Société Générale Predicts Global Economic Collapse In Two Years Time

by Ambrose Evans-Pritchard 22 December 2009 from Telegraph.co.uk Société Générale has advised clients to be ready for a possible "global economic collapse" over the next two years, mapping a strategy of defensive investments to avoid wealth destruction. In a report entitled "Worst-case debt scenario", the bank's asset team said state rescue packages over the last year have merely transferred private liabilities onto sagging sovereign shoulders, creating a fresh set of problems. Overall debt is still far too high in almost all rich economies as a share of GDP (350pc in the US), whether public or private. It must be reduced by the hard slog of "deleveraging", for years. "As yet, nobody can say with any certainty whether we have in fact escaped the prospect of a global economic collapse," said the 68-page report, headed by asset chief Daniel Fermon. It is an exploration of the dangers, not a forecast. Under the French bank's "Bear Case" scenario (the gloomiest of three possible outcomes), the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010. Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade. (UK figures look low because debt started from a low base. Mr Ferman said the UK would converge with Europe at 130pc of GDP by 2015 under the bear case). The underlying debt burden is greater than it was after the Second World War, when nominal levels looked similar. Ageing populations will make it harder to erode debt through growth. "High public debt looks entirely unsustainable in the long run. We have almost reached a point of no return for government debt," it said. Inflating debt away might be seen by some governments as a lesser of evils. If so, gold would go "up, and up, and up" as the only safe haven from fiat paper money. Private debt is also crippling. Even if the US savings rate stabilises at 7pc, and all of it is used to pay down debt, it will still take nine years for households to reduce debt/income ratios to the safe levels of the 1980s. The bank said the current crisis displays "compelling similarities" with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time. SocGen advises bears to sell the dollar and to "short" cyclical equities such as technology, auto, and travel to avoid being caught in the "inherent deflationary spiral". Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar. Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would "generate turbo-charged returns" mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan's 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons. SocGen's case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis. Mr Fermon said his report had electrified clients on both sides of the Atlantic. "Everybody wants to know what the impact will be. A lot of hedge funds and bankers are worried," he said.

Naughty banks need more than a slap on the wrist

by Matt McCarten from NZ Herald 13 December 2009 The Australian banks last week had their Prime Minister scolding them to take a hard look at themselves. That's because they snuck through an interest rate rise after their Reserve Bank raised its rates. Westpac was the worst with a 45-point hike, even though the Reserve Bank raised the rate by only 25 points. Westpac rubbed salt into its customers' wounds by sending them an email comparing the bank's profit-gouging decision to a situation when a tropical storm hits a banana plantation. Apparently, such an occurrence would increase the price of a banana smoothie. Of course, the comparison was dishonest and patronising. A bank's unethical profiteering that puts people in a situation of not being able to pay their mortgage is outrageous enough. But comparing it with paying more for a banana smoothie has caused a furore in Australia. Westpac won't want that public relations disaster following it over here, given it has announced it is making over its New Zealand brand to show how much it cares about us. The other Australian banks (ANZ, ASB, BNZ and National) have followed with a charm offensive, too. There are lots of soothing words about how they want to get closer to New Zealanders by opening more branch offices and offering more intimate services. It's a bit hard to understand their strategy, given they recently sacked hundreds of Kiwi bank tellers and shipped their work offshore to call-centre factories. It seems only yesterday we were being told local bank branch closures would save us money. Despite those rather inconvenient truths, the public relations campaign to win our goodwill is well under way. Recently, BNZ proudly promoted its public spirit credentials by closing its doors for a day and paying its employees to do community work for the day. I'm not trying to piss on the parade, but the day after, I was in a BNZ bank and the staff were running ragged. One of them dryly noted that BNZ got good publicity, but it also meant the workers had to fit five days' work into four days that week. One of the BNZ's main competitors, the ASB Bank, is now rebranded as the "caring bank". It also claims to have been a "Kiwi bank since 1847". I doubt the Commonwealth Bank of Australia is aware of the new change of ownership. It seems that the new initiatives to win our favour are twofold. Despite the widespread political opposition and scepticism to setting up a publicly owned community, Kiwibank has gone from strength to strength as many New Zealanders have swapped their bank accounts over. Nationalism and sovereignty are strong emotions. The second reason is the public mood is going dog on them. There's been too much news about interest fixing, exorbitant fees and the outrageous tax evasion cases now before the courts. That's on top of the increasing numbers of ordinary New Zealanders losing their homes as the banks start foreclosing on them. Vaughan Gunson from the Bad Bank campaign claims the Australian bank owners are terrified that the public sentiments will lead to politicians on both sides of the Tasman following their American colleagues and regulating the industry to curb its excessive profiteering. Gunson blames the banks for causing the financial crisis that almost collapsed the global economy. The Bad Bank supporters picketed a bank in downtown Auckland on Friday as part of their campaign to force the Government to hold a formal inquiry into the role of banks in this country. Westpac ran a stupid banana campaign, says Gunson, but the whole world banking system has gone bananas. One slip on a skin and we're all gone. The Government's siding with the Australian bank owners in not holding an inquiry makes me nervous.

