Collusion_How Central Bankers Rigged the World Page 40

  —Greg Palast, author of The Best Democracy Money Can Buy

  “[An] unflinching, troubling exposé… well worth a close read by anyone looking to understand the roots of the last crash and prepare for the next.”

  —Publishers Weekly

  “A somber, important warning that’s likely to cause readers to wonder about the safety of their assets, if not fear for the near-term future.”

  —Kirkus Reviews

  GLOSSARY

  Asset: A resource (physical or financial) that represents economic value over which a government, private company, or individual has control of buying or selling.

  Asset bubble: When the price of assets rises above valuations that are justified; asset bubbles usually portend an unexpected drop in price—they are a system ripe for a “pop.”

  Bailout: The general definition of a bailout is a rescue from financial distress, however in the context of post-financial crisis and elite-power maneuvers, there were often strings attached to bailouts so that countries receiving them weren’t able to direct those funds to promote public well-being or real economic growth, but rather had to divert them to banks, creditors, or international speculators.

  Benchmark interest rate: The interest rate upon which a security or interest rate swap is based, normally set by central banks.

  Bonds: A type of investment that represents a loan in which an investor loans money to a corporation or a government for a certain period of time in exchange for an agreed-on interest rate. Usually, the entity that issues (offers for sale) the bond as a way to borrow money is so large that it must borrow from multiple investors, so a bond is really a piece of a large loan.

  Bretton Woods Agreement: The agreement among delegates from forty-four countries that established the prevailing monetary and exchange rate system in 1944 in Bretton Woods, New Hampshire, in which currencies were pegged to the price of gold, and the US dollar was designated the major reserve currency linked to the price of gold.

  Capital: Assets or representations of the values of assets that operate in a financial system and that are often used for generating wealth through investment or short-term speculative bets.

  Capital markets: Part of a financial system that deals with raising money through equity (stock), bonds, or other types of long-term investment methods, and where buyers and sellers engage in trading those securities.

  Central bank: A government-based monetary authority authorized to set monetary policy for, distribute money to, and offer credit to financial institutions. Central banks are responsible for regulating domestic banking and financial institutions.

  Credit: An agreement, often made using legal tender, that allows a borrower to receive money or something of value that they will later repay to the lender, typically with interest; sometimes borrowers are required to offer some sort of collateral in exchange for credit.

  Credit risk: The risk that a borrower may not meet the repayment obligations of a loan that a lender faces, which would cause the lender to experience loss of principal or interest.

  Equity: Stock or any other security representing an ownership interest in a company.

  Exchange rates (foreign currency rates): The price of one national currency in comparison to another currency; the exchange rate can be affected by monetary policy, trade, or speculative activity.

  G3: For the purposes of this book, the Group of 3 consists of the United States, the European Union, and Japan.

  G7: The Group of 7 consists of Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

  G20: The Group of 20, established in 1999, consists of the governments and central bank governors representing the twenty major economies: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, United Kingdom, United States, and the European Union.

  GDP: The measure of the market value of final goods and services produced by a country during a specified period, usually quarterly or annually.

  Interest rate: The amount a borrower is charged by a lender to use an asset (to borrow it), payable at predetermined intervals.

  Interest rate swap: An agreement between two counterparties to exchange one stream of interest payments for another, over a certain period of time.

  Liquidity: The ability of financial market participants to buy and sell financial securities quickly and with the least amount of cost involved.

  Monetary intervention: The influence government agencies or central banks have over the natural monetary cycle, supply and demand, or the cost of money (rates) in a financial system.

  Monetary policy: The authority afforded a central bank, currency board, or other regulatory body to set the size and rate of growth of the national money supply by calibrating the level of interest rates, inflation rates, and other targets.

  Monetary system: A system of finance that combines central bank policy, private financial institutions, and government-based regulatory systems that influence the way money flows.

  NIRP: Negative interest rate policy; a policy tool used by central banks whereby private institutions pay central banks to hold their money, or, in other words, central banks charge depositors interest to keep the deposited money in holding. The opposite of paying interest.

  Options: In their most basic form, options are a form of derivative security, because their price depends on or is linked to the price of something else. Basic options trade on exchanges; ones that are composites of others and more complex can trade just between two counterparties.

  Private corporate debt: Debt that nonfinancial companies incur; nonfinancial companies are in business making market goods or providing services that are not related to finance.

  Private equity: Equity capital not bought or sold on a public exchange mechanism.

  Public debt: The amount of money that a country’s government owes its lenders or other nations or investors that buy its bonds. It is also called national debt.

  Quantitative easing: An unconventional monetary policy in which a central bank purchases government bonds or other securities from the market to lower rates and increase money supply.

