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     Jun 7, 2011

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This crisis has an exit
By Ellen Brown

For the bankers, however, it was a good system. It put them in control.

Setting the global debt trap
Professor Carroll Quigley was an insider groomed by the international bankers. He wrote in Tragedy and Hope in 1966:
The powers of financial capitalism had another far reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as a whole.

The apex of the system was to be the Bank for International Settlements [BIS] in Basle, Switzerland, a private bank owned and controlled by the world's central banks which were themselves private corporations. Each central bank... sought to dominate its government by its ability to control Treasury loans…
The debt trap was set in stages. In 1971, the dollar went off the

gold standard internationally. Currencies were unpegged from gold and allowed to "float" in currency markets, competing with other currencies, making them vulnerable to speculation and manipulation.

In 1974, a secret agreement was entered into with the members of the Organization of Petroleum Exporting Countries to sell oil only in dollars. The price of oil was then suddenly quadrupled. Countries lacking oil had to borrow dollars from US banks.

In 1980, interest rates were raised to 20%. At 20% compound interest, debt doubles in under four years. As a result, most of the world became crippled by debt. By 2001, developing nations had repaid the principal originally owed on their debts six times over; but their total debt had quadrupled because of interest payments.

When debtor nations could not pay the banks, the International Monetary Fund stepped in with loans - with strings attached. The debtors had to agree to "austerity measures," including:
  • Cutting social services;
  • Privatizing banks and public utilities;
  • Opening markets to foreign investors;
  • Letting currencies "float".

    Today, austerity measures are being imposed not just in developing countries but in the European Union and on US States.
    The BIS: apex of the private central banking pyramid
    What Professor Quigley foretold about the Bank for International Settlements (BIS) has also come to pass. The BIS now has 55 member nations and heads the global financial pyramid.

    The power of the BIS was seen in 1988, when it raised the capital requirement of its member banks from 6% to 8% in an accord called Basel I. The result was to cripple the Japanese banks, which until then were the world's largest creditors. Japan entered a recession from which it has not yet recovered.

    US banks managed to escape by dodging the capital requirement. They did this by moving loans off their books, bundling them up as "securities", and selling them to investors.

    To persuade the investors to buy them, these mortgage-backed securities were protected against default with "derivatives", which were basically just bets. The "protection seller" collected a premium for agreeing to pay in the event of default. The "protection buyer" bought the premium. Owning the asset was not required. Like gamblers at a horse race, derivative players could bet without owning a horse. Derivatives became a very popular form of gambling. The result was the mother of all bubbles, exceeding US$500 trillion by the end of 2007.

    Because of securitization and derivatives, credit mushroomed. Virtually anyone who walked in the door could get a loan.

    The tipping point came in August 2007, with the collapse of two hedge funds. When the derivatives scheme was exposed, the market for derivative-protected securities suddenly dried up. But the US stock market did not collapse until November 2007, when new accounting rules were imposed. The rules grew out of the Basel II Accords initiated by the BIS in 2004.

    "Mark to market" accounting required banks to value their assets according to market demand that day. Many US banks, like those in Japan in the 1990s, suddenly had insufficient capital to make new loans. The result was a credit crisis from which the US has not yet recovered.

    The BIS has now become global regulator, just as Quigley foresaw. In April 2009, the Group of 20 nations agreed to be regulated by a Financial Stability Board based in the BIS, and to comply with "standards and codes" set by the board. The codes are only guidelines, but countries that fail to comply risk downgrades in their credit ratings, something so costly that the guidelines have effectively become laws.

    An article on the BIS website states that central banks in the Central Bank Governance Network should have as their single or primary objective "to preserve price stability". That means governments should not devalue the national currency by inflating the money supply; and that means not "printing money" or borrowing credit created by their own central banks.

    Like the American colonies after King George took away their power to issue their own money, governments must fund their deficits by borrowing from private banks. The bankers' global control over currency issuance has become virtually complete.

    The effects of this policy are particularly evident in the European Union, where EU rules allow deficits of only 3% of government budgets and prevent member countries from either issuing their own money or borrowing credit advanced by their own central banks. Member nations must borrow instead from the European Central Bank, private international banks, or the IMF. The result has been forced austerity measures, as seen in Greece and Ireland. The system is so unsustainable that commentators are predicting that the EU may break up.

    The way out: return the money power to public control
    To escape the debt trap of the global bankers, the power to create the national money supply needs to be restored to national governments. Alternatives include:
  • Legal tender issued directly by national treasuries and spent on national budgets;
  • Publicly owned central banks empowered to advance the nation's credit and lend it to the government interest-free;
  • Nationalization of bankrupt banks considered "too big to fail". These banks could then issue credit to the public and serve the public's banking needs, with the profits recycling back to the government, defraying the tax burden on the people;
  • Publicly owned local banks (state, provincial, or municipal).

    Publicly owned banks have been successfully established and operated in many countries, including Australia, New Zealand, Canada, Germany, Switzerland, India, China, Japan, Korea, and Malaysia. In the United States there is currently only one state-owned bank, the Bank of North Dakota.

    The model, however, has proven to be highly successful. North Dakota is the only US state to have escaped the credit crisis unscathed. In 2009, while other states floundered, North Dakota had its largest budget surplus ever. In 2008, the Bank of North Dakota (BND) had a return on equity of 25%. North Dakota has the lowest unemployment rate in the country and the lowest default rate on loans. It also has the most local banks per capita.

    North Dakota has had its own bank since 1919, when farmers were losing their farms to the Wall Street bankers. They organized, won an election, and passed legislation. The state is required by law to deposit all its revenues in the BND. As with the sustainable model of the bank of colonial Pennsylvania, interest and profits are returned to the government and to the local economy.

    A growing movement is afoot in the United States to copy this public banking model in other states. Fourteen US state legislatures have now initiated bills for state-owned banks.

    The model could also be replicated in other countries. In Ireland, for example, where the major banks are insolvent and are already nationalized or soon will be, the government could deposit its revenues in its own publicly owned banks, add sufficient capital to meet capital requirements, and leverage these funds to create interest-free credit for its own local needs.

    That is exactly what Alexander Hamilton did when faced with government debts that were impossible to repay: he put the government's existing funds in a bank, then borrowed the money back several times over, employing the accepted "fractional reserve" model.

    Japan's solution is also a variant of what Alexander Hamilton proposed two centuries earlier. Japan retains its status as the third-largest economy in the world although it has a debt to gross domestic product (GDP) ratio of 226%. Japan has "monetized" the national debt, turning it into the national money supply. The government-owned Bank of Japan holds Japanese government debt equal to 100% of the nation's GDP; and because the government owns the bank, this loan is interest-free and can be rolled over indefinitely. An interest-free loan rolled over indefinitely is the equivalent of issuing money.

    Ellen Brown is an attorney and president of the Public Banking Institute, http://PublicBankingInstitute.org. In Web of Debt, her latest of eleven books, she shows how a private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://webofdebt.com and http://ellenbrown.com. (Copyright Ellen Brown 2011)

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