The new masters of the financial world

Central banks, such as the Fed, IMF, BIS and many others are privately owned, by banks. All central banks are under the control of bankers and as is pointed out in the article, are unaccountable. Leaving the power to expand global debt in the hands of those who benefit from this expansion is pure folly and will end it tears.

The latest deal to create yet more debt to "fight" the markets merely creates more opportunity for the banks to profit from our current woes. Western economies are now gripped in a debt spiral from which the only escape is a radically new devolved monetary system accountable to the people rather than banks.

Murray N Rothbard, a right wing economist, wrote an illuminating book on our debt based money system over 25 years ago, The Mystery of Banking. All non-bankers should study this book, then an understanding of why we are where we are may dawn. Only then will real solutions emerge.

A quotation attributed to Amschel Rothschild in 1838: ”Let me issue and control a Nation’s money and I care not who makes its laws”

@clive

>>Central banks, such as the Fed, IMF, BIS and many others are privately owned, by banks

please expand on this assertion

The mystery of banking, in one sentence - it's a great big ponzi scheme, legitimised by putting on good showmanship!

Where now then for our hard earned savings?Time for a new system to get our savings to responsible business borrowers? The money is wasting, the business need is there. Where are the bold banking entrepreneurs with a moral compass and work ethic. There must some out there.

Steve, the first US central bank was granted a 20 year charter in 1791 but its unpopularity was such that the charter wasn't renewed. In 1816 the banks managed to buy enough influence over Congress to achieve another 20 year charter in 1816. Andrew Jackson, elected President in 1828, described the central bank as "an engine of corruption" and again the charter lapsed. That held the banks at bay until they managed to bring about the introduction of the Federal Reserve Act in 1913, creating the Fed. Woodrow Wilson later wrote of his deep regret over signing the Fed into existence.

There is a three and a half hour video, The Money Masters, available online which gives a more detailed account. As you would imagine, these institutions are secretive when it comes to ownership but Congress has no power to audit the Fed and when it comes to the IMF and BIS, they are even more opaque, being effectively supranational and beyond any political control.

Fractional reserve banking supported by central banks has achieved the transfer of wealth from the majority to those in control of banks while creating the situation in which we find ourselves. The debt currently being loaded on to the system is unsustainable and when the collapse comes, it will be analogous to the French or Russian revolutions; the ruling elites need to recognise that the current excesses are not in their interests; redistribution of wealth is inevitable. The choice is bloody revolution or planned evolution. Margrit Kennedy wrote an interesting paper in 1995, it is well worth reading:

Interest and Inflation Free Money

http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

HTH

We desperately need a transparent model which will bypass the banks and link savers with businesses. Was there not a website somewhere that did just that? Was there not also an Indian gentleman with a good track record of lending small amounts to small businesses which had a sound record of success. People no longer expect expect crazy returns, they want security and to see their cash helping to grow the economy. The banks are preventing this.

"We desperately need a transparent model which will bypass the banks and link savers with businesses. Was there not a website somewhere that did just that?" There is: http://www.fundingcircle.com/

The idea that central banks are owned by private sector banks is popular with conspiracy theorists, who may well have written whole books about it, but does not correspond with reality. There may, however, well have been times when, coming from similar backgrounds, central bankers and commercial bankers have been too much in cahoots. While I am not that sympathetic to the latter, they do face something of a dilemma, when, at one and the same time, they are being told to raise more capital, reduce their dependence on wholesale funding and lend more to businesses, especially SMEs. It is not altogether surprising in these circumstances that some marginal borrowers end up on the thin end of the wedge, particularly when, as a result of recent losses, lenders have (over-?) tightened their criteria for lending.

Has anyone else knowledge of experience of Funding circle?

The new masters of the financial world will be the Chinese. What do you suppose they will extract from the Eurozone as the price for backstopping the EFSF? Transfer of Chateau Lafite to Chinese state ownership? Right of abode in the EU for 1.5bn Chinese? Permanent loan of Carla Bruni?

Put that way Drake, the only weapon left will be to spell that message out loud and clear to all EU citizens and get them to start working their backsides off to ensure that doesn't happen.

William Bishop, OK if this is a conspiracy theory (this first line of defense, when confronted with truth), who owns the Fed? And why can't Congress audit its books?

For all I know, the ever expanding Chinese Economic / Financial Empire succeeded in getting the US into their captivity.

It looks like another 'candidate' will soon be captured into a state of sorrowing as a result of the need to relinquish whatever is left of their economic / financial power ! Cap in hand...Call it whatever you want, the Balance of Power is shifting, and rapidly too.

No big deal...Egypt was once a Super Power after all.

Mandarin, here we come...

If you want to know who makes political and monetary policy, check out the Bilderberg.

Clive, anything to say about JFK, UFO's, Princess Di....?

When you reach the top of the administrative hierarchy, you discover that the design of the pyramid levels out to a plateau of elitist interconnected brokers, each specialising in their own brand of power.

Land (entitlement)

People (lawmaking)

Exchange (money)

Business (trading)

Supreme Belief (religion)

Coercion (war)

The people who populate this plateau have always been few in number, and once they reach that heady height they know that the only movement possible is sideways, or downward.

The danger that the world faces at this point in time is that the sides of the pyramid are too steep, and that if it conforms to the laws of physics, it will collapse.

It doesn't matter whether the individuals at the top are Chinese Mandarins, or American Moguls; if the Hottentots, and the troglodytes at the bottom cannot support their weight, the whole edifice will come crashing down.

The only way that the present system can survive is to gradually redistribute some of the enormous, and disproportionate wealth which is concentrated at the top.

"The only way that the present system can survive is to gradually redistribute some of the enormous, and disproportionate wealth which is concentrated at the top. "

All well written, and said. However, the fact is there is a "Power Circle" out there that will ALWAYS defend their ALREADY ESTABLISHED "RING OF FENCE". While breaking - through such ring involves an effort of nuclear proportions, I do not see their [ members inside the ring ] exercising WISDOM in allowing redistribution of the "disproportionate wealth" since they see such as decimation, unless an ENFORCEMENT is put in place.

Another side to it all is that they probably worked very hard to have accumulated such wealth. Any fairness in redistribution , and on what basis ?

