Special Reports
Fed attempts to bail out bankrupt Wall Street speculators; Cheney demands staged terror attacks, war with Iran -- part 1 of a 3-part series
By Webster G. Tarpley
Online Journal Contributing Writer


Aug 15, 2007, 01:39

WASHINGTON DC �� By deciding to ante up $38 billion for a hopeless bailout of predatory Wall Street hedge funds and the banks that stand behind them, Federal Reserve Chairman Helicopter Ben Bernanke has placed the bankrupt US dollar on a direct course towards the precipice of hyperinflation. In so doing, he has given new momentum to the backers and controllers of Dick Cheney, who favor an insane flight forward into general war with Iran, deluding themselves that they can thus escape from both military defeat in Iraq and Afghanistan, and from the death agony of the dollar.

On August 9-10, the European Central Bank, the Bank of Japan, the Federal Reserve, plus the central banks of Australia, Norway, Switzerland, and other countries �injected� the equivalent about a third of a trillion dollars ($325 billion) into the money systems of the world. The Bank of Japan handed out a dramatic �1 trillion, about $8.5 billion. The European Central Bank showed signs of panic, or of realism, by spewing out about �160 billion over two days. Their goal was to stave off a spreading panic at bond trading desks and in the capital markets of the world about junk bonds, collateralized debt obligations (CDOS), mortgage backed securities, and other paper debt instruments.

At about 9 AM on Friday August 10, the Chicago futures markets suggested that the Dow Jones Industrial average would open down about 190 points. That meant the potential for spreading stock market panic, with the DJIA closing down 1,000 to 2,000 points or more by the end of the day, quite possibly pitching more banks and hedge funds into bankruptcy. Such an event would also tend to awaken the US middle class to the fact that their 401 (K) and IRA pension plans were being liquidated. This would make the financial crisis a political crisis as well, and perhaps stoke the fires of impeachment. Helicopter Ben therefore followed his predecessor, Bubbles Greenspan, on the path of bailout, although on a larger scale than what Greenspan had ever attempted in public. Bernanke and the New York Fed bought up $38 billion of toxic mortgage-backed securities from the principal hyenas of Wall Street -- led, we can be sure, by Goldman Sachs, Bear Stearns, Lehman Brothers, J.P. Morgan Chase, Merrill Lynch, and Citibank. For bailout purposes, the banks were given a sweetheart interest rate, just 4 percent, less than the 5.25 percent target Fed funds rate used for interbank lending, and much less than the 6.25 percent the Fed requires from banks coming to its own discount window under normal circumstances. The $38 billion, injected in three doses during the course of the day, in addition to other Fed measures, was almost enough to prop the market up for eight hours -- the Dow closed with a loss of 31 points. So the central banks will need to provide more fixes, sooner rather than later.

As Alan Greenspan instructed Bill Clinton when the latter took office, the bond market, also referred to as the capital or credit market, is much more important than the stock market in the current US-UK financial system. Right now not just dubious junk bonds and mortgage-backed securities, but even the classic triple A investment grade corporate bonds, are in great distress. Indeed, the bond market has partially shut down in response to the crisis. This is far more serious than a mere stock market crash, such as the one of October 1987.

The Bank of England has said nothing about injections, and is poised to raise its interest rates once again, putting additional pressure on the dollar by tempting hot money to flee out of Wall Street to London. The British may well figure that when the battered US greenback goes under, the British pound sterling will remain afloat, and benefit from the US shipwreck. London has in any case already replaced New York as the real financial capital of the world; this has been a strategic priority for Gordon Brown for some years.

Wall Street derivatives monsters -- too big to bail out

It would take more than $38 billion to bail out Goldman, Bear, Merrill, and the rest. The bonds of the firms just mentioned are already rated as high-risk junk. The Wall Street banks and investment banks represent a black hole into which literally trillions of dollars could disappear without a trace -- it is enough to cite the derivatives holdings of JP Morgan Chase and Citibank, who are listed in the spring 2007 report of the Controller of the Currency as having $105 trillion in derivatives between them, and the reality is a multiple of that. In addition, there is fear of the unknown. This past week traders from Rick Santelli in Chicago to London stock touts have reported that a large financial entity -- something probably bigger than Goldman Sachs -- has been selling off a portfolio of some $10 to $15 billion in value. No one has said publicly what this entity is, or what this �unprecedented event� might represent. A few days ago, oil hit an all-time high of $78 per barrel. It then fell back 10 percent, because so much of the price of oil -- at least $30 at present levels -- is pure hedge fund speculation. And these hedge funds, as they near bankruptcy, massively sell off oil futures. Gold has taken some nasty dips for the same reason.