"It's the whole banking system which is bananas", say Bad Banks campaigners

Bad Banks media release 10 December 2009 http://www.badbanks.co.nz/ Australian prime minister Kevin Rudd has given a very public serve to Westpac for an email the bank sent to mortgage customers featuring a cartoon video about selling bananas to justify a hike in its mortgage rates. (See Westpac goes bananas - http://www.news.com.au/couriermail/story/0,,26462786-3122,00.html) "This is just another example of the silly tricks that the Big Four Australian-owned banks (ANZ National, BNZ, Westpac and ASB) are pulling to try and "win over" the public", says Vaughan Gunson, Bad Banks campaign spokesperson. In New Zealand, BNZ closed the doors of its branches and instructed staff to do community work for a day. And ASB Bank has been pushing an advertising campaign which tries to paint a picture of a "caring bank" that serves us. "ASB have made the ridiculous claim that they've been a "Kiwi bank since 1847", when in fact they're fully owned by Commonwealth Bank of Australia", says Gunson. "The banks are trying to "suck up" because they know there's a bad public mood against them, as a result of their interest gouging, fee charging, and tax dodging", says Gunson. "Many New Zealand homeowners are experiencing mortgage stress, thanks to the banks." "What the Aussie banks are worried about is that the public mood against them will put pressure on governments on both sides of the Tasman to put in place tough regulations that curb their power and rein in their profits", says Gunson. The Bad Banks campaign is doing its bit to keep the pressure on the banks. Tomorrow (Friday) at 12noon we're going to be outside ASB's Queen Street branch (cnr Wellesley St) with placards and a new leaflet exposing ASB. "Our aim is to promote a nationwide and popular debate on the banks and their role in the economy", says Gunson. "It goes way beyond a few bad banks, we think the whole banking system is bananas." "The financial implosion that almost brought down the global economy last year, and which is continuing to wreck havoc on the lives of grassroots people, shows that we need to urgently bring the banks under control", says Gunson. There is momentum building even amongst the global financial elite for more regulation and control to be imposed on the banks. (See Ex-Fed chief Paul Volcker's 'telling' words on derivatives industry - http://www.telegraph.co.uk/finance/economics/6764177/Ex-Fed-chief-Paul-Volckers-telling-words-on-derivatives-industry.html.) To contribute to the national debate that we must have in New Zealand about the banking system, Bad Banks offers these suggestions for transforming the power relationship between banks and the people: 1. Immediate government intervention to stop banks turfing "mum and dad" homeowners out of their homes because of a job loss or income cut. 2. The establishment of a government regulatory body to oversee the renegotiation of mortgages based on realistic market values and the ability of the homeowner to pay. 3. Turn Kiwibank into a proper "public service" bank offering first-home buyers a 3% interest state loan. 4. Zero-fee banking offered to people on modest incomes. Facilitated by expanding the role of Kiwibank and forced regulation of all banks operating in New Zealand. 5. Introduction of a Financial Transaction Tax (FTT) that would net the banks and other financial speculators. A decisive step in shifting the tax burden off low and middle income people and onto the mega-rich. 6. All bank loans to big business over a fixed amount to be approved by a government regulatory body that acts to protect the environment and communities. Such a measure is essential to preventing powerful global banking interests from sabotaging the necessary emergency mobilisation against climate change. 7. A full public inquiry which looks at every aspect of banking operations in New Zealand, with public meetings held throughout the country, so that grassroots people can tell their stories. Contact: Vaughan Gunson Bad Banks media spokesperson (09)433 8897 021-0415 082 svpl@xtra.co.nz

Are New Zealand's major banks sound?

by Grant Morgan International credit rating agency Standard & Poor says that all Australian banks have "insufficient funds to cover their lending exposures", reports the Sydney Morning Herald on 25 November 2009. No Australian banks were included in the handful that Standard & Poor believe meet the minimum threshold to be considered safe for depositors. Given that Australian banks own all major New Zealand banks, this news is hugely significant for the Bad Banks campaign in Aotearoa. The Standard & Poor analysis points towards the financial unsoundness of Australian-owned banks in New Zealand. See Australian banks fail new capital test.

Australian banks fail new capital test by Eric Johnston Sydney Morning Herald 25 November 2009 RATINGS agency Standard & Poor's has warned that nearly all the world's big banks - including Australia's major lenders - have insufficient funds to cover their lending exposures and risk a ratings downgrade unless they move to bolster their balance sheets over the next 18 months. The warning follows the release of a tougher global measure of bank capital by Standard & Poor's, which has found that most large banks do not meet the minimum 8 per cent threshold under the credit ratings agency's new risk-adjusted capital ratio. The findings appear to be out of step with claims by Australian banks that they are among the strongest in the world under the traditional measure of bank capital known as the tier 1 ratio. Over the past year, Australian banks have raised more than $20 billion in new capital to strengthen their balance sheets. This has resulted in an increase in the average tier 1 ratio of the big four banks to 8.9 per cent from 7.8 per cent a year ago. But critics warn that these measures of tier 1 can be misleading because they fail to distinguish between higher-risk and lower-risk forms of lending. As well, the tier 1 measure is not consistently calculated on an international level. Australian banks argue that their capital ratios would increase by about 2 per cent on average if they were calculated under existing British rules. Under the new measure, S&P gives a lower rating to hybrid capital because it behaves more like debt than equity. For Australian banks, hybrid securities can make up to a quarter of their total capital. Specific exposures including trading desks and private equity would require banks to significantly increase the level of capital. S&P reviewed 45 banks around the world under its new risk-adjusted measure. No Australian banks were included in the handful that hit the minimum threshold to be considered safe. Of three local lenders included in the review, ANZ scored the highest rating with 7.1 per cent. National Australia Bank was at 6.9 per cent and Commonwealth Bank at 6.3 per cent. While Australian banks benefited from having a large exposure to low-risk residential mortgages, S&P said a narrow geographic and business base counted as a negative. It also noted that the capital raisings by the local banks had been used mainly to fund acquisitions or balance sheet growth. Among the global banks considered most vulnerable are Mizuho Financial (2 per cent), Citigroup (2.1), UBS (2.2) and Sumitomo Mitsui (3.5). The global average came in at 6.7 per cent. ''The results to date appear to confirm our view that capital is a rating weakness for a majority of banks in our sample,'' S&P said. The ratings agency said it expected banks to continue strengthening their capital ratios over the next 18 months to comply with tougher regulatory standards. ''Failure to achieve this could put renewed pressure on ratings,'' it said. The top-rated global bank is HSBC on 9.2 per cent, followed by Dexia on 9 per cent and ING on 8.9 per cent. The review of capital strength comes as Australian banks face a crackdown on rules related to liquidity.

