on Foreign Relations onto his TV show at CNBC, America's premier financial news cable channel.

The expert, Benn Steil, explained what Larry called "the new template" for rescuing troubled banks.  The explanation was clear as mud, but it had something to do with depositors and bank bondholders taking on the burden that the taxpayer had been saddled with in the TARP bail-outs. This new, improved template would actually be a "bail-in" rather than a "bail-out," the next time American banks got into a big trouble.

This was a great idea, Larry enthused -- soak the savers and bondholders instead of the taxpayers. As if savers and bondholders aren't also taxpayers.

I don't know how many emails CNBC received within the hour from outraged American savers but the next night, when Larry Kudlow returned to the topic of the new template, this time without Benn Steil in tow, he omitted "savers" from this commentary and just stuck to soaking the bond holders. It was the same for the next night, Thursday March 28,  which marked the last time Iknow about that Larry returned to cheerleading for the new template. By that time all hell had broken loose on the portion of the Internet that follows financial news, as the real story of the Cyprus bailout had finally surfaced on March 27 and gone viral by the 28th.

(To my knowledge, the real story never did make it onto American national television, even though 55 percent of Americans get their news from TV with only 13 percent getting news from the Internet; this, according to a Gallup poll released earlier this year. I doubt the poll broke down how many Americans who get their news from the Internet actually read Internet sources or simply watch TV news on the Internet. In any event, so much for the hype and hope that the Internet would keep the American body politic better informed.)

Was Professor Quigley right, after all?

Ellen Hodgson Brown, an American civil litigation attorney and author of Web of Debt, an investigative report on central banks; and Chairwoman of Public Banking Institute, broke the news on her website:

It Can Happen Here: The Confiscation Scheme Planned for US and UK Depositors
by Ellen Hodgson Brown
March 27, 2013

Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the U.S. Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland ... and that the result will be to deliver clear title to the banks of depositor funds.
[...]
Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.” The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.

The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.” It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:

An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution. 

No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks. The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.

 

An Imminent Risk

 

If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008.Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which [another] major bank crisis no doubt will be.

[...]

Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank. Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which a major bank crisis no doubt will be.

[...]

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

Those are just a handful of paragraphs from the report, which I recommend you read in its entirety if this is the first time you're learning about it. The link in the first paragraph I quoted is from Ellen's June 22, 2009 report titled Big Brother in Basel: BIS Financial Stability Board Undermines National Sovereignty. (Note the year.) The report begins:

Buried on page 83 of the 89-page Report on Financial Regulatory Reform issued by the U.S. Administration on June 17, 2009 is a recommendation that the new Financial Stability Board strengthen and institutionalize its mandate to promote global financial stability. Financial stability is a worthy goal, but the devil is in the details. The new global Big Brother is based in the Bank for International Settlements, a controversial institution that raises red flags among the wary . . . .

[...]

[B]ut more disturbing is the description by Dr. Carroll Quigley of the pivotal role assigned to the BIS in consolidating financial power into a few private hands. Professor Quigley, who was Bill Clinton’s mentor at Georgetown University, claimed to be an insider and evidently knew his subject. He wrote in Tragedy and Hope (1966):

"[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole. This system was to be controlled in a feudalist fashion by the central banks of the world acting in concert, by secret agreements arrived at in frequent private meetings and conferences. The apex of the system was to be the Bank for International Settlements in Basel, Switzerland, a private bank owned and controlled by the world’s central banks which were themselves private corporations."

 

That helps explain the alarm bells that went off among BIS-watchers when the Bank was linked to the new Financial Stability Board (FSB) President Obama signed onto in April.

When the G20 leaders met in London on April 2, 2009, they agreed to expand the powers of the old Financial Stability Forum (FSF) into this new Board. The FSF was set up in 1999 to serve in a merely advisory capacity by the G7 (a group of finance ministers formed from the seven major industrialized nations). The chair of the FSF was the General Manager of the BIS.

