By Sell on News, a macro equities analyst. Originally posted at MacroBusiness.
One of the puzzles of the global financial crisis has been that there has been no push for debt to equity swaps. In previous crises, most notably the Latin American debt crisis of the 1980s, arguably the beginning of the modern era of hyper usury and financial debauch from globalising Western banks, the situation was solved by at least the appearance of debt for equity swaps. The obvious difference being that with equity the risk lies with the creator of the funds and with debt the risk lies with the recipient of the funds. When there is a risk to the whole system, this is a way to reduce the overall peril.
I wonder as we look to Cypriot savers taking a “haircut”, if we are seeing the shape of what will happen in the next crisis. The essence of a debt for equity swap is that the obligation that goes with debt is taken away. Calling the confiscation of bank deposits equity instead of theft would be a way to prettify the actions of the hyper-usurers. Michel Chossudovsky thinks that Cypress is a dress rehearsal for things to come. A “savings heist” in European and American banks deemed too big to fail.
“According to the Institute of International Finance (IIF), “hitting depositors” could become the “new normal” of this diabolical project, serving the interests of the global financial conglomerates.
This new normal is endorsed by the IMF and the European Central Bank. According to the IIF which constitutes the banking elites mouthpiece, “Investors would be well advised to see the outcome of Cyprus… as a reflection of how future stresses will be handled.” (quoted in Economic Times, March 27, 2013)
“Financial Cleansing”. Bail-ins in the US and Britain
What is at stake is a process of “financial cleansing” whereby the “too big to fail banks” in Europe and North America (e.g. Citi, JPMorgan Chase, Goldman Sachs, et al ) displace and destroy lesser financial institutions, with a view to eventually taking over the entire “banking landscape”.
The underlying tendency at the national and global levels is towards the centralization and concentration of bank power, while leading to the dramatic slump of the real economy.
Bail ins have been envisaged in numerous countries. In New Zealand a “haircut plan”was envisaged as early as 1997 coinciding with Asian financial crisis.
There are provisions in both the UK and the US pertaining to the confiscation of bank deposits. In a joint document of the Federal Deposit Insurance Corporation (FDIC) and the Bank of England, entitled Resolving Globally Active, Systemically Important, Financial Institutions, explicit procedures were put forth whereby “the original creditors of the failed company “, meaning the depositors of a failed bank, would be converted into “equity”. (See Ellen Brown, It Can Happen Here: The Bank Confiscation Scheme for US and UK Depositors,Global Research, March 2013).
What this means is that the money confiscated from bank accounts would be used to meet the failed bank’s financial obligations. In return, the holders of the confiscated bank deposits would become stockholders in a failed financial institution on the verge of bankruptcy.
Bank savings would be transformed overnight into an illusive concept of capital ownership. The confiscation of savings would be adopted under the disguise of a bogus “compensation” in terms of equity.”
There is little doubt that the problems of the crisis have not been addressed. The central issue is that governments no longer govern the financial system, they have instead allowed private actors, traders and banks mostly, to make up their own rules – all under the guise of “financial de-regulation” which is a logical nonsense because money IS rules.
Until that absurdity is addressed the problems will linger. A second crisis is highly likely and this time governments will have little left to fight its effects. Extreme measures like debt for equity swaps seem likely.
But there are differences. The Latin American debt crisis was a conventional banking crisis. It was basically American and European banks shoveling petro dollars into the pockets of corrupt Latin American politicians and officials, who promptly invested the money back in European and American banks. It was a fairly common form of greed that could be partially solved by reconfiguring debt into equity.
This crisis is a lot more deadly. The debt, or leverage, is mostly created at the meta-level – on derivatives, which are transactions derived from more conventional forms of capital (such as debt, equity) That type of debt is used to amplify the returns from relatively small changes in pricing. The stock of derivatives is over $700 trillion, more than twice the value of the conventional forms of capital from which it is derived.
That leverage is a form of debt, and as the crisis demonstrated when that debt goes wrong it can potentially destroy the whole system. It was something seen as far back as 1998 when LTCM almost brought down the world financial system after it made a highly leveraged play on the rouble that went horribly wrong.
After this bail out I rather monotonously wrote about the looming crisis for a decade in BRW, Australia’s national business magazine (to precisely no effect). It was obvious the problem had not been addressed. It is still obvious that it has not been addressed, although there is at least an understanding that something is seriously wrong.
The trouble is, that kind of leverage is in the realm of meta money: the layer of financial activity that goes on above the level of conventional banking and government finances and GDP.
Meta debt can bring down banks and governments, as we have seen. But it can’t be swapped in any obvious way into equity in order to reduce the risk. The only solution is to stop it, by setting rules that take it away. But that would require governments to govern, and that seems to be something they refuse to do – perhaps because they have been bought off, or perhaps because they cannot think clearly enough about their role in global capital markets.
Lambert here: Or perhaps there as been a change in the Constitutional order such that “governments” do not and perhaps cannot govern as they once did.