Banking operations pushing us towards trans-Tasman integration

by Vaughan Gunson Bernard Hickey's blog post Single currency gaining speed (6 Sept) on the NZ Herald website links the operations of the Aussie-owned banks with moves towards increased trans-Tasman economic and political integration, specifically one dollar and common banking regulations. As the Aussie parent banks are only interested in making as much profit as possible, and the role of the Australian state is to facilitate the making of those profits, the dominant position of the Aussie-owned banks in the NZ economy is resulting in ever greater political dominance of Australia over NZ. The Rudd government and the Aussie parent banks are making much of the claim that they've been propping up the NZ economy post-financial crisis, through the Australian government's credit guarantee scheme and the parent banks loaning across the Tasman to support the operations of the Big Four in NZ. The reality of mega-profits been sucked out of NZ, chiefly through mortgage lending, over the preceding decade is of course disregarded. And today the Big Four banks operating in NZ are continuing their profit run at the expense of grassroots Kiwi homeowners. What's clear is that the operations of the Aussie-owned banks in NZ is propelling forward increased integration of the Australian and NZ economies, to the benefit of the former. The question of NZ's eroding political sovereignty is one that many people will be interested in. The Bad Banks campaign has the potential to tap into a number of economic and political issues of popular concern, and which go to the heart of 21st century finance capitalism.

“We need a full public inquiry into banking operations,” say Bad Banks campaigners

Bad Banks media release
2 September 2009

The operations of the Big Four Aussie-owned banks are harmful to the lives of ordinary Kiwis,” says Vaughan Gunson, publicity coordinator for Bad Banks, a recently initiated grassroots campaign against banking power.

ANZ National Bank, BNZ, Westpac and ASB have been making mega-profits from interest gouging grassroots Kiwis. In 2008, their combined income from loan interest went up $4.6 billion. Last year the profits of the Big Four totaled over $3 billion.

“And now, in a recession, these Bad Banks are king-hitting people who have lost their jobs or had their incomes cut,” says Gunson. “They’re inflicting penalties on people who can’t meet their mortgage payments and forcing mortgagee sales in increasing numbers.”

“They’re looking after their own equity position and chucking people out of their homes. It’s disgusting. These Bad Banks are part of a corporate culture of greed that’s sucking the life out of this country,” says Gunson.

While it's good that the Green, Labour and Progressive parties have gone ahead with their banking inquiry, the time frame for submissions was very short. That means there are only 11 oral submissions.

“11 oral submissions does not do justice to the devastating impact banking power is having on the lives of grassroots Kiwis,” says Gunson. “We need a full public inquiry, properly resourced and promoted, so that grassroots people can have their say and the Aussie-owned banks be held to account.”

“Any full public inquiry should allow for public meetings up and down the country, so that grassroots people can tell their stories.”

“We hope that MPs in the Green, Labour and Progressive parties are going to be part of an ongoing campaign against the banks,” says Gunson. “We need to confront corporate power full-on.”

The first goal of the Bad Banks campaign is to educate people about the operations of the banks. Bad Banks activists will be out on the streets in Auckland and other cities handing out leaflets and talking to people over the coming weeks and months.

“People can find out more about Bad Banks by going to our webpage www.badbanks.co.nz. We welcome any stories or comments on the banks,” says Gunson. “We’re looking to reach out to other groups, organisations and individuals to help build this campaign.”