Dow 36,000 in sight, thanks to hyperinflation

In 1998, neocon economic commentator James Glassman got some attention by predicting a steady rise in the Dow to 36,000. Now, Glassman may get his wish -- THANKS TO hyperinflation. If the central banks continue to �inject� tens of billions of dollars every day, while secretly buying masses of worthless kited paper from banks and investment banks, we may soon experience a fool�s paradise interlude which to some will look like recovery -- after all, the stock market may appear to be rising. But watch the prices for milk, other food items, gasoline, and other staples. If they begin to levitate upward, we will know that the fan and bellows of hyperinflation are indeed at work.

Helicopter Ben earned his name some years ago by giving a speech in which he said that he could stop a panic from becoming a depression by dumping bales of dollars out of helicopters to provide stimulus. He has thus always had a hyperinflationary overtone. On Tuesday, August 7, Bernanke presided over a Fed meeting that refused to cut interest rates, and also failed to offer the bankrupt speculators words of assurance that they would be assisted. This was followed two days later by a panicked selloff, with the DJIA down 387 points.

Death agony of the US dollar

These events represent a new phase of the death agony of the US dollar, which has been in decline since about the start of the Iraq war, and has gone from 80 cents to buy a euro to almost $1.40. Knowing that the dollar is a wasting asset, and also because of widespread hatred for Bush, everyone in the world has been attempting to dump the dollar in any way possible. Russia has set up a ruble-based trading system where oil, gold, and grain can be bought; they don�t take American Express. Iran tried to set up a euro-denominated oil market, but has been prevented from starting it because of US-ordered UN sanctions and related economic warfare. But Iran has asked Japan to pay for its oil with yen, not with dollars. Brazil and Argentina have eliminated the dollar in their bilateral trade. Many European oil companies have eliminated the dollar from their international operations. Every time the dollar is cut out of a lucrative commodity flow, Wall Street and the London Eurodollar market lose the ability to skim 5 percent to 10 percent off the top of these transactions in the form of financing, banking services, and fees.

No more zero interest loans from Tokyo

For the past five years, the dollar has enjoyed massive support from the Bank of Japan�s zero interest rate policy. This allowed hedge funds to load up with free money in Tokyo and transform those yen into dollars to use in speculating in US markets. This created a constant demand for dollars, and also tempted hot money away from Tokyo into high-risk, high-yield investments elsewhere, a practice known as the yen carry trade. But this so-called yen carry trade is ending: the Bank of Japan has now raised its rate to 0.5 percent, and is set to hike it again this month. This has played havoc with so-called emerging markets for more than a year. The main advocate for the weak yen, my college classmate Hiroshi Watanabe, was ousted from the Bank of Japan some weeks ago. As the yen gets stronger, meaning as it goes from 118 to 117 to 115 to 110 on the television screen, the huge mass of kited loans becomes harder and harder for the US borrowers to pay back, since the yen has become more expensive. Therefore any fall in the dollar in relation to the yen will result in chain reaction bankruptcies among the US firms which went overboard with yen carry trade loans.

This danger is very real. The dollar has been very weak against the yen lately. In fact, the dollar has been very weak in general, falling to an all-time low of almost $1.40 to a euro, and a 26-year low of about $2.05 to a British pound. There has also been a long-term low against the Canadian dollar. Given that the US trade deficit is approaching $1 trillion, this cannot come as a surprise.

All of this represented the background to Helicopter Ben�s dilemma of the past two weeks. If he kept interest rates and money supply at their current levels, the subprime mortgage crisis would spread to all non-Treasury bonds and paper, blowing out the bond market. If he lowers interest rates, the dollar will fall like a stone, and the yen carry trade hangover will sink the Wall Street banks. If he raises interest rates to save the dollar, the banks go bankrupt anyway because of the contagion from the collapsing mortgage bubble.

For a time it seemed as if Fannie Mae and Freddie Mac, quasi-governmental institutions which deal in mortgage-backed securities, would be used to bail out bankrupt mortgage-backed paper by buying it up, with the taxpayer ultimately left holding the bag. (Fannie and Freddie participate to some extent in the �full faith and credit� guarantee that covers Treasury bonds.) But Fannie and Freddie are already deeply troubled institutions, as the early stages of the bubble collapse have already revealed. Using them for a bailout is being blocked by the Bush White House. That leaves Helicopter Ben with the option of directly monetizing debt -- taking in Wall Street�s bankrupt mortgage paper and paying out dollar bills in return. He took the first step towards doing just that this past Friday morning.

Panic dumping of dollar and hyperinflation loom

The Fed measures taken so far have sharply increased the money supply, making the dollar even weaker. Wall Street is clamoring for an emergency rate cut of one half percent or even one full percent as early as next week. If this is done, the dollar will surely take a spectacular dive. Fed boss Paul Volcker was always haunted by the fear of a sickening slide of the dollar which, once begun, would be impossible to stop. Depending on what Bernanke does, we may now be near such a point. In the present situation, a dollar panic is always latent.