Who are the Enforcers ? The Power That Be. Who are the "Powers That Be"? Them !

Need We Say More ? Someone who probably knows it well once said, "There are power / forces we do not know / see, but are in operation".

"plateau of elitist interconnected brokers, each specialising in their own brand of power."

Folks, that's the way it works. I saw it all during the Enron debacle 10 years ago when I was involved in the project from this side of the pond. Nothing has changed. No thing will change. That's the way it is.

Lest I forget, I simply love your piece, Hotrod. Thanks.

For the benefit of Clive Menzies and any other doubters that the ultimate owner of the Fed is the US government, I suggest visiting www.federalreserve.gov, clicking on About the Fed, scrolling down to The Federal Reserve System: Purposes and Functions, and clicking on Overview of the Federal Reserve System, then reading as much as you feel inclined. While ownership is not specifically discussed, perhaps because it is considered self-evident, the patient reader will discover that 95% of the Federal Reserve System' earnings since 1914 have been paid over to the US Treasury (which could hardly have been the case if it was owned by the banks!). Also, it does make clear that there is a substantial degree of oversight by both the Administration and Congress to counter-balance the independence from government in day-to-day operations, as is typical of the US constitutional system with its plethora of checks and balances to avoid over-concentration of powers.

With apologies for probably boring the bulk of the readership.

William Bishop, ownership is stipulated in the Act and the member banks receive a 6% dividend annually. The Act also provides for money to be paid over to the government but this in no way means that the Federal Reserve isn't under the bank member/owners' control. Plus I've yet to find a congressional audit report:

Federal Reserve Act

Section 5. Stock Issues; Increase and Decrease of Capital

1. Amount of Shares; Increase and Decrease of Capital; Surrender and Cancellation of Stock

The capital stock of each Federal reserve bank shall be divided into shares of $100 each. The outstanding capital stock shall be increased from time to time as member banks increase their capital stock and surplus or as additional banks become members, and may be decreased as member banks reduce their capital stock or surplus or cease to be members. Shares of the capital stock of Federal reserve banks owned by member banks shall not be transferred or hypothecated. When a member bank increases its capital stock or surplus, it shall thereupon subscribe for an additional amount of capital stock of the Federal reserve bank of its district equal to 6 per centum of the said increase, one-half of said subscription to be paid in the manner hereinbefore provided for original subscription, and one-half subject to call of the Board of Governors of the Federal Reserve System. A bank applying for stock in a Federal reserve bank at any time after the organization thereof must subscribe for an amount of the capital stock of the Federal reserve bank equal to 6 per centum of the paid-up capital stock and surplus of said applicant bank, paying therefor its par value plus one-half of 1 per centum a month from the period of the last dividend. When a member bank reduces its capital stock or surplus it shall surrender a proportionate amount of its holdings in the capital stock of said Federal Reserve bank. Any member bank which holds capital stock of a Federal Reserve bank in excess of the amount required on the basis of 6 per centum of its paid-up capital stock and surplus shall surrender such excess stock. When a member bank voluntarily liquidates it shall surrender all of its holdings of the capital stock of said Federal Reserve bank and be released from its stock subscription not previously called. In any such case the shares surrendered shall be canceled and the member bank shall receive in payment therefor, under regulations to be prescribed by the Board of Governors of the Federal Reserve System, a sum equal to its cash-paid subscriptions on the shares surrendered and one-half of 1 per centum a month from the period of the last dividend, not to exceed the book value thereof, less any liability of such member bank to the Federal Reserve bank.

[12 USC 287. As amended by act of Aug. 23, 1935 (49 Stat. 713).]

The illusion of a government controlled central bank is perpetuated and while many aspects of the bank are at the direction of government, monetary policy is not and clearly there are conflicts of interest. And as the Fed is responsible for regulating banks, member banks are regulating effectively themselves.

When the financially literate are misled in this way, what hope is there of ordinary folk understanding the truth about the banking system.

Think about guys. What is that most basic of commodities that the Chinese are trying to control? FOOD. Rumour has it they are going to offer to subsidise EU farmers. Look on the bright side though, it could be the answer to the West's obesity problem.

Daye Tucker,

Fanatastic news!

We should promote a cunning plan to make the Chinese fat and Europeans thin again; a great solution to our present obesity issues (both mental and physical).

Oh to see our once green and pleasant land covered in rice paddies! ;)

You gotta laugh; life is just too short to be serious 24/7/365.

In answer to Clive Menzies, even if the capital of the Federal Reserve banks is held in the manner described, it does not seem to me that this gives the private banks any real ownership power when "shares shall not be transferred or hypothecated" and, as already discussed, any profits not retained are paid over to the US Treasury, and not to the banks.

As the Fed's website states, its accounts are audited by a major accounting firm and its operations are also subject to regular review by the GAO, which is the administration's financial watchdog as regards governmental spending. While Congress, in the interests of expanding its power, might like also to be able to "audit" the accounts, this seems to me to be essentially a political ploy, and not one of useful financial supervision. Congress does already exercise a considerable degree of supervision through the Fed Chairman and other senior officials being called to testify quite frequently, and there is legislation (Humphrey/Hawkins?) requiring regular (bi-annual?) reporting.

The trend internationally in recent years has been towards giving central banks greater independence from governments in the operation of monetary policy. There is, no doubt, scope for discussion as to whether or not this is a good thing, but in the current context it seems a bit odd to be worrying that monetary policy is not "at the direction of government". On the whole, the Fed has tended to be at some pains not to get at cross-purpose with government policies, and I think that this may have been because there is an underlying worry that, if it pushes too far, it might find its independence circumscribed.

Clive may have a point that there is a theoretical conflict of interest between the ultimate ownership of the Federal Reserve system and the regulation by the Fed of the banks. However, given that the ownership seems not to confer any real power, this may not be a factor in the practical realm. I am not aware of any real evidence of the Fed holding back unjustifiably in the field of bank regulation. although again there will always be issues as to which banks are considered "too big to fail" without unacceptable adverse economic consequences.

Have we reached a point of compromise?!

Yes Robert, it is laughable at this stage and conjures up great cartoon images.