Why we need to battle the banks

by Vaughan Gunson The recession is taking grip in New Zealand. People are losing their jobs. In some grassroots communities unemployment is already turning into a social crisis. 138,000 people are officially unemployed. Thousands more will be desperately looking for work. And the situation is going to get grimmer as the economy slumps further. Job losses and income cuts are putting many homeowners in a terrible situation. They can’t meet their mortgage payments. The banks are knocking at the door. And with property values falling some people are left owing more money to the banks than their home is worth. They face financial ruin. For grassroots people, this is all very frightening and unfair. Grassroots mood against the banks Jobs and homes are gut issues for people. Rising concern about these gut issues is intersecting with a mass mood against the banks. Last year, RAM activists took a survey out on to the streets, which questioned people about the operations of the banks in this country. Over 90% of people thought the banks were doing no good. That sentiment has probably hardened. It can be picked up in everyday conversations. It’s reflected in the stories being carried in the media. You know there’s a mass mood on an issue in New Zealand when two things happen. The first is when it becomes a storyline on Shortland Street. Scotty and Shanti are in trouble with the bank, owing more than their house is worth. The second indicator of a mass mood is when you start hearing calls for a public enquiry. This is what the Green, Labour and Progressive parties have been voicing. They want an independent public enquiry into the banks. They’ve sensed the mood and the political opportunities that it presents. Not right In the eyes of grassroots people it’s not right that in these times of increasing hardship the banks are continuing their profit run. The Big Four Australian-owned banks, ANZ National Bank, BNZ, Westpac and ASB, control 90% of the banking industry in New Zealand, putting them in a near-monopoly position. With so much market control, there’s no pressure to lower interest rates. In 2008, the income the Big Four banks received from loan interest went up a whopping $4.6 million. As a result the profits of these Aussie-owned banks totalled over $3 billion in 2008, up 3.7% on the year before. To add fuel to the fire, the Big Four are trying to avoid paying a tax bill of $2.25 billion. BNZ has been convicted by the High Court and told to pay up. Undaunted, the banks are using their extreme wealth to hire teams of lawyers to fight the ruling. The feelings people have towards the banks has been heading South for sometime. This was before the banks started turfing people out of their homes. To maintain their own equity position the banks are getting tough and forcing mortgage sales in rapidly increasing numbers. In April this year, there were 250 foreclosures. The numbers are only going to escalate as mortgage pressures worsen with further waves of job losses. The banks are the bad guys. They could become public enemy number one. A Bad Banks campaign In isolation grassroots people have no power against the banks and the laws written to protect the money men. But mass feelings are strong. It is the job of mass Marxists to tap into those mass feelings. That’s why Socialist Worker is launching a “Bad Banks” campaign. We believe the Aussie banks are vulnerable to a broad and inclusive campaign that connects with the anger ordinary people feel towards these mega-rich interest gougers. A campaign to expose and shame the banks must be out on the streets. We’ll produce mass leaflets and posters. There will be street stalls. We can build towards publicity pickets outside targeted banks. We will organise public meetings. Send out media releases, write submissions. We will liaise with others on the left about organising jointly hosted campaign conventions. The campaign will have a web presence http://www.badbanks.co.nz/. A Bad Banks Facebook group is up and running (log into Facebook and search for “Bad Banks”). We will pursue multiple publicity strands that aim to connect with masses of grassroots people. The first stage of the campaign will be educative. We’ll tell people what the banks are up to. We’ll even explain in popular language “fractional reserve lending”, the credit creation mechanism which literally allows the banks to make money out of thin air. Our leaflets and other publicity will connect the operations of the banks to the Great Implosion. Explaining what’s happening globally and pointing the finger at who’s responsible. Knowledge, as they say, is the first step to empowerment. As the Bad Banks campaign evolves we begin to put forward concrete demands and campaign goals. These will emerge through dialogue with other leftists and through listening to grassroots people themselves. Broad left cooperation A multi-headed campaign against the banks has the potential to bring networks of indebted homeowners, political parties, unions, community groups and grassroots activists together. The campaign on the streets should work in tandem with the good initiative of the Green, Labour and Progressive parties to set up their own independent public enquiry into the banks. Parliamentary and street campaigning can both work to build a movement. Linking these two essential political arenas will get the best out of each. The Bad Banks campaign (or some other campaign name that emerges through discussions with others) could become an invigorating example of broad left political cooperation in practice. This would be extremely positive. Joint work, sharing of ideas and on-the-ground collective organisation around this “flashpoint” political issue will hopefully encourage a further coming together of broad left forces. Such political cooperation is needed if the left is to rise to the challenge of the biggest economic meltdown since the Great Depression of the 1930s. Banks and the “bubble economy” The role the banks and international money men have played in the Great Implosion needs to be widely exposed. The banks are at the centre of the “bubble economy” built on trillions of dollars of debt and speculation. The floundering of the real economy since the 1970s has seen workers, business and the state increasingly reliant on the extension of credit. Over the last four decades debt has ballooned. This has allowed the banks and other money lenders, facilitated by governments, to assume a dynamic role within late capitalism. So entwined are industry giants, big banks and governments, that when the credit crunch hit last year, following the bursting of the worldwide housing bubble, the leaders of the world’s big economies raced to save the banks. In January this year, Oxfam calculated that $8.424 trillion had so far been raised by governments to bailout the banks and other financial institutions. That’s a vast sum, one which could easily put an end to world poverty. And the bailouts haven’t stopped. In the US alone, the Obama administration’s bailout commitments could reach as high as $23.7 trillion, according to an official independent report. However, the bailouts have not prevented the economy from nose-diving, far from it. There’s a global pandemic of job losses and other social miseries. Smaller banks and other financial institutions continue to go under. Yet some of the big banks, like Goldman Sachs, one of the main players behind the housing bubble, are now posting record profits. With trillions and trillions of government money floating around, these experts at financial manipulation are creaming it. Helped by government insiders the really big banks are now set on dominating like never before the creation of credit, the fragile base upon which the world economy rests. The banks left standing are profiting out of lending to cash-strapped governments at high interest rates. They’re speculating again in financial markets. It’s “win-win” for them and “lose-lose” for the rest of us. Given all the social and environmental problems besetting the world the bailout of bankers is a crime against humanity of obscene proportions. Debating the nature of capitalism A system that can divert trillions of dollars to a mega-rich minority and let the majority fend for themselves in an increasingly scary world is an unjust one. Without a doubt the global economic crisis, and the response by governments, is eroding the legitimacy of the market. And it’s happening in the so called “first world” economies of Northern America and Europe. That’s significant. A broad campaign against the banks in this country will, if successful, begin to expose the structures of power within monopoly finance capitalism that locks in place gross inequalities globally. A mass-based campaign against Bad Banks has the potential to stimulate a nationwide debate about the nature of capitalism and the need for a human centred economy. Socialists and leftists from a number of political traditions will want to see this happen. Lots to learn, lots to get excited about The Bad Banks campaign that Socialist Worker is initiating will be a long term one. We will be trying things out as we search, hopefully alongside other activists, for a connection with a mass audience. There’s lots to learn about the operations of the banks in this country and internationally, and how to connect their operations to a system in crisis. It’s going to be a big learning curve for everyone involved. While the Bad Banks campaign is only just hitting the streets, it’s yet to be fully tested in practice, we do know there’s great resentment towards the banks amongst ordinary Kiwis. We should have confidence that this path will bear fruit for the left in this country. That prospect should be an exciting one. Vaughan Gunson is the publicity coordinator for the Bad Banks campaign. To contact him with feedback or offers to help, email socialist-worker(at)pl.net or ph/txt 021-0415 082.

