Two weeks ago, Goldman Sachs was on the Congressional hot seat, grilled for fraud in its sale of complicated financial products called "synthetic CDOs." Last week the heat was off, as all eyes turned to the attack of the shorts (bets that a stock will decline in value) on Greek sovereign debt and the dire threat of a sovereign Greek default. By Thursday, Goldman's fraud had slipped from the headlines and Congress had been cowed into throwing in the towel on its campaign to break up the too-big-to-fail banks. On Friday, Goldman was in settlement talks with the SEC.
Goldman and Wall Street reign. Congress appears helpless to discipline the big banks, just as the European Central Bank (ECB) appears helpless to prevent the collapse of the European Union.... Or are they?
Suspicious Market Maneuverings
The shorts circled like sharks in the Greek bond market, following a highly suspicious downgrade of Greek debt by Moody's on Monday. Ratings by private ratings agencies, long suspected of being in the pocket of Wall Street, often seem to be timed to cause stocks or bonds to jump or tumble, causing extreme reactions in the market. The Greek downgrade was suspicious and unexpected because the ECB and International Monetary Fund had just pledged 120 billion euros to avoid a debt default in Greece.
Markets were roiled further on Thursday, when the US stock market suddenly lost 999 points, and just as suddenly recovered two-thirds of that loss. It appeared to be such a clear case of tampering that Maria Bartiromo blurted out on "CNBC," "That is ridiculous. This really sounds like market manipulation to me."
Manipulation by whom? Markets can be rigged with computers using high-frequency trading programs (HFT), which now compose 70 percent of market trading; and Goldman Sachs is the undisputed leader in this new gaming technique. Matt Taibbi maintained that Goldman Sachs has been "engineering every market manipulation since the Great Depression." When Goldman does not get its way, it is in a position to throw a tantrum and crash the market.
Goldman was an investment firm until September 2008 when it became a "bank holding company" overnight in order to capitalize on the bank bailout, including borrowing virtually interest free from the Federal Reserve and other banks. In January, when President Obama backed Paul Volcker in his plan to reinstate a form of the Glass-Steagall Act that would separate investment banking from commercial banking, the market collapsed on cue, and the Volcker Rule faded from the headlines.
When Goldman got dragged before Congress and the SEC in April, the Greek crisis arose as a "counterpoint," diverting attention to that growing conflagration. Greece appears to be the sacrificial play in the EU just as Lehman Brothers was in the US, "the hostage the kidnappers shoot to prove they mean business."
The Nuclear Option
It is still possible, however, for the ECB to snatch Greece from the fire and rout the shorts. It can do this with what has been called the nuclear option - "monetizing" the debt of Greece and other debt-laden EU countries by effectively "printing money" (quantitative easing) and buying the debt itself at very low interest rates. This is called the "nuclear option" because it would blow up the hedge funds and electronic sharks operated by Goldman and other Wall Street heavies, which specialize in bringing down corporations and whole countries for strategic and exploitative ends. Will the ECB proceed with this plan? Perhaps, say some experts. It could just be waiting for the German election on Sunday, which the ECB cannot be seen to be influencing.
The US Congress, too, could solve its debt crisis by "monetizing" its debt. It could do this either by issuing dollars directly or by borrowing them from its own central bank. Ideally, Congress would nationalize the Fed first, making it truly an arm of Congress, as it should have been all along; but that would not actually be necessary in order to turn its debt into dollars that are essentially interest free. The Federal Reserve says on its web site that it rebates its profits to Congress after deducting its costs.
What invariably stops countries from this obvious solution to their debt problems is the perceived threat of hyperinflation; but that need not be a concern any time soon, since the world is now in a deflationary crisis, following the collapse of the housing market. The vast majority of the money supply today is created as a debt to private banks; and when debt collapses, the money supply collapses. There is insufficient money to run businesses, pay workers and buy products, so collapse of the economy follows. To say that adding money to the system would lead to hyperinflation in this situation is equivalent to withholding food from a starving patient to prevent him from getting fat.
Price is a function of supply and demand. Adding "demand" (money) without increasing "supply" (goods and services) will drive prices up; but when a country is at less than full employment and the money is added in a way that actually feeds the producing economy, increasing demand will increase productivity, increasing supply. And when supply and demand increase together, prices remain stable.
The only way we will be able to turn the tables on the banks and recapture our sovereignty is to tap into our own sovereign credit engines, with the US government borrowing from its own central bank, US states setting up state-owned banks, and EU countries tapping into the low interest rates offered by the ECB.