Don't jest about the rice paddies though, I farm in the wet West of Scotland and we increasingly jest about growing rice. We also often discuss the merits of selling water to England! Anything is possible in this fast changing world!

William, thank you for acknowledging that the Fed is owned by banks. "Ownership seems not confer any real power" is supposition based on misplaced faith in public and other institutions. In so far as our debt based monetary system is corrupting because of the excessive rewards available to "insiders", ordinary citizens should be wary of "theoretical" conflicts of interest.

eg. In the sub-prime mortgage market the credit rating agencies were colluding with the issuing banks to achieve AAA ratings for toxic junk. The issuing banks pay the ratings agencies for ratings, a clear conflict of interest. No individual or organisation has been held to account for the crimes committed and nothing material has changed. All this happened under the purview of the SEC, the Fed and all the other regulators and public institutions.

The credit default swap market was valued at $20trillion in 2006, a three fold increase over the previous two years. It is likely significantly larger today but quantification is difficult because transactions are "over the counter". This is yet another "accident waiting to happen".

The central point remains, we are in a debt spiral from which there is no escape within the current monetary system. Issuing yet more debt to alleviate a debt problem merely inflates the debt bubble even further. The inevitable collapse will be much more severe as a consequence.

Margrit Kennedy's paper, referred to previously, demonstrates quantitatively why the system is unsustainable:

Interest and Inflation Free Money

http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

Daye Tucker, I believe you have hit the bullseye. Africa for commodities and energy, Europe for food. They've already nabbed all our technology. Niall Fergusson is right I'm afraid.

Just to say that I do have quite a large degree of agreement with Clive Menzies' most recent post, while feeling that perhaps escaping from the debt cycle, allowing for the very large liquidity holdings in developing economies as well as the debt levels in the developed ones, should be described as difficult, but perhaps not as impossible.

Perhaps this is a good point to close down this exchange.

An excellent article, which talks about power moving developed to emerging nations and from governments to central banks. The immediate problems are not here, they are in the collapse of the Euro, for reasons of credit / debt. Adding more to the debt bubble will just make the implosion bigger,, a someone here pointed out. So it's worth taking a look at the more tangible problems that must urgently be corrected.

We know that there is a balance of payments problem between north and southern members of the EU. Caused by economies of different efficiencies (if you want to be polite about Greece, for example). And the surplus was lent to the South with all the problems we know today - basically, no-one believes anymore that these countries can pay it back, especially not now with that credibility problem turned into higher interest rates.

All would have been OK if there had been a federal budget with a transfer of money between parts of the zone. But the EU has a budget of just 1.5% of GNP while the Fed has 30%.

Otherwise, the options for redressing the imbalance are that Germany could stimulate home demand, or invest the surplus in the deficit countries, or finally could lend the money to the south risking of course the current crisis.

Crating the Euro destroyed the power of the central banks as they could no longer print to pay off debt, but the CEB did not have the power required to take on the new problems as there is a "no bail out" clause in the treaty that created it. Of course, ways around this were found and in May last year, the ECB started buying up government bonds. It is only i this way, ie turning the debt into new money, that a way out within the existing system can now be found. At least, for the moment, this is all that can be done to take the pressure off the Euro and it is what the leaders of Europe finally agreed to.

Still, it is worth understanding the German objections. They think, from their experience, that adding money without adding value leads to inflation. But we know, from Keynes, that economies can be managed and once r stimulated the excess money can be withdrawn, ie once the new value has been created.

And as for the French, they worry that raising the amount required to prevent contagion would put their AAA rating in danger if ever the Stability Fund couldn't pay it back. But they forget that the Fund can print its own money if necessary, if attached to the ECB, just like the France of France used to be able to do. Like the US can today (I am not saying this is the answer!!!!!!!!!!!)

Then of course there is the moral hazard argument that if we save these wastrels from the south, they carry on and do some more. Same for the banks and the "too big to fail".

So what we could have is a European Minister f Finance, as proposed last 23 Oct, whose job would be to keep the finances in order of the member states in order and develop a longer term strategy for modernising their economies. A good idea, but that comes against the problems of an electorate and the fact that Europe is the birthplace of democracy and kinda wants to keep this. So what would need to be done is to put that Minister under democratic control. And there we have it - no political union, no economic union, the Euro will disintegrate.

If you don’t want a solution from the public sector, try the private sector solution. Here, it would mean politicians creating the context for northern investment in the south and modernisation coming from contractual arrangements between companies. This would suffer from being labelled protectionist and would fall foul of also of exchange contracts where the buyer agrees to buy if the seller agrees to set up production facilities chez eux.

So these are two longer routes out of this mess. My own money is on an implosion and want out of the currencies of all democracies.

My guess is that once it becomes clear that the eurozone is a dead duck Germany and France will leave the eurozone and let the "lesser " members sort themselves out. Most Germans yearn for the return of the Deutschmark and the French to this day still quote the FF price of goods and services on many of their invoices, so in their minds they have never really abandoned the Franc at all. They will take emergency measures to insulate themselves from the ensuing financial fallout, principally by printing DM and FF to recapitalise their banks and in some cases take them into state ownership until the storm dies down. Moreover it will be a surprise move in order to forestall a run on their own banks. The first act will be a prohibition on withdrawal of funds, as all euros in German accounts will be redesignated as DM and all euros in French accounts will become FF. It will be done over a weekend, followed by a frantic week or two of printing the new currencies. So don't expect any notice.

William, thank you for gracious acknowledgment of some validity in my arguments. I understand you feel the exchange should be at an end but I came across this and thought it pertinent. I've not undertaken research to corroborate it and it dates from 1983; nonetheless, it is useful input to the debate on who wields power over global affairs:

http://www.lawfulpath.com/ref/federal_reserve.shtml

A couple of points that I don't quite understand:

The outcome of the recent meetings in Brussels stated that agreement had been reached to write off 50% of Greek debt held by banks. Did this mean that the face value of Greek bonds would be reduced by 50% or did it mean that half the bonds would be surrendered worthless. The summation of coupons would give a very different result in each case. In GDP terms, does this explain why the "haircut" has been evaluated to reduce the figure from 180% to 120% when the simple calculation would imply 180 divided by 2 = 90%

Also, whatever happened to the original concept of Govt. debt as first introduced by the Dodes of Venice. The original bonds were undated securities, with no guarantee that they would ever be redeemable. Their tradeable value was based on the fact that interest in the form of coupons was virtually perpetual, whilst cancellation at face value was still possible at the discretion of the issuer. In other words it could be computed that the capital had been repaid once the interest times the number of years in circulation equalled the the face value of the notes.