  Reserve currency: Currency maintained by a central bank or financial institution that is used for paying off debt obligations or influencing domestic exchange rates.

  SDR basket: The special drawing rights basket; an international reserve asset created by the International Monetary Fund (IMF) within the Bretton Woods fixed exchange rate system that is composed of weighted currency units from the United States, United Kingdom, European Union, Japan, and China.

  Securities: Financial means (or instruments) that represent ownership of shares in stocks, bonds, or other forms of rights (options).

  Speculation: Betting on the future value of a market, asset, item, or event.

  ZIRP: Zero interest rate policy; a policy undertaken by central banks to keep the base rate at zero percent, theoretically in the hopes of stimulating an economy, but in practice with great benefits to private financial institutions.

  NOTES

  AUTHOR’S NOTE

  1. The London Interbank Offered Rate.

  2. “About: Carter Glass,” US Department of the Treasury, www.treasury.gov/about/history/pages/cglass.aspx.

  INTRODUCTION

  1. Dion Rabouin, “Total Global Debt Tops 325 pct of GDP as Government Debt Jumps: IIF,” Reuters, January 4, 2017, www.reuters.com/article/us-global-debt-iif-idUSKBN14O1PQ.

  2. Edward Yardeni and Mali Quintana, Global Economic Briefing: Central Bank Balance Sheets (Yardeni Research, Inc., August 25, 2017), www.yardeni.com/pub/peacockfedecbassets.pdf.

  3. Liquidity in finance refers to the instant availability of capital, whether in the form of cash, securities, or reserves to be used for buying or selling in the market.

  4. “About the Fed,” Board of Governors of the Federal Reserve System, www.federal reserve.gov/aboutthefed/mission.htm.

  5. �
��Historical Debt Outstanding—Annual 2000–2015,” TreasuryDirect, www.treasurydirect.gov/govt/reports/pd/histdebt/histdebt_histo5.htm.

  6. Angela Monaghan, “Income Inequality Still at Record Levels, Says OECD,” Guardian (Manchester), November 24, 2016, www.theguardian.com/business/2016/nov/24/income-inequality-oecd-financial-crisis.

  7. Jaime Caruana, “Stepping Out of the Shadow of the Crisis: Three Transitions for the World Economy” (speech, Bank for International Settlements Annual General Meeting, Basel, Switzerland, June 29, 2014), www.bis.org/speeches/sp140629.pdf.

  8. Robert N. McCauley, Patrick McGuire, and Vladyslav Sushko, “Global Dollar Credit: Links to US Monetary Policy and Leverage” (BIS Working Papers No. 483, Bank for International Settlements, Basel, Switzerland, January 2015), www.bis.org/publ/work483.pdf.

  9. Binyamin Appelbaum, “I.M.F. Urges Fed to Delay Raising Interest Rates,” New York Times, June 4, 2015, www.nytimes.com/2015/06/05/business/economy/imf-recommends-fed-delay-raising-interest-rates.html?mcubz=2.

  10. At first a Goldman Sachs–conceived term connoting fast-growing developing countries Brazil, Russia, India, China, and South Africa; in the wake of the artisanal money era, the BRICS nations would form long-lasting economic, infrastructure-development, and diplomatic ties as well.

  11. Oliver Stuenkel, “Why Brazil Shouldn’t Turn Its Back on the BRICS,” Americas Quarterly, June 28, 2016, www.americasquarterly.org/content/why-brazil-shouldnt-turn-its-back-brics.

  12. Renminbi is the official name of the Chinese currency, or “the people’s currency,” as translated from Mandarin. Yuan are units of renminbi.

  13. Alessandro Speciale, “ECB Post-Summer Boost to Bond Purchases Slows Near Month End,” Bloomberg, October 5, 2015, www.bloomberg.com/news/articles/2015-10-05/ecb-bought-63-billion-euros-of-debt-under-qe-in-september.

  14. The European Commission (EC), the European Central Bank (ECB), and the International Monetary Fund (IMF).

  15. “Fed’s Yellen Expects No New Financial Crisis in ‘Our Lifetimes,’” Reuters, June 27, 2017, www.reuters.com/article/us-usa-fed-yellen-idUSKBN19I2I5.

  16. Ben S. Bernanke, “The Subprime Mortgage Market” (speech, Federal Reserve Bank of Chicago’s 43rd Annual Conference on Bank Structure and Competition, Chicago, IL, May 17, 2007), www.federalreserve.gov/newsevents/speech/bernanke20070517a.htm.