The new FSB has been expanded to include all G20 members (19 nations plus the EU). The G20, formally called the “Group of Twenty Finance Ministers and Central Bank Governors,” was, like the G7, originally set up as a forum merely for cooperation and consultation on matters pertaining to the international financial system. But its new Financial Stability Board has real teeth, imposing “obligations” and “commitments” on its members.
[...]
*******************
Again, those are just a few paragraphs from the report, which I also suggest you read in its entirety.

With news of the BOE-FDIC paper out of the bag, suddenly quite a number of People in the Know began singing like a bird -- a bird with a sore throat because no one explained it as clearly as Ellen Brown had. More annoying than the raspy warbling was the airy attitude: Like, dude, you mean you didn't know?

If you're hoping that Ellen somehow misunderstood what these people were up to, let go of that forlorn hope. Yet unless you already know what they're talking about it can be like pulling teeth to understand their points. Consider the following quotes from Federal Reserve Board Governor Jeremy C. Stein's speech at the "Rethinking Macro Policy II" conference sponsored by the International Monetary Fund, Washington, D.C. on April 17, 2013. He's actually discussing the same topic that Ellen is, but you'd need a decoder ring to know what he's really driving at without Ellen's translations:

Regulating Large Financial Institutions
[...]
All of you are familiar with the areas of progress. Higher and more robust capital requirements, new liquidity requirements, and stress testing all should help to materially reduce the probability of a SIFI [Systemically Important Financial Institution] finding itself at the point of failure.

And, if, despite these measures, a SIFI does fail, the orderly liquidation authority (OLA) in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act now offers a mechanism for recapitalizing and restructuring the institution by imposing losses on shareholders and creditors.

In the interests of brevity, I won't go into a lot of detail about OLA. But my Board colleague Jay Powell talked in depth about this topic in a speech last month, and I would just register my broad agreement with his conclusion--namely that the Federal Deposit Insurance Corporation's (FDIC's) so-called "single point of entry" approach to resolution is a promising one. ... The Federal Reserve continues to work with the FDIC on the many difficult implementation challenges that remain, but I believe this approach gets the first-order economics right and ultimately has a good chance to be effective.

Perhaps more to the point for TBTF [Too Big Too Fail], if a SIFI does fail I have little doubt that private investors will in fact bear the losses -- even if this leads to an outcome that is messier and more costly to society than we would ideally like. Dodd-Frank is very clear in saying that the Federal Reserve and other regulators cannot use their emergency authorities to bail out an individual failing institution. And as a member of the Board, I am committed to following both the letter and the spirit of the law.
[...]
******************
Speaking of the need for a decoder ring, Pundita readers who watched Fed Chairman Ben Bernanke's press conference in May might be thinking at this point that Ben must have lied when a reporter asked him about the Cyprus banking crisis and he replied that he hadn't been closely following the situation. He didn't lie. He just didn't mention that he didn't need to follow the situation; he knew what it was all about even before it made the news.

As to whether he lied when another reporter asked whether what happened to Cypriot depositors could happen to Americans -- again, he didn't lie within the narrow context of the question. He replied that it couldn't happen because the FDIC insured American deposits up to $250,000. Yet I'd find it hard to believe he didn't know that if the deposits have been converted to bank shares, they don't fall under the category of a deposit, which means the FDIC insurance doesn't apply.

This situation would be part of the "messy" costs to society Jeremy glided over in his speech: millions of Americans being handed worthless stock in a "systemically important" failed bank in exchange for a large chunk of their money on deposit, and having no legal recourse.

Then it was gold's turn

In quick order during the second week of April 2013 there were a number of moves against gold. These included what turned out to be a wildly incorrect story fed to Reuters about the Cyprus government having to sell its gold reserves to help finance its bail-out (see this commentary from Seeking Alpha); a recommendation by Goldman Sachs to short the price of gold -- Goldman being so entwined with the U.S. government in my opinion, I'm surprised it doesn't have a branch office set up in the Treasury building.