A 100 Euro bond is currently trading at 37 Euros. It will be redeemed at 50. Sounds interesting deal. Not all the debt is in bonds - from memory (correct me) about 230b on 380b..something like that.

Those were the days! ebt is now available at different maturity dates to match future liabilities of the buyer.

Anyone else have some better answers?

Clives interesting link poses the question, are all our efforts to find a solution just p...ing in the wind because the reality is that from time immemorial society and global affairs have been and continue to be in the hands of the clever and manipulative few who until the dawn of the internet have remained largely invisible, but wield absolute power.

Hotrod and Anon 1 raise some interesting points, but the simple answer is that no-one knows how this will be done (because it is so fiendishly complex), or indeed whether all the banks will accept a voluntary haircut. I should add that it's not just banks who hold this debt, it's insurance companies, hedge funds, investment groups and even individual investors. In order to avoid a technical default there has to be 100% agreement on the haircut - frankly, as a City restructuring lawyer I can tell you that the concept is laughable. Even if 90% agree there will always be a minority who hold out for more. Moreover, even if only one issue of Greek debt fails to be reduced by agreement and defaults, there will be cross-default and cross-acceleration over virtually all Greek debt. Even if 100% agreement is reached there is a sizeable body of opinion that this would be an accommodation with creditors which would count as an event of default no matter what.

Why is this important? Because unless it's voluntary it will count as a "liquidity event" or event of default under other instruments, most notably credit default swaps (CDS's) and will trigger early repayment, penalties and, in the case of CDS's, vast payments by the companies who have insured the debt. These are the so-called monoline insurers in the US, who do not have enough money to pay out on all this insurance. As in 2008, we would therefore have the possibility of a collapse in the CDS market, which has a face value in excess of $60 trillion, which is greater than the GDP of the entire world. That would endanger the whole banking system. The eurozone is playing with fire. The scary thing is that there are so many hedge fund investors who stand to make billions out of Greek CDS's, the chances of a voluntary arrangement going unchallenged are nil.

Scared? You should be.

Daye, well that is what the Occupy Wall Street movement is about. The 99% may not understand the mechanisms by which the monetary system facilitates the transfer of wealth from those who need money to those who have more than they need but they do know it's happening. Once they understand how it works, the pressure for change will be irresistible.

The mathematical logic of how it works is described in Margrit Kennedy's paper referred to previously which puts forward workable alternatives. Citing figures for Germany she relates how governmental income, the Gross National Product, and the salaries and wages of the average income earner "only" rose by about 400% between 1968 and 1989, while the interest payments of the government rose by 1,360%. I've not done a similar calculation for the changes in recent years for the Anglo Saxon economies but I suspect they are significantly worse.

http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

Drake, thanks for the CDS figure, the only information I'd come across recently was a BIS report of $20 trillion in 2006 (trebled over the previous two years). What is the provenance of the $60 trillion number? And are all the CDS contracts with monoline insurers? My understanding is that they are often interbank, I would be grateful to be corrected.

Thanks Clive. Ain't the internet an amazing tool?

No problem Daye and indeed it is.

However, amidst all the other issues to think about is net neutrality. Deep pocketed content companies (Verizon and others) are lobbying furiously to be able to control bandwidth by charging content providers. Currently under the ITC, also under attack, equal access to all information is preserved. The internet is a double edged sword and should it come under government or commercial control, its use as a tool for democratic dialogue, will end.

It would be interesting to trace the debt, through all the front companies, back to the owners. I guess we would arrive at a list that ressembles the Forbes 100 richest people. Now if it were just a hundred people behind all this trouble...

An interesting point:

If a sovereign debt technically defaults and pays out 50% does the CDS pay out the full 100% or just the actual loss?

If the CDS holder wasonly paid out the net loss (in this case 50% and not 100%) surely the loss would be more equally spread?

As those who write Credit Default Swaps make money from a perceived risk surely they must expect to lose occasionally when things go wrong?

I'd love to take out CDS on my corporate bonds as an insurance should they default but have always been told that this is way too expensive and that people either trade in CDS or the underlying assets but never both unless very large institutions and this doesn't make sense to me.

I believe you should only be able to take out a CDS [as an insurance] if you actually own the asset; otherwise those who hold CDS just make money at the expense of those who have lost which, to me, sounds all wrong.

To pay a small premium as a credit default swap to insure oneself against a bond defaulting makes sense provided it doesn't eat up too much of the income generated by the bond, but buying a CDS just to gain if somebody else loses sounds immoral and very, very wrong.

Maybe it should be the duty of governments worldwide to prevent such financial instruments to exist for such a perverse reason, but then maybe I'm just naieve and stupid.

Net neutrality is an interesting one. Broadband availability or rather lack of it is a major issue for Scotland, impacting on ability to compete on the world stage in education and economic development terms . Delving further down, the BBC delivers only English news to the whole of the Scottish Borders area leaving them at a disadvantage and disconnect with the rest of Scotland. That along with the 1999 Scottish Territorial Waters Boundary change from Berwick to Carnoustie, a political move achieved by a very few behind closed doors in a committee room could never have happened today.

Robert - the workings of these devilish instruments, the CDS, are expained in Wikipedia. It was an English woman who invented the whole thig - and also the carbon marketplace incidentally.

As I understand it, in the case of a credit event (tb defined), the seller of the CDS gets the bond and the buyer is compensated as if there had never been a default.

And yes, annyon can buy CDSs and you don't have t own the underlying instrument and they can be traded quite separately in fact from the underlyng. They are traded OTC, over the counter, though exchanges are about to be set up for them so that with a third party broker being incvolved, they can be managed.

Someone mentioned earlier the total value is equal to the entire world GDP, so yes, scared we are.

