Geithner Rushes to Sabotage German Derivatives Ban; Schäuble Prepares New Moves Against Speculators

Webster G. Tarpley
May 27, 2010

The German government is now fully committed to escalating its ongoing counterattack against international financial speculation. These moves represent an historical watershed as Germany becomes the first major economic power to roll back the tide of financial globalization, under which crackdowns on hedge funds, derivatives, and the world gambling casino were branded as taboo for national governments. German Finance Minister Wolfgang Schäuble has announced that the Merkel government is sending a draft bill to the German parliament (the Bundestag) targeting “turbulence” and “volatility” through further regulation of “certain transactions [which] amplify the crisis.” The bill reaffirms the most fundamental German measure enacted so far, the May 18 blanket ban on all naked credit default swaps issued against the treasury bonds of the eurozone nations. This ban represents the most aggressive move anywhere in the OECD against these most toxic derivatives, which have figured prominently in the AIG bankruptcy and the recent Goldman Sachs Abacus scandal. They are also the derivatives being widely used by hedge fund hyenas and zombie banks to attack such nations as Greece , Spain , and the rest of the Southern tier of the euro.

The naked CDS ban protects euroland government bonds, To that would now be added a ban on the naked shorting of those Euro zone government bonds themselves. This means that a speculator wishing to sell a Euro zone government bond short must own that bond in advance. This makes speculation more complex and expensive, and is all to the good.

Schäuble’s new measures also expand protection for certain stocks and for the euro itself. The draft bill would outlaw naked shorts of all German stocks, meaning stocks whose primary listing is at a German exchange. The original May 18 package had banned naked shorts against a list of 10 large German banks, insurance companies, and reinsurance firms. The obvious next step is to ban naked shorting of stocks altogether. From now on, speculators who wish to short German stocks must own those stocks before they sell, making it more difficult and costly for said speculators to operate. The new draft bill would also outlaw the naked shorting of the euro itself in the foreign exchange markets. The Bundestag needs to approve this bill on the fast track, and then do more.

Tiny Tim Geithner’s US Treasury is attempting, but not succeeding, to conceal its apoplectic hysteria over the German ban. Geithner announced that he was flying from China to Europe in order to confer with George Osborne, the new Bilderberger Chancellor of the Exchequer, and Bank of England boss Mervyn King in London, followed by consultations with European Central Bank chief Trichet and Bundesbank leader Axel Weber in Frankfurt, followed then by a meeting with Schäuble in Berlin. There was no doubt that the overriding purpose of Geithner’s mission was to sabotage the German moves against derivatives in particular and speculation in general.

An unnamed US Treasury official speaking off the record on condition of anonymity told Dow Jones that the German ban on naked credit default swaps was “damaging to the market and counterproductive.” The band was “one-sided,” he added, making clear that Geithner & Co. did not expect the German ban to be adopted on a large scale. Geithner was evidently deeply concerned that the German ban might be imitated by some of Germany ’s closest economic partners, including the Netherlands , Belgium , and Sweden , as well as by other nations much farther afield. Who was the anonymous official? It might have been Tiny Tim himself, or it might have been Mark Patterson of Goldman Sachs, Geithner’s chief of staff and chief lobbyist for carbon offset boondoggles.

Spain is an example of a country which would have been very well advised to join in the German measures when they were first proposed. Observers have noted with some astonishment that the self-styled “socialist” Zapatero of Madrid is unable or unwilling to embrace the measures against the casino economy which the center-right Christian Democratic/Liberal government in Berlin is actively pursuing. The explanation is obviously that the Socialist International as a whole (with figures like Papandreou of Greece and Socrates of Portugal, as well as Zapatero) is acting as an abject puppet of the financiers.

Spain is now paying the price for its inaction through an incipient banking panic emerging on the weekend after the German ban was announced. The Caja Sur, a savings bank representing about 1% of the Spanish banking system, became insolvent, quickly followed by eight banks over the next three days. This meant that the hedge funds had succeeded in spreading the Greek contagion, thus raising questions about the short-term survivability of such overextended speculative operations as Banco Santander and Banco de Bilbao. The Spanish parliament approved a draconian austerity program by a single vote, offering the lunatic spectacle of a country already mired deeply in economic depression, with an official unemployment rate of 20%, embracing its own self-cannibalization with a deflationary austerity program in the vain effort to regain the confidence of international financial markets and investors. Spain needs to understand that there are no “markets” today, but only oligopolies and cartels. They need to understand that they are dealing with ruthless speculators, and not with investors. They might as well try to regain the confidence of Bonnie and Clyde , Dillinger, and Ma Barker.