Bad banks: NZ people vs banks $38 million and rising

Green Party media release 11 August 2009 The struggling New Zealand taxpayer is tens of millions of dollars out of pocket due to the fight between the Inland Revenue Department and some of our largest banks, said Green Party Co-Leader Dr Russel Norman. Figures obtained by the Green Party show that as at 31 July 2009, the total cost for all Structured Finance cases against some of New Zealand’s largest banks is approximately $38,500,000. In July the High Court found in favour of the IRD in a court case involving the BNZ. The case revolved around a particular kind of transaction known as Structured Finance. The IRD considered these types of transactions to be tax avoidance. The ruling - subject to the latest appeal - meant the BNZ must pay at least $416 million in back taxes. “This is a David and Goliath fight,” said Dr Norman. “However unlike the recent movie championing alleged ‘Kiwi battler’ Dave Henderson’s fight against the IRD ‘We are here to Help’ – this time the IRD is David and the banks are Goliath. “The decision today by the BNZ to appeal a High Court decision that went against the bank will see the cost to the NZ taxpayer of fighting Structured Finance cases blow out even further,” said Dr Norman. “We know from our experience of New Zealand’s de-regulated financial market in the 80s that if banks can get away with paying less tax they will. “The problem then is who picks up the tab – and that is the greater New Zealand public. At present the Government have set up a working group to study tax – and suggestions coming from this group are that GST should be raised to 15 percent.” The Tax Working Group announced by Finance Minister Bill English in May includes Business Roundtable chairperson Rob McLeod. Earlier this year Mr McLeod gave evidence on behalf of the BNZ in the High Court in his capacity as a tax expert. “Surely when picking a group to look at the New Zealand tax system we should be casting the net further than ‘tax experts’ who give evidence in court cases on behalf of banks engaged in fighting our own IRD,” said Dr Norman.

Global banking class wages war to extend profits and power

A very good article by Stefan Steinberg, International banks exploit the crisis to reap massive profits, from the World Wide Socialist Website exposes the control the powerful banking class is exerting over the world. The big banks are experiencing an obscene return to profitability. Having caused the financial meltdown, then secured trillions and trillions of public money to bail them out, big banks are now making mega-profits through their tight control of credit. They're lending to indebted governments (because of the bail outs and a collapsed global economy) at high interest rates and making a killing. Likewise they're strangling industry in the real economy and profiting on bond speculation. Steinberg writes:

The bailout measures adopted by national governments represent a huge safety net for the banks, enabling them to once again engage in highly speculative forms of financial trading. The levels of debt resulting from the bank bailout packages and other forms of economic stimulus have assumed gigantic dimensions and will be paid for by generations to come. At the same time, the rapid accumulation of debt by governments opens up vast and lucrative opportunities for the banks. Trading in government loans bound up with financial rescue packages is emerging as a central activity of the big banks. Average government debt in the European Union is expected to rise to 80 percent of GDP this year and even higher in 2010. In Britain, government debt is expected to reach 100 percent of GDP in 2009. Japan’s government debt is headed for 200 percent by 2011, and government debt in the US is expected to reach 100 percent of GDP by the same time. As the levels of debt rise across the globe, rating agencies are downgrading the lending status of individual countries, which then have to pay increased interest rates to the banks in order to service their loans. For the banks, it is a classic “win-win” situation. At the same time, banks are refraining from investing in businesses because, as they note euphemistically, “in the current financial climate” the prospects for ordinary companies and industrial enterprises are “too risky.” Confronted with the refusal of the banks to extend credit, industrial and commercial companies are forced to sell corporate bonds at much higher levels of interest. The banks make further profits by speculating in the trading of these bonds.

The banks are waging an aggressive war, out in the economy and through government insiders, to secure their control and wealth at the expense of everyone else. The role of the banks in the global economy needs to be brought to the attention of masses of people who are suffering the fallout of the financial crisis. Strategies need to be thought of that best mobilise people against the banks and others of the global finance class. See also The Joy of Sachs by Paul Krugman.

New Zealand: Are the Banks helping?