Cape Town

Yup - quite frightening; but something can be done to make normal individual investors feel safer!

In the UK, unless I'm mistaken, you can't take out life insurance on somebody unless you have an 'insurable risk' - i.e. that you would not have some financial oss if the person died (e.g. a spouse).

The same should apply to dangerous newfangled financial struments such as CDS; you should not be able to buy a CDS unless you own the debt you wish to insure yourself against the loss of it defaulting.

Being able to gain from the financial loss of a third person is both dangerous as well as being just plain 'wrong' [in my opinion] in that it is the interest of the person buying the CDS that the debt defaults as if the debt doesn't default the cost of the CDS is lost.......... surely putting people in the position that they can make huge gains out a country or company defaulting on debt is very, very 'iffy' whilst insuring against a potential personal loss is ok?

i.e. the holders of the debt taking out a CDS as insurance of which the cost of the premium will quite rightly reduce their income but cover the prospect of far greater loss if the debt defaults.

Insurance should be for the 'little person' who faces a far greater personal loss in these circumstances and would be grateful to be able to take out some form of insurance should it be economically viable to do so.

Hi Drake, $60 Trillion dollars is a mind boggling amount!

The only way I can rationalise this number is to compare the CDS market with the design of electricity power supply.

Take for example a typical 13amp domestic ring main consisting of 10 sockets. The potential total current flow would be 10 X 13 = 130amps. To install cabling and switchgear to cope with this demand would be simply impractical. Therefore sizes are calculated on the basis of average consumption per appliance, and the statistical fact that not all appliances/ socket outlets are likely to be used all at the same time. When the law of averages is applied to these calculations, predictable consumption for the circuit can be reduced by a factor of 10. i.e. 13amps. Adding a reasonable margin of safety would result in a 16amp circuit breaker (fuse) being fitted at the supply source (consumer unit) Disclaimer: These figures are stated for illustration purposes only, and should NOT be used for actual electricity installations.

Of course financiers do not think in exactly the same way as electrical engineers, but I do think there are some curious parallels. e.g. towns and cities have been blacked out because consumption has been underestimated, and just like the financial world, contagion could spread to whole regions.

Hello Robert.

A very commendable argument, but in my opinion, City folks don't think that way. A heads I win, tails I only lose a small fraction, would soon result in the little people becoming big people, and one or other of big people would lose their stature.

The City guys would rather make a book. They are not interested in taking unnecessary risks. If they calculate the odds correctly, is doesn't matter whether the horses win or lose, the punters will pay the difference, and the brokers will be the ultimate winners at the end of the day.

Thanks Hotrod.

Methinks it might be like this.

A country or company issues 1 billion of a bond (never mind if in GBP or USD or EUR; it's still a thousand million of whatever currency these days and not the million million that we Brits used to love and cherish).

Company 'A' writes a CDS for the whole amount at a premium of say 10,000 'whatever' per annum.

Company 'B' also writes a CDS for the same amount based on the same figures.

Company 'C' does the same but feels a bit insecure and buys another CDS from somebody else to cover its own risk.

Eventually that debt for 1 billion of a bond has been covered 26 times by 'x' different players including hedge funds and bush funds and solitary tree funds so that if the original company that issued the bond defaulted it would take a veritable Sherlock Holmes to unravel the financial consequences.

I'd suggest that it should be ILLEGAL to provide any form of financial bond insurance unless the person buying the insurance actually held the bond and that the maximum a bond could be insured for was the lower of either its face value or the price at which it was purchased on the market; i.e. if i bought a bond at 60 i could only insure it at what I paid for it (60) and not it's face value of 100.

We should not get 'something for nothing' - when people insist on getting something for nothing it's bound to create unhealthy distortions in the system.

>>Eventually that debt for 1 billion of a bond has been covered 26 times by 'x' different players including hedge funds and bush funds and solitary tree funds so that if the original company that issued the bond defaulted it would take a veritable Sherlock Holmes to unravel the financial consequences.<<

I'd have thought any clerk would be able to do this for each company. If this bond goes down we stand to pay around 10,000 whatevers.. Providing bonds have unique reference numbers (do they, I dunno?) it's fairly straightforward.

Steve

PS I've more or less answered my own qustion, I guess it's to do with if enough fail then "we" (the CDS writer) fail, but nobody can calculate the consequences of that.

Just backed up and discovered Clive Menzies' post with reference to the Lawful Path website. Unfortunately, this appears to me the product of some kind of extreme right-wing crackpots who believe that the whole world is under the sinister control of the Rothschilds!

More germanely, I have in the meantime remembered how it came about that the Fed has this apparent, albeit largely theoretical in my view, ownership by the banks. There was a major panic and banking crisis in 1907, which was only averted from becoming a black hole by very strenuous efforts by the more responsible leading bankers, most notably J Pierpont Morgan. After this, those involved did not want to be put in the position of again being responsible for bailing out the entire banking system, and proposed the formation of the Federal Reserve, which was finally legislated in 1913. The initial motivation, however, was clearly for the bankers to become less, not more, responsible for macrofinancial decision making, which again tends to negate the suggestion that the banks still exert some kind of behind the scenes control.

William, I'm grateful for your interest and I agree the http://www.lawfulpath.com site appears to be a Christian fundamentalist site. However, the original source of the information is: FEDERAL RESERVE DIRECTORS: A STUDY OF CORPORATE AND BANKING INFLUENCE STAFF REPORT FOR THE COMMITTEE ON BANKING, CURRENCY AND HOUSING HOUSE OF REPRESENTATIVES 94th Congress. Second Session August 1976. I've not verified the Rothschild connection which is of no particular interest to me. However, my major concern is the concentration of power to control the money supply. Clearly Congress shared my concerns. From the forward:

"I transmit herewith a staff study of the corporate, banking and trade association relationships of the directors of the 12 Federal Reserve Banks.

This Committee has observed for many years the influence of private interests over the essentially public responsibIlities of the Federal Reserve System.

As the study makes clear, it is difficult to imagine a more narrowly-based board of directors for a public agency than has been gathered together for the twelve banks of the Federal Reserve System.

Only two segments of American society – banking and big business-have any substantial representation on the boards, and often even these become merged through interlocking directorates.