Despite the alarm signals the gold and silver bulls assumed all the bad news wouldn't shave much off gold or silver prices. Then, on Friday, April 12, the price of gold inexplicably plummeted. On Monday the rout continued; by then the "small" gold investor, the "retail" investor who'd bought paper gold via exchange traded gold funds, had panicked and dumped his shares. The rout had extended to silver.

At 10 PM Eastern time on Monday, April 15, USA Today's John Spence summed up the carnage in the gold market in his report, ETFs contribute to gold's plunge:
"Gold-backed exchange-traded funds (ETFs) helped fuel gold's historic rally as the ETFs allowed investors and hedge funds to easily buy the precious metal with one click of a mouse. Now, the ETFs are likely exacerbating the worst two-day fall in 30 years, which has sent the price of gold plunging more than $200 an ounce. The sharp slide has left hedge fund managers like John Paulson smarting, benefited others like billionaire George Soros [who'd shorted gold], and prompted nervous traders and individual investors to dump their holdings.[...]"

Despite his decades of experience as a very aggressive gold investor, one who'd engaged in many wars with gold bears and was a close Fed and Treasury watcher practically since he was in diapers, Jim Sinclair was stunned by the severity of the rout in the gold price. He wrote on his website (paraphrasing here) that he didn't think they'd go that far. Who's they? I don't recall that he specifically said. But the usual suspects, if one is going to suspect a U.S. government orchestrated raid on gold, are the Federal Reserve and Treasury and their friends on Wall Street, and maybe working in coordination with other major central banks. Certainly there were rumors and speculations on the Internet that the rout was government orchestrated.

When they have to, governments are capable of ganging up on speculators of all kinds, including gold speculators. And yet it wouldn't have taken much to panic the mostly unsophisticated investors who'd piled into the gold exchange funds. The bottom line is that the "physical delivery" gold market is very thin and largely unregulated. Only those with deep pockets and nerves of steel should attempt to play that kind of market -- especially in order to argue with the Federal Reserve about its monetary policy.

At the same time, speculators are capable of ganging up on other speculators, not to mention naive investors. And it's no secret that gold traditionally has many enemies on Wall Street, especially among traders who believe that if you have money to invest, it should go into stocks, or maybe a hedge fund with a nicely balanced portfolio of stocks and bonds.

In summary, I don't know whether government(s) orchestrated an attack on gold, or whether the rout was simply a classic bear raid. Either way, the rout worked out to the same difference in the view of the Guardians of the Economy: the statistical anomalies who believed that gold was a better refuge than the U.S. dollar and that they knew more about monetary policy than the Fed got a big dose of reality.

FATCA (Not to be confused with FACTA)

On October 19, 2012 Anita Greil's report for the Wall Street Journal, Wary Swiss Banks Shun Yanks addressed some negatives of the insanely draconian U.S. legislation known as FATCA:   "The new law, expected to be phased in over several years, requires foreign banks to identify Americans among their clients and to provide their financial information to the Internal Revenue Service. Just one person overlooked could mean a penalty equivalent to 30% of a bank's U.S. income. The measure, known as the Foreign Account Tax Compliance Act, or Fatca, applies globally."

The financial penalty to foreign banks is an addition to the masses of red tape that the U.S. government is wrapping around every foreign bank that dares do business with Americans for any reason whatsoever. The aim is very clearly to discourage such business and the banks are taking the hint; many now won't deal Americans.

It's gotten to the point, as Anita's report highlights, that Americans with a legitimate need to do business with foreign banks are having to change their citizenship -- even though this path can easily put the Americans on the wrong side of other aspects of FACTA, as the report details.

FATCA is so destructive to American interests there's been a move in Congress to roll back some of it. Yet the legislation fits with government's general approach to Americans who don't fall within the Economic Collective in the post-2008 financial meltdown era. 

The approach is simple: Nobody moves, nobody gets hurt.

Next up:  Dodd-Frank Act, whereupon we meet a Guardian of Financial Stability and return to pondering Larry Summers's musings.

.