by Bill Rosenberg from CTU Monthly Economic Bulletin June 2009 There has been much public debate as to whether the banks have dropped their interest rates enough in response to the Reserve Bank’s reductions in its Official Cash Rate (OCR). In May, Statistics New Zealand in its latest Producers Price Index, reported that in the March quarter “the margins that financial intermediaries [mainly banks] make on their borrowing and lending operations… increased due to the rates for borrowing falling more than the rates for lending.” This followed increases in the previous six months, and both the quarterly and annual increase were the largest since records began in 1994. Parliament’s Finance and Expenditure Committee was told by Deputy Reserve Bank Governor Grant Spencer that “It is disappointing that banks have not dropped mortgage rates further as more people face loan defaults in the coming year”. The Committee reported that “We are concerned that New Zealand businesses find it increasingly difficult to access credit from the major Australian-owned banks, where lending decisions are reportedly now being made by offshore bank parties rather than onshore relationship managers.” There were calls (as yet unheeded) for an inquiry into the banking system. In its June Monetary Policy Statement, the Reserve Bank again complained that “it appears as though the most recent reductions in the OCR have not been passed on to borrowers to the extent that we would have expected. While there has been some increase in funding costs from higher retail deposit rates and longer-term interest rates offshore, this does not appear to fully explain the relative lack of movement of interest rates at shorter terms.” The following graph from Reserve Bank data illustrates the widening bank margins. Since about March, interest rates have levelled out or risen despite continuing cuts in the OCR. In defence, the banks say they have to borrow at higher interest rates domestically because of competition for bank deposits, and rates have risen overseas where they still source almost 40% of their funds, because of the state of those financial markets. In addition, they need to tighten up their lending conditions and raise interest rates because business risks have increased due to the recession. Clearly though, the Reserve Bank is not convinced. There are at least two explanations for what is happening, both of which may apply. The first is that the big four Australian banks are taking advantage of their dominant position and pushing out their margins between their borrowing and lending costs to protect or expand their profits. Statistics New Zealand and the Reserve Bank provide some evidence for that. However it is difficult to believe that is the full story. The small New Zealand banks – Kiwibank and TSB included – have increased interest rates almost as fast. Given their competitor status, they would be more likely to have taken advantage of the increasing margins to undercut the Big Four. A second explanation is that because we have virtually unregulated movement of funds between New Zealand and the rest of the world – open international capital markets – we to a large degree import the monetary conditions of the rest of the world (interest rates and availability of finance). To simplify, if interest rates offered to savers here are lower than the rest of the world, fund managers can take their money to where interest rates are higher, forcing banks here to raise the rates they offer. If our domestic rates go higher than international rates, the banks can (and will) borrow more cheaply overseas in order to lend for mortgages and business loans. There are complicating factors such as margins for risks in our economy and changes in the exchange rate, but it means that the Reserve Bank has much weakened ability to influence monetary conditions within New Zealand. It has some influence on short term interest rates, because the OCR is for short term lending. But longer term rates are much more connected to international conditions because they can be funded profitably from overseas. We saw an opposite symptom of the same cause when the economy was at its height – the Reserve Bank had to set the OCR punitively high to have any effect. Now, no matter how low it cuts the OCR, it seems that longer term rates won’t respond sufficiently. The result undermines the needed stimulus to a depressed economy, and contributes to a persistently overvalued exchange rate, penalising exporters. A revealing scenario is being played out at the same time. The Reserve Bank wants to wean the major banks off their risky habit of borrowing at short terms (like 90 days, often overseas) and lending for mortgages longer term, and in general to lengthen the terms of their borrowing. It is likely to be worried that another freeze in world financial markets would force it to repeat what it did last year: arrange overseas funding lines to be used to prevent New Zealand’s financial system from freezing up too. The new regulations it is putting in place have been delayed, presumably under pressure from the big four Australian banks which are the main perpetrators, and Westpac came out recently saying that being forced to borrow longer term would further increase costs, which they would pass on to borrowers in higher interest rates. We said these regulations are important, and the banks have a responsibility to keep interest rates down by absorbing some of the costs – if they exist – into their profit margins. It is interesting that, according to an article in the Reserve Bank of Australia’s June Bulletin, the same four banks when operating in Australia borrow overseas for longer terms (they borrow relatively little short term overseas). Yet a Sunday Star-Times survey of international interest rates reported on 14 June indicated that while interest rates on deposits are lower here, mortgage interest rates are already higher than Australia. The OCR is currently higher in Australia too (3.0 percent compared to 2.5 percent here). The banks have some credibility issues.

Bank lending to dairy farmers NZ equivalent of US sub-prime lending

New Zealand farmers are in debt to the tune of $45 billion, 61% of which is in the dairy sector. This ballooning of debt over recent years is New Zealand's equivalent of the US sub-prime lending that sparked the financial crisis. This is the claim made by Fran O'Sullivan, leading business columnist for the NZ Herald, in her article White gold rush turns deep shade of red. She writes: "Where that farm debt is highly concentrated - eg, at least 20 per cent of New Zealand's dairy farm production - it is such that farms cannot, and will not ever, meet their debt servicing commitments even under the most promising payout and interest rate scenarios. This is New Zealand's equivalent to US sub-prime lending: reliant on continuing asset gains as income was never going to meet debt-servicing commitments." This bank driven "land bubble" is about to burst with dairy prices falling due to falling global demand, compounded by a high NZ dollar. The dairy industry is a huge part of the NZ economy, being the largest exported commodity. A big drop in rural income will drag the whole NZ economy downwards with a flow-on political impact.

A global political and ideological campaign to wipe the debt

Michael Hudson has written a very important article on the debt bondage of Iceland for the excellent Global Research website. Iceland is an advance battleground in the war between the global finance oligarchs and grassroots people. The logical conclusion of Hudson’s article is that there needs to be a global political and ideological campaign to wipe the debt and bring credit under the control of governments in the interests of humanity and the planet.

The Financial War Against Iceland: Being defeated by debt is as deadly as outright military warfare by Prof Michael Hudson from Global Research 5 April 2009 Iceland is under attack – not militarily¬ but financially. It owes more than it can pay. This threatens debtors with forfeiture of what remains of their homes and other assets. The government is being told to sell off the nation’s public domain, its natural resources and public enterprises to pay the financial gambling debts run up irresponsibly by a new banking class. This class is seeking to increase its wealth and power despite the fact that its debt-leveraging strategy already has plunged the economy into bankruptcy. On top of this, creditors are seeking to enact permanent taxes and sell off public assets to pay for bailouts to themselves. Continue at http://www.globalresearch.ca/index.php?context=va&aid=13055

Financial implosion and stagnation: Back to the real economy

by John Bellamy Foster and Fred Magdoff from UNITY Journal May 2009 [originally published in Monthly Review] But, you may ask, won't the powers that be step into the breach again and abort the crisis before it gets a chance to run its course? Yes, certainly. That, by now, is standard operating procedure, and it cannot be excluded that it will succeed in the same ambiguous sense that it did after the 1987 stock market crash. If so, we will have the whole process to go through again on a more elevated and more precarious level. But sooner or later, next time or further down the road, it will not succeed... We will then be in a new situation as unprecedented as the conditions from which it will have emerged.