The lack of diversity on the boards raises serious questions about the quality of economic intelligence and opinion which the district banks presumably feed into the Federal Reserve System and its monetary policy machinery. And the heavy links to the banking community raise doubts about the ability of the district boards to view bank and bank holding company regulatory issues with objectivity."

Recent events highlight why this issue is so important. Clearly, monetary policy and the financial system is being run in the interests of those controlling the Federal Reserve, a narrow base of banking and big business.

As regards the establishment of the Federal Reserve, as I related in this thread, two earlier attempts to sustain a privately owned central bank had been curtailed when their charters weren't renewed. Andrew Jackson was key in holding the banks at bay until 1913 but part of the means by which they persuaded Congress and the populace of the need for a central bank, was to engineer a banking crisis in 1907 which allowed the ultimate owners to increase their hold over banking and politics.

One may place trust in institutions like the Fed to "do the right thing" when they are truly independent and accountable. The Fed is not, nor are many other central banks. Central banks appear august, authoritative and to be acting on behalf of their respective governments. In reality, their owners have bought political influence to benefit their own interests. William may dispute this but evidence suggests this is so.

The full document is available here:

http://adabyron.net/FederalReserveDirectors.pdf

"Until we have basic reforms, the Federal Reserve System will be handicapped in carrying out its public responsibilities as an

economic stabilization and bank regulatory agency. The System’s mandate is too essential to the nation’s welfare to leave so much of

the machinery under the control of narrow private interests. Concentration of economic and financial power in the United States has

gone too far. We should celebrate our Bicentennial by reversing the trend away from Thomas Jefferson"

But who are these people today? What are their names and their backgrounds? Their "narow interests" more specifically?

It may be of interest to note that a according to a spokesman for the occupy wall street movement; donations to the cause now exeed $500,000, which seems to me to be a viable amount of working capital.

Much now depends on how their councillors decide to spend this money. If they employ learned, legal, and political minds to put their case, they are going to give the establishment quite a few headaches and sleepless nights. On the other hand, members of the group cover such a diverse range of opinion, the question has to be asked: "Are they capable of formulating a realistic set of reforms, which could be debated in parliament.?"

Likewise the occupy London group are gaining credence, but their challenges are somewhat different. They now have to fight the battle on two fronts. Their immediate concern is how to respond to the dispute over territory, which diverts attention away from the main reasons they are there in the first place, but again, money to employ legal representatives does not seem to be a problem.

It seems to me that the thorn in the side of the establishment has now gone in too deep to be extracted with a pair of tweezers.

Cape Town, I don't know where the quotation you posted came from, perhaps I've overlooked it in the thread.

As regards your last post, my own view is that to focus on the individuals or families which dominate global banking is a diversion and distraction, not least because obtaining that information is difficult because of nominee companies, trusts etc. It is telling that when JP Morgan died his estate was very modest which implies he was acting on behalf of others.

It is the system which facilitates accelerating inequality, people merely exploit the system that exists. Recriminations over how it came about are pointless but we do need to change it before revolutionary change is forced upon us.

I've summarised the first chapter of Kennedy's book thus:

Our debt based monetary system lies at the heart of many of the issues which anger/concern the occupy movements. It is also unsustainable because the level of debt is becoming unaffordable. When it collapses, we’ll need an alternative monetary system if we are to avoid the bloodshed and dire consequences of the Russian and French Revolutions. In a globalised world, where debt based financing crosses national boundaries, revolutions will roll across the globe. Far better we prepare for planned evolution.

Those interested in resolving issues of injustice and increasing inequality would do well to study Margrit Kennedy’s paper written in 1995, Interest and Inflation Free Money. In it she explodes four popular myths about money and interest:

Myth 1: THERE IS ONLY ONE TYPE OF GROWTH

In the natural world things grow fast in the early stages and then growth ceases as they mature. A child undergoes rapid physical development from birth until around the age of twenty when physical growth ceases and we grow qualitatively through intellect, experience etc. There are organisms which grow exponentially, typically diseases and viruses, eg. cancer which starts slowly and accelerates until it is untreatable and the host or patient dies. Our economic system requires exponential growth. When people talk about growth they visualise a straight line but in fact 3% pa (for example) is a doubling every 24 years and is an upwards exponential curve climbing eventually almost vertically. In order to feed this exponential growth we need to cut down ever more trees and extract ever more resources while consuming yet more stuff we don’t need, just to maintain our 3% rate.

Moral: We need a monetary system which follows a natural rather than cancerous growth pattern.

Myth 2: WE PAY INTEREST ONLY IF WE BORROW MONEY

Every time you buy food, pay your electricity bill, buy a train ticket or pay your council tax, you are paying interest. The figures used by Kennedy are for Germany around the time she wrote the paper. On average citzens paid about 50% in interest on goods and services. In the UK, PFI and PPP schemes and mechanisation mean that we are paying significantly more than 50% in interest on average today.

Moral: We could work half as hard or enjoy twice as much for the same amount of work.

Myth 3. IN THE PRESENT MONETARY SYSTEM WE ARE ALL EQUALLY AFFECTED BY INTEREST

Kennedy’s paper compared the interest payments and income from

interest in ten numerically equal sections of the German population. It indicates that the first eight sections of the population pay more than they receive, the ninth section receives slightly more than it pays, and the tenth receives about twice as much interest as it pays, i.e., the tenth receives the interest which the first eight sections have lost. For the top I% their gain is many multiples of that received by the top 10%. Remember, these figures are for Germany, a country with much less inequality, and from nearly 20 years ago. Since then inequality has expanded exponentially.

Moral: The debt based monetary system expedites the transfer of wealth from the many to the very few at an accelerating rate.

Myth 4. INFLATION IS AN INTEGRAL PART OF FREE MARKET ECONOMIES

From Kennedy’s paper: While the governmental income, the Gross National Product, and the salaries and wages of the average income earner “only” rose by about 400% between 1968 and 1989, the interest payments of the government rose by 1,360%. Studies demonstrate that the difference is reflected in inflation.

Moral: Government debts will sooner or later outgrow government income, even in the industrialized nations and the system will collapse.