Another country that urgently needs to join the anti-derivatives front is Italy , where a large-scale debate on economic populism broke out on the weekend after the German ban. The financiers Franco Debenedetti and Paolo Savona, camouflaged amidst a group of free-market quackademics, are desperately campaigning to convince Prime Minister Berlusconi to maintain the sanctity of hedge funds and derivatives. My answer to these market fetishists appears below. Berlusconi is moving in the wrong direction on draconian austerity with the €30 billion package of cuts which he has presented to the parliament. If this is all Berlusconi has to offer, the Italian economy is in danger of entering a death spiral in which tax increases and cuts to spending and public services inevitably cause rising unemployment, falling real production, and constantly lower government revenue receipts. Berlusconi should concentrate on suppressing speculation and on launching a recovery program, not on austerity.

Reactionary commentators around the world continue to parrot the line that the great crisis is a crisis of the welfare state,” and spells the doom of any and all government measures designed to defend and secure the health, education, and welfare of their respective populations. The Greeks, we are told, are “profligate.” This legend of the profligate Greeks conveniently ignores the fact that Greece is the second poorest nation of pre-1990 Europe – only Portugal is poorer. The Greeks have 18% official unemployment, with 20% of the population living below the official poverty line. The average Greek office worker earns about $1500 per month, or barely 40% of the wage level of their German counterparts. And the average pension for Greek government worker is about $750 per month. This is hardly a king’s ransom. Greece is also an example of one of the peripheral countries where the depression first began to hit. Greece is heavily dependent on tourist revenue, which began to decline sharply in 2007 and 2008 as the world derivatives panic began to lash Germany and northern Europe , spelling fewer foreign visitors on the Acropolis and on Mykonos and the Dodecanese .

The pro-financier ideologue Robert Mundell, speaking in Warsaw , has voiced his evaluation that a restructuring of Greek government debt is now inevitable. The Greeks and many others would be well advised to act on this advice immediately. For many of these countries, it is already obvious that their current debts cannot be repaid in the physical universe as presently constituted. For them, default is simply an inevitable necessity, not a choice. Their only choice is now when they will default, and with what strategy. In this regard, their choices are essentially two. On the one hand, they can destroy their national economies, dilapidate their capital stock, and destroy the living standard of productive working families through criminally stupid austerity programs and budget cuts of the vandalistic type dictated by the monetarist crackpots at the International Monetary Fund, European Commission, World Bank, Bank for International Settlements, and similar institutions. At the end of all this unspeakable torture of austerity, they will find their political institutions destroyed, their internal governability and stability deeply compromise or totally wrecked, and their ability to pay lower than when they started. At the end of all this, they will default anyway, and drift like derelict wrecks on the world ocean. Many of them will fall under dictatorships, or even fascist regimes.

The alternative to this nightmare scenario is to use the time-tested weapon of the unilateral financial debt moratorium as a means of national survival and national sovereignty. (If Republican US President Herbert Hoover could successfully propose an international financial debt moratorium among Germany, France, and Great Britain, and the United States in June 1931 to fight that depression, this approach cannot be regarded as wild radicalism.) This freeze on all payments of interest and principal on international financial debt must be conducted in an orderly, legal fashion, fully explained to the population and presented as an integral part of a strategy for national economic recovery. Plans should be made in advance for suppressing financial speculation, while mobilizing domestic economic resources for the most ambitious projects of national public infrastructure as a means to radically reduce unemployment and poverty. Raw materials must be secured in advance through barter deals and other ad hoc arrangements with the relevant countries, and these transactions must necessarily occur outside of the straitjacket of IMF and World Trade Organization rules.

Countries using the weapon of debt moratorium should normally be able to reduce their foreign debt exposure by about one half. If they play their cards correctly, they can do even better for their people.

Every country needs to identify at least one area in which it can produce the most advanced high technology capital goods for export, and strive to become the world leader in that department. This production must be capital-intensive, energy intensive, and high value added, and it must target the world export market. The goal is to produce something which the world will find simply indispensable, independent of whatever protectionist measures may or may not be enacted elsewhere. This effort can be used as a science driver along with other science drivers to restart scientific discovery and technological research and development throughout the entire national economy. This is the kind of strategy which the leaders of the southern tier nations of the euro should currently be elaborating.

And they need to act fast. By September, the tide of financial panic which is now engulfing Greece and Iberia will be in the suburbs of Paris and London .

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