- Harry Magdoff and Paul Sweezy (1988)

“The first rule of central banking,” economist James K. Galbraith wrote recently, is that “when the ship starts to sink, central bankers must bail like hell.” In response to a financial crisis of a magnitude not seen since the Great Depression, the Federal Reserve and other central banks, backed by their treasury departments, have been “bailing like hell” for more than a year. Beginning in July 2007 when the collapse of two Bear Stearns hedge funds that had speculated heavily in mortgage-backed securities signaled the onset of a major credit crunch, the Federal Reserve Board and the U.S. Treasury Department have pulled out all the stops as finance has imploded. They have flooded the financial sector with hundreds of billions of dollars and have promised to pour in trillions more if necessary – operating on a scale and with an array of tools that is unprecedented.

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Bernanke's Financial Rescue Plan: The growing prospect of a U.S. default

by Mike Whitney from Global Research, 6 April 2009 Fed chief Ben Bernanke has embarked on the most radical and ruinous financial rescue plan in history. According to Bloomberg News, the Fed has already lent or committed $12.8 trillion trying to stabilize the financial system after the the bursting of Wall Street's speculative mega-bubble. Now Bernanke wants to dig an even bigger hole, by creating programs that will provide up to $2 trillion of credit to financial institutions that purchase toxic assets from banks or securities backed by consumer loans. The Fed's generous terms are expected to generate a flurry of speculation which will help strengthen the banking system while leaving the taxpayer to bear the losses. It is impossible to know what the long-term effects of Bernanke's excessive spending will be, but his plan has the potential to trigger hyperinflation or spark a run on the dollar. Continue at http://www.globalresearch.ca/index.php?context=va&aid=13077 See also Can Obama's policies fix the economy?

David Harvey: Their crisis, our challenge

In a far reaching interview with Red Pepper, David Harvey argues that the current financial crisis and bank bail-outs could lead to a massive consolidation of the banking system and a return to capitalist ‘business as usual’ – unless there is sustained revolt and pressure for a dramatic redistribution and socialisation of wealth. Does this crisis signal the end of neoliberalism? My answer is that it depends what you mean by neoliberalism. My interpretation is that it’s a class project, now masked by a lot of rhetoric about individual freedom, liberty, personal responsibility, privatisation and the free market. That rhetoric was a means towards the restoration and consolidation of class power, and that neoliberal project has been fairly successful. Continue at http://www.redpepper.org.uk/Their-crisis-our-challenge

It’s Time for a New Monetary System

Press Release: Global Research 25 March 2009 The Obama administration is spending hundreds of billions of dollars trying to persuade the banking system to restart lending. Federal Reserve Chairman Ben Bernanke plans to create hundreds of billions more of new bank reserves by purchasing mortgage-related debt. With Bernanke and Treasury Secretary Timothy Geithner working together, “the initiative will seek to entice private investors, including big hedge funds, to participate by offering billions of dollars in low-interest loans to finance the purchases. The government will share the risks if the assets fall further in price.” (Martin Crutsinger, AP) Finally, President Obama is taking over the distinction of being the biggest Keynesian in history with a fiscal year 2009 deficit of $1.75 trillion.

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'We need shock and awe policies to halt depression'

by Peter de Waal The key thing I got from Ambrose Evans-Pritchard's article We need shock and awe policies to halt depression is that industrial production has collapsed at a rate 2-10 times faster than in 1929-1932! The credit bubble was largely based on worldwide property prices being pushed up with financial tricks over a 30-year period. In my opinion Capital has two ways out of this: 1) Allow house prices to collapse to the value at which ordinary working people can afford to buy them again i.e. 1-4 times the average yearly wage. This would of course bankrupt many insurance companies, pension funds and banks, ruining the rich. This would happen if the governments of the world stopped promising to bail out failed banks. The banks would then have to "mark-to-market" their loan portfolios, rather than hanging on to the notion that the book value of 18 months ago can be realised. Because of the bail-outs US Banks have been refusing reasonable offers for properties and their loan books, and have actually increased their exposure to toxic credit derivative products safe in the knowledge that they are "too big to be allowed to fail." 2) Print money like crazy and hope inflation catches up with those still wildly-inflated house prices. Option (2) is very dangerous, as it would capsize US efforts to get the world to buy it's debt in order to finance the bail-out of it's destitute banking system. Why would you buy a T-Bond when the value of the US$ is plummeting? Printing money or allowing inflation to rip would deal quite effectively to the US debt problem. There is always option (3) War. World War II began as a trade war, became a shooting war and ended as a nuclear war. We need option (4) make the bosses pay and end capitalism.

Finance Capitalism Hits a Wall: The Oligarchs' Escape Plan ­ at the Treasury's Expense

by Professor Michael Hudson from Global Research 18 February 2009 The financial “wealth creation” game is over. Economies emerged from World War II relatively free of debt, but the 60-year global run-up has run its course. Finance capitalism is in a state of collapse, and marginal palliatives cannot revive it. The U.S. economy cannot “inflate its way out of debt,” because this would collapse the dollar and end its dreams of global empire by forcing foreign countries to go their own way. There is too little manufacturing to make the economy more “competitive,” given its high housing costs, transportation, debt and tax overhead. A quarter to a third of U.S. real estate has fallen into Negative Equity, so no banks will lend to them. The economy has hit a debt wall and is falling into Negative Equity, where it may remain for as far as the eye can see until there is a debt write-down.