If the occupy movements want to energise the 99% to support radical change for a better world for everyone, they need to study Kennedy’s paper and unite behind the development of a new monetary system as the primary goal. Without an interest free monetary system, nothing will change except by revolution. The top 1% (by wealth) need to be aware of the risks of obstructing or resisting change. A new system need not prejudice their dynasty and they could sleep soundly in their opulent beds!

http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

@Clive Interest free.

Paying interest has been considered haram by the top two monotheistic religeons.

@Clive Quote

Is from

HENRY S. REUSS, Chairman,

Banking, Currency and Housing Committee

Of the U.S. House of Representatives

See http://adabyron.net/FederalReserveDirectors.pdf

you've got to read to the end ;-)

Thanks Cape Town

I realised afterwards it must have come from the Banking Committee report. I must read it again in depth. I think more than two major religions prohibited usury (interest). Judaisism allowed it only in respect of gentiles.

This discussion seems to have taken on a life of its own! I am once again in the position of largely agreeing with Clive Menzies (based on Margrit Kennedy's critique) on the current monetary situation. The proposal of a non-interest economy is certainly radical, but I am unclear that it could be a practical one.

I also broadly agree that, regardless of the exact technicalities, central bankers are probably drawn from a too narrow spectrum of backgrounds, although, given the specialised expertise required, it would be difficult for someone without this to get up to speed with the requirements within a reasonable time.

Unfortunately identification of problems is relatively easy - proposing effective solutions is not.

We are "gentiles" aren't we? That seems a bit discriminatory? ANyone today against usury wouldn't be able to make that kind fo distinction - does this rule hold today?

William, Clive is saying money is the rrot of all evil and the mechanism to our destruction is in accepting to pay interest.

But I am not sure, like you, that there is a practical route out of us....abandond debt and you abandon profit, limited liability company...all that must go Clive?

Cape Town, I'm no religious expert but I read something about this a while back and haven't checked it out. No doubt practice varies with degrees of orthodoxy, much as in Islam. In Christianity there seems to be a broad spectrum of adherence to various edicts. "Thou shalt not covet thy neighbour's goods" disappeared relatively recently and coveting everything seems to be now regarded as a virtue by some.

Cape Town, William, I understand the dilemma. Everything we've experienced in our lives and our knowledge of history suggests a world without interest is unworkable if we are to enjoy development and prosperity. But it is the only banking and monetary paradigm we have known. It is hard to imagine what the implications of an Interest and Inflation Free Money based world would be.

However, in her paper (also a book) Kennedy describes various successful experiments with interest free money. In addition to increasing the velocity of money, multiplying economic activity and reducing unemployment, the experiments fostered other social and creative benefits.

From Kennedy’s book:

BRAKTEATEN MONEY IN MEDIEVAL EUROPE

Between the 12th and the 15th century in Europe a

money system was used called “Brakteaten.” Issued by the

respective towns, bishops and sovereigns, it not only helped

the exchange of goods and services but also provided the

means of collecting taxes. Every year the thin coins made

from gold and silver were “recalled,” one to three times

re-minted and devalued on an average about 25 % in the

process.

Since nobody wanted to keep this money, people in-

stead invested in furniture, solidly built houses, artwork

and anything else that promised to keep or increase its

value. During that time, some of the most beautiful sa-

cred and profane works of art and architecture came into

existence. “For while monied wealth could not

accumulate, real wealth was created.”

We still think of this time as one of the cultural

culmination points in European history. Craftsmen

worked a five-day week, the “blue” Monday was

introduced and the standard of living was high. In

addition, there were hardly any feuds and wars between

the various realms of power.

–

And let's not forget what provoked the American Civil War: banking interests were dismayed at the thriving colonial economy operating, in a resource rich land, over which they had no control. The colonies operated an interest free money system called Colonial Scrip.

Kennedy’s ideas are a good starting point to think about what an alternative monetary system might look like and how it could address many of the problems we face. It doesn’t advocate an attack on the 1% but shows they could benefit not least from greater stability and security. The 99% would certainly benefit.

Instead of interest, loans would incur a risk premium and admin fee, say c2.5% and those with money would be encouraged to deploy money rather than hoard it, because holding money would incur a cost.

Let's also not forget the original concept of a joint stock company: Investors buy shares in a company and if it thrives they receive annual dividends. Surplus income would be ploughed back into the economy. Should the company go bankrupt, investors lose their investment , a novel concept in this post bailout world :-)

I would encourage everyone to read Kennedy's book, Interest and Inflation Free Money. The ideas contained therein require the ability to think in a different paradigm and imagine the possibilities. Many of our problems, both economic and societal would be alleviated in such a paradigm. If adopted on a global scale, and adoption would favour the early movers (a non-inflationary currency will become increasingly desirable) geopolitical tensions would be eased because, in a sustainable world, competition for resources would diminish.

http://userpage.fu-berlin.de/~roehrigw/kennedy/english/

There is a paucity of ideas for extracting us from the current debt spiral, primarily because the system is now analogous to an advanced form of cancer, ie there is no long term cure within the current monetary paradigm.

I suppose that I really ought to read up on Kennedy before commenting seriously, but in the meantime the comments on the medieval period quoted by Clive Menzies do strike me as somewhat idealistic, particularly the last sentence. (How about the Hundred Years' War, for a start?)

William, I'm afraid I was inattentive when we covered the 100 years war at school, too many years ago. We would need to dig deeper into history to discover the players, the politics and the currency systems of those involved, yet another piece of work to add to the list :-)

I welcome your participation in this discussion. It will be interesting if between us, and many others, we can flesh out these ideas further.

Hmm, The developments at Saint Paul's are encouraging. The Clergy have decided not to persue a legal solution. No doubt they have learned a few lessons from the Dale Farm experience. i.e. Dispute could drag on for years with the potential for an enormous legal bill.

Also,opposition to the protestors aims and aspirations could be contrued as hypocritical, but the Church could argue that although Jesus threw out the money changers from the temple he was not against money changers per se. It was just that he thought it was irreverent to use the sacred house for that purpose.

I don't know how far this development will progress the debate for monetary reform, but perhaps the protestors may have found an unexpected ally. If they could come to some sort of arrangement, then maybe the theologians could bring pressure to bear. The big question is: Will the protestors be willing to devolve power?, and if so; would the Church deliver?

