Wednesday, February 17, 2010
Leading economic historian Niall Ferguson writes:
Behind each great historical phenomenon there lies a financial secret,
Ferguson provides some examples:
“It was Nathan Rothschild as much as the Duke of Wellington who defeated Napoleon at Waterloo” by selling bonds and stockpiling gold for the British Army. The richest bankers on the Continent in the 19th century, the Rothschilds became known as die Finanzbonaparten (the Bonapartes of finance). And, as Ferguson argues, they also played a crucial part in the South’s defeat in the Civil War by declining to invest in Confederate cotton-collateralized bonds. Imperial Spain amassed vast amounts of bullion from the New World, but it faded as a power while the British and Dutch empires prospered because they had sophisticated banking systems and Spain did not. Similarly, the French Revolution was made all but inevitable by the machinations of an unscrupulous Scotsman named John Law, whom the deeply indebted French monarchy recklessly placed in charge of public finance. “It was as if one man was simultaneously running all 500 of the top U.S. corporations, the U.S. Treasury and the Federal Reserve System,” Ferguson writes. Law proceeded to single-handedly create the subprime mortgage bubble of his day. When it collapsed, the fallout “fatally set back France’s financial development, putting Frenchmen off paper money and stock markets for generations.” Wilhelmine Germany, meanwhile, came up short in World War I because it “did not have access to the international bond market,” Ferguson writes.Newsweek corroborates Ferguson's statement, focusing on Goldman Sachs:
Goldman Sachs and other investment banks already dragged us in years ago. Their strategy dates back to the '90s, when countries such as Greece and Italy, with chronic fiscal deficits, were eager to join the EMU but couldn't match the standards of budget discipline imposed by the 1992 Maastricht Treaty. So Wall Street helped them hide their true national indebtedness, at a high price. But these deals only made the crisis worse when the market reckoning finally came. This is not a new phenomenon. Many previous currency crises, going back to Asia in 1997–98 and Mexico in 1994–95, were exacerbated by overleveraged derivatives trades that were not revealed until much later. In those earlier cases it was the local banks, not the governments, that cut quiet swaps deals to juice their income. When Mexico decided in December 1994 that it would try to devalue the peso by just 10 percent, hundreds of millions of dollars of off-the-books derivatives deals turned the effort into a market rout. All of a sudden Mexico's major banks were hit with margin calls from U.S. banks, taking Mexico's central bank by surprise. The result was a $50 billion bailout orchestrated by Washington—the first of many, with Wall Street the main beneficiary nearly every time (though to be fair, the Treasury ultimately made a profit from Mexico's paybacks, too). The Asia crisis played out similarly, with Asian banks also badly hit.
(Indeed, Goldman Sachs also helped France and Spain to hide their debt over the last decade or two.)
The United States is no different. It also has been subject to the whims and decisions of banks and other financial players throughout its history.
For example, Ellen Brown writes that Abraham Lincoln's civil war efforts were threatened by usurious interest rates by the banks:
The bankers had Lincoln’s government over a barrel, just as Wall Street has Congress in its vice-like grip today. The North needed money to fund a war, and the bankers were willing to lend it only under circumstances that amounted to extortion, involving staggering interest rates of 24 to 36 percent. Lincoln saw that this would bankrupt the North and asked a trusted colleague to research the matter and find a solution. In what may be the best piece of advice ever given to a sitting President, Colonel Dick Taylor of Illinois reported back that the Union had the power under the Constitution to solve its financing problem by printing its money as a sovereign government. Taylor said:
“Just get Congress to pass a bill authorizing the printing of full legal tender treasury notes . . . and pay your soldiers with them and go ahead and win your war with them also. If you make them full legal tender . . . they will have the full sanction of the government and be just as good as any money; as Congress is given that express right by the Constitution.”***
Lincoln took Col. Taylor’s advice and funded the war by printing paper notes backed by the credit of the government.
Thomas Jefferson might have been right when he said:
Banking establishments are more dangerous than standing armies.