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Failure to save East Europe will lead to worldwide meltdown

by Ambrose Evans-Pritchard from The Telegraph (UK) 15 February 2009 If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP.

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See also Next Wave of Banking Crisis to come from Eastern Europe by F. William Engdahl.

Failure to save East Europe will lead to worldwide meltdown

by Ambrose Evans-Pritchard from The Telegraph (UK) 15 February 2009 If mishandled by the world policy establishment, this debacle is big enough to shatter the fragile banking systems of Western Europe and set off round two of our financial Götterdämmerung. Austria's finance minister Josef Pröll made frantic efforts last week to put together a €150bn rescue for the ex-Soviet bloc. Well he might. His banks have lent €230bn to the region, equal to 70pc of Austria's GDP. "A failure rate of 10pc would lead to the collapse of the Austrian financial sector," reported Der Standard in Vienna. Unfortunately, that is about to happen. The European Bank for Reconstruction and Development (EBRD) says bad debts will top 10pc and may reach 20pc. The Vienna press said Bank Austria and its Italian owner Unicredit face a "monetary Stalingrad" in the East. Mr Pröll tried to drum up support for his rescue package from EU finance ministers in Brussels last week. The idea was scotched by Germany's Peer Steinbrück. Not our problem, he said. We'll see about that. Stephen Jen, currency chief at Morgan Stanley, said Eastern Europe has borrowed $1.7 trillion abroad, much on short-term maturities. It must repay - or roll over - $400bn this year, equal to a third of the region's GDP. Good luck. The credit window has slammed shut. Not even Russia can easily cover the $500bn dollar debts of its oligarchs while oil remains near $33 a barrel. The budget is based on Urals crude at $95. Russia has bled 36pc of its foreign reserves since August defending the rouble. "This is the largest run on a currency in history," said Mr Jen. In Poland, 60pc of mortgages are in Swiss francs. The zloty has just halved against the franc. Hungary, the Balkans, the Baltics, and Ukraine are all suffering variants of this story. As an act of collective folly - by lenders and borrowers - it matches America's sub-prime debacle. There is a crucial difference, however. European banks are on the hook for both. US banks are not. Almost all East bloc debts are owed to West Europe, especially Austrian, Swedish, Greek, Italian, and Belgian banks. En plus, Europeans account for an astonishing 74pc of the entire $4.9 trillion portfolio of loans to emerging markets. They are five times more exposed to this latest bust than American or Japanese banks, and they are 50pc more leveraged (IMF data). Spain is up to its neck in Latin America, which has belatedly joined the slump (Mexico's car output fell 51pc in January, and Brazil lost 650,000 jobs in one month). Britain and Switzerland are up to their necks in Asia. Whether it takes months, or just weeks, the world is going to discover that Europe's financial system is sunk, and that there is no EU Federal Reserve yet ready to act as a lender of last resort or to flood the markets with emergency stimulus. Under a "Taylor Rule" analysis, the European Central Bank already needs to cut rates to zero and then purchase bonds and Pfandbriefe on a huge scale. It is constrained by geopolitics - a German-Dutch veto - and the Maastricht Treaty. But I digress. It is East Europe that is blowing up right now. Erik Berglof, EBRD's chief economist, told me the region may need €400bn in help to cover loans and prop up the credit system. Europe's governments are making matters worse. Some are pressuring their banks to pull back, undercutting subsidiaries in East Europe. Athens has ordered Greek banks to pull out of the Balkans. The sums needed are beyond the limits of the IMF, which has already bailed out Hungary, Ukraine, Latvia, Belarus, Iceland, and Pakistan - and Turkey next - and is fast exhausting its own $200bn (€155bn) reserve. We are nearing the point where the IMF may have to print money for the world, using arcane powers to issue Special Drawing Rights. Its $16bn rescue of Ukraine has unravelled. The country - facing a 12pc contraction in GDP after the collapse of steel prices - is hurtling towards default, leaving Unicredit, Raffeisen and ING in the lurch. Pakistan wants another $7.6bn. Latvia's central bank governor has declared his economy "clinically dead" after it shrank 10.5pc in the fourth quarter. Protesters have smashed the treasury and stormed parliament. "This is much worse than the East Asia crisis in the 1990s," said Lars Christensen, at Danske Bank. "There are accidents waiting to happen across the region, but the EU institutions don't have any framework for dealing with this. The day they decide not to save one of these countries will be the trigger for a massive crisis with contagion spreading into the EU." Europe is already in deeper trouble than the ECB or EU leaders ever expected. Germany contracted at an annual rate of 8.4pc in the fourth quarter. If Deutsche Bank is correct, the economy will have shrunk by nearly 9pc before the end of this year. This is the sort of level that stokes popular revolt. The implications are obvious. Berlin is not going to rescue Ireland, Spain, Greece and Portugal as the collapse of their credit bubbles leads to rising defaults, or rescue Italy by accepting plans for EU "union bonds" should the debt markets take fright at the rocketing trajectory of Italy's public debt (hitting 112pc of GDP next year, just revised up from 101pc - big change), or rescue Austria from its Habsburg adventurism. So we watch and wait as the lethal brush fires move closer. If one spark jumps across the eurozone line, we will have global systemic crisis within days. Are the firemen ready?