The significance for me is that we are returning to religeon to each us right and wrong, not the market place anymore. There is a lot of prfound respect for what St Pauls chapter is now doing. The church could be reborn on this one.

I have skipped through some parts of Kennedy, but can't really get my head around whether a radical change to a non-interest monetary system would be even remotely within the practical realm.

One analogy - in the 1970s, I remember remarking that arguably justice would suggest that coal miners should be paid several times more than those who sat playing interesting intellectual games in centrally-heated offices. But I could not see then, and still cannot see, how it would possible to reconsruct the whole wage system from the ground up to achieve that kind of outcome. There does not seem to be any firm point of reference between leaving everything to the market, and national job evaluation - and all the evidence suggests that the latter would be a complete disaster.

We have always tradedand will always, just that it needs regulation. For example, we have fishing fleets that are pulling out more fish from the oceans than the oceans can reproduce. What should we do? MAny of these new financial products are the same.

So should we stop fishing?

William, I agree it takes quite a bit of mental gymnastics to get one's head around the concept of a world without interest and how it would work in practice.

It's taken me quite a while to come to terms with the deep, fundamental flaws in the current monetary system. The immediate reaction is how could it have endured for hundreds of years without people understanding its divisive nature and why hasn't it collapsed before now. For many years the ruling classes would have been quite happy with the status quo. The nature and cause of the imbalance would have been much less obvious at the time. Collapse was much less likely because banking and economic activity were widely dispersed and there was much less leverage in the system. However, there were Tulipmania, South Sea Bubble and the Great Depression. Post big bang there have been a few major shocks which should have served as a warning but the focus was on the symptoms rather than the cause: eg. Black Monday 1987, Long Term Capital Management 1998 and recently, the credit crunch.

It seems like a huge task to change the global economic system onto a different basis so fundamentally different. However, rather than a grand design for transition, perhaps a way forward is to devise some local interest free money systems to run alongside the existing monetary system but favouring them by requiring local taxes to be paid in it.

If you are right and they are unworkable, it should become apparent. If competing ideas are implemented, it would provide the means to choose the best ideas and integrate them into another phase of experiments with wider reach. If these were created locally rather than centrally the various solutions would be responsive to local needs.

As a matter of courtesy, I emailed Margrit Kennedy today to explain that I'd been disseminating her work and ask how she's developed her ideas over the 16 years since she wrote Interest and Inflation Free Money. In her response she said she had just sent a 70 page book (in German) to the publishers. She hopes it will be translated soon: "Occupy Money - It is high time for a sustainable currency"

Cape Town, no one is suggesting we abandon fishing but if the fishermen could buy boats without interest, it would reduce costs significantly. If all working in the fishing industry could make a decent living in an interest free world, the compulsion to over fish, would diminish.

Regulation is like applying a band aid to stem internal bleeding. I'm not saying all regulation is unnecessary but we should create monetary and other systems to minimise the need for regulations. The Financial Services Act 1988 failed to stop Nick Leeson bankrupting Barings for £800bn in the 1990s, the subsequent regulatory reform failed to stop Laurent Kerviel taking Soc Gen for $5bn or the subprime crisis ($2 trillion and counting). Why should future regulation be any more successful?

Regulators invariably try to prevent the last crisis.

In an interest free world, the need and appetite for exotic securities would evaporate. Yes, the financial services industry would shrink but other more useful industries will flourish, rebalancing the economy. Financial engineering and leveraged buyouts have exported many real jobs overseas, leaving a reduced pool of consumers and grave social problems. Ironically, the current economic paradigm demands exponential consumption and yet an increasing proportion of the population are consuming less and less as their real income declines and real jobs evaporate.

From a City perspective, this may sound like turkeys voting for Christmas but it is more like slaves throwing off the chains of debt servitude. Remember the generation of students being enslaved prematurely to feed the insatiable imperative for debt interest.

How long is it before we load debt onto secondary school students in return for A levels? Student debt is immoral and introduced by a generation that enjoyed all the benefits of free education - hypocrisy! Education is not about producing economic units, its purpose should be to unleash potential creativity and development for the benefit of all.

Agree with Clive Menzies that capitalism is subject to intermittent crises, and that this goes back a long way. The issue may be whether the present is just another of these, or something more terminal. Being inclined to give credibility to long-term economic cycles, I am more inclined to believe the former, even if I cannot see any clear way out and into the next upswing. But I always could be wrong, and this time it really is different.

Well they are now saying that it is the worst for 100 years, ie since records began. I feel that it could be reviived but it is like livig in the land of the dead, it is a zombie existence, because no way can people pay off the debts thay have and events are unreal.

Look a the Greek fiasco. papndreos was absolutely right to want to put this important question a referendum. There are not nearly enough referenda i our mature democracies. But he got he qiestion slightly wrong. It is not

"Do you want to default on your debt?" BEcause of course the Greeks want to apy of ftheir debts. It is, rather

"Who should pay off the Greek debt?" Because at the moment, it is the people. Which is an incredible cheek. The amount salted away in Swiss bank accounts by Greek residents of Switzerland, when they live in relaity in Greece, is enough to apy off the debt. The amount they have avoided in paying taxes honestly due from them. I am talking about Greek shipping companies.

The owners of Greek shipping companies have tricked Greece out of taxes that sould be sufficient to cancel the Greek debt.

The topic under discussion is "The new masters of the financial world"

Well, the developments of the past week have established one thing: George Papandreous is not one of them. All he has succeeded in doing is to make a pigs ear out of a silk purse filled with money. No wonder Greece is in the mire, if that is the best they can do in choosing a leader. It strikes me, that a referendum, or even a general election wouldn't improve the situation. Maybe what is needed is for Greek MPs to take an IQ test, as it would appear that some of them are following the wrong profession and would be more meaningfully employed as clowns at the circus. Why have they not tabled a no confidence motion and forced him to resign immediately. The world is waiting.

All those long serving families - the gaddafis, the ben alis, the al-khalifas....the Papandreoseroceros are another dynastic family.

They should all be cleared out and they will be.