Scenarios have long circulated about a young MBA manager in Kuala Lumpur or Taipei who comes into the office one morning and decides that his central bank is holding just a few too many dollars. He orders that a hundred million or so be sold. This generates a rumor that the dollar is being dumped by the country in question. A panicked rush for the exits begins. Central banks join the stampede. Country after country begins dumping its dollars and its US Treasury securities. By the time the wave reaches the US, the dollar is down to 30 percent of its value the previous day, and the Treasury market is in chaos. Volcker may yet live to see his nightmare become reality, in a time-lapse sequence.

As I show in Surviving the Cataclysm, the German hyperinflation of 1923 peaked at a rate of 4.2 trillion paper marks to a US dollar. The main cause of this hyperinflation was the British and French policy of driving down the mark to create economic chaos and prevent Walter Rathenau�s German-Russian Rapallo alliance. But the main point for our present purposes is that the mark was ruined first and foremost by its international exchange rate.

We too may be headed into an era when shoppers take their dollars to the supermarket in a shopping cart, and bring their purchases home in their pockets. This is especially so since today everything in the US except for certain food items is imported from low wage sweatshops abroad. If the dollar collapses, hyperinflation will result all the more readily, since such a large part of the consumer�s market basket is composed of imports.

If Bernanke had been intelligent, he would have silently bailed out the two Bear Stearns hedge funds back in June, effectively suppressing the issue, and steering clear of a much larger crisis. He is reviled in Wall Street for not doing this. Given this track record of weakness and incompetence, Bernanke now appears likely to try to quiet the clamor of Wall Street for easy money. His nickname will truly be an omen of hyperinflation.

Another wrinkle in the scenario is that Bush and the Democratic Congress are already on a collision course over spending, with Bush demanding draconian spending cuts which never occurred to him while the GOP ruled Capitol Hill; the goal is to weaken the Democrats with their own key constituencies, who are demanding some largesse from the new majority. Senator Schumer has signaled that he wants to bail out mortgage paper, meaning that he wants to save Bear Stearns and Goldman Sachs. Bush is adamant that there will be no bailout. An irrepressible conflict is therefore more than likely. We have seen how Bush dealt with Iraq, and then with Katrina. Now we are seeing how he deals with a financial breakdown crisis.

The Paulson-Bernanke Plunge Protection Team in action

The $38 billion is outrageous, but it is not all that the Fed was doing for the wealthy parasites of Wall Street. Since about 1989, the Fed has funded a shadowy organism called the President�s Working Group on Financial Markets, more popularly known as the plunge protection team or PPT. This entity intervenes every day to prop up Wall Street�s speculative house of cards. The PPT buys stock futures in Chicago with the goal of up drafting stock prices in New York. As long as the PPT can keep the price of the Chicago future above the price of the underlying stock on the NYSE, speculators and program traders will sell the future and buy the stock, accomplishing the PPT�s goal of generating totally fictitious demand and preventing gaping market breaks where there is simply no bid for stocks offered.

A few billion of futures buying in Chicago can generate tens of billions of buying in New York -- especially when the operation is signaled by Wall Street figures known to be de facto spokespersons for the PPT, such as Abby Joseph Cohen of Goldman Sachs. Once speculators know the PPT is moving in, they can pile on the bandwagon, and realize nifty short-term gains before selling to the suckers before the next dip. Hundreds of billions of dollars of Fed money have been committed in this way. Whenever you see a sharp rise of the DJIA right before the close based on no news, you can be sure that the PPT is in action. The PPT is basically illegal, but it may have been authorized by secret presidential executive orders, starting under Bush senior and Clinton. Today, Bush would justify it as a war measure to maintain orderly markets.

One of the first published descriptions of what is now called the PPT appeared in my George Bush: The Unauthorized Biography (1992). In the wake of 9/11, accounts in the corporate press boasted of the protection that the PPT was giving small investors. Since then, discussion of the PPT has largely been banished to the Yahoo Finance message boards of stocks like JPM, C, GS, BSC, WM, LEH, MS, and other financial institutions. Journalists beholden to the financier oligarchy never mention the PPT. On CNBC, ham-handed interventions by the PPT are nervously explained away as �bargain hunters� or �small investors making a stand.� Most recently, Gary Dorsch has contributed a detailed study of the PPT entitled �The �Plunge Protection Team� Working Overtime,� Global Money Trends Magazine, August 9, 2007.

The panic had started in mid-June, when two hedge funds controlled by Bear Stearns, the sleazy sixth-ranked investment bank in Wall Street, had disintegrated. First it was announced that the hedge fund investors would get 50 cents on the dollar. Then they were told they would get nothing. In spite of this, the DJIA hit an all-time record at 14,000 and a fraction on July 20, although only with a big push from the PPT. �The entire capital structure from equity all the way to AAA can go to nothing,� Steve Eisman, a portfolio manager at Front Point Partners, told a July 19 conference call on the subprime mortgage debacle, according to the New York Times. By July 26-27, triple digit dives of the DJIA had become the order of the day, as rumors swirled about Bear and Goldman. Soon it became known that investors in a third Bear hedge fund were being told that they could not withdraw their money.

Next, Part 2: Systemic breakdown crisis