  17. Richard Dobbs, Susan Lund, Jonathan Woetzel, and Mina Mutafchieva, “Debt and (Not Much) Deleveraging,” (report, McKinsey Global Institute, February 2015), www.mckinsey.com/global-themes/employment-and-growth/debt-and-not-much-deleveraging.

  CHAPTER 1: MEXICO: THERE’S NO WALL AGAINST US FINANCIAL CRISES

  1. “Mexico: GDP (Current US$): 2002–2009,” World Bank, accessed September 6, 2017, http://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2009&locations=MX&start=2002.

  2. Anthony DePalma, “Dogged Doctor for Mexico’s Morass,” New York Times, December 31, 1994, www.nytimes.com/1994/12/31/business/dogged-doctor-for-mexico-s-morass.html.

  3. “Current Member Biography, ‘Guillermo Ortiz,’” Group of Thirty, accessed September 6, 2017, http://group30.org/members/bio_current/ortiz.

  4. “Personalidades: Guillermo Ortiz Martínez, gobernador de Banxico,” Es Mas, accessed September 6, 2017, http://web.archive.org/web/20120716192333/www.esmas.com/noticierostelevisa/biografias/406198.html.

  5. The Bank of Mexico is the Central Bank of Mexico, also referred to as “BANXICO.”

  6. World Economic Forum, www3.weforum.org/docs/WEF_AM08_Report.pdf. (This section of the website is unavailable.)

  7. Thomas Atkins and Mike Dolan, “Bank Rules under Fire After Losses and Scandal,” Reuters, January 26, 2008, www.reuters.com/article/us-davos-baselii-idUSL26686102 20080126.

  8. Nomi Prins, It Takes a Pillage (Hoboken, NJ: Wiley, 2009).

  9. Then at CNBC.

  10. “Mexico’s Ortiz Sees Risk in Overregulating,” Davos Live (blog), Wall Street Journal, January 26, 2008, http://blogs.wsj.com/davos/2008/01/26/mexicos-ortiz-sees-risk-in-overregulating/.

  11. Ibid.

  12. Lisa J. Adams, “Seeing US Slowdown, Mexico Cuts Growth,” USA Today, January 30, 2008, http://usatoday30.usatoday.com/money/economy/2008-01-30-1083465555_x.htm.

  13. “Banco de México Governor Ortiz Joins Dallas Fed’s Globalization Institute Advisory Board” (press release), Federal Reserve Bank of Dallas, February 14, 2008, https://www.dallasfed.org/news/releases/2008/nr080214.aspx.

  14. Brian Naylor, “Bush’s Final Budget Proposal: $3.1 Trillion,” NPR, February 4, 2008, www.npr.org/templates/story/story.php?storyId=18672648.

  15. “Bush Says US Spending Plans Will Help Mexico,” Reuters, February 5, 2008, www.reuters.com/article/bush-mexico-idUSN0521809020080205.

  16. In 2008 dollars.

  17. Mary Swire, “Mexican Government Unveils USD5.6bn Stimulus Package,” Tax-News, March 5, 2008, https://www.tax-news.com/news/Mexican_Government_Unveils_USD56bn_Stimulus_Package_____30193.html.

  18. “FOMC Statement” (press release), Board of Governors of the Federal Reserve System, March 18, 2008, www.federalreserve.gov/newsevents/press/monetary/20080318a.htm.

  19. Frank Newport, “Bush Job Approval at 28%, Lowest of His Administration,” Gallup, April 11, 2008, www.gallup.com/poll/106426/bush-job-approval-28-lowest-administration.aspx.

  20. George W. Bush, “The President’s News Conference with President Felipe de Jesus Calderon Hinojosa of Mexico and Prime Minister Stephen Harper of Canada in New Orleans,” American Presidency Project, April 22, 2008, www.presidency.ucsb.edu/ws/?pid=77159.

  21. “Bush Praises Nafta Treaty,” CNBC Times Video, April 22, 2008, www.nytimes.com/video/business/1194817111807/bush-praises-nafta-treaty.html.

  22. Bush, “The President’s News Conference with President Felipe de Jesus Calderon Hinojosa of Mexico and Prime Minister Stephen Harper of Canada in New Orleans.”

  23. According to the World Economic Forum (WEF) as of May 2015.

  24. Marla Dickerson, “Rising Costs Push Mexico to Hike Rates,” Los Angeles Times, June 21, 2008, http://articles.latimes.com/2008/jun/21/business/fi-mexinflation21.

  25. Annual Report Summary: 2007 (Mexico City: Banco de Mexico, April 2008), www.banxico.org.mx/publicaciones-y-discursos/publicaciones/informes-periodicos/anual/%7B7E9262F3-949C-D1DC-FFA3-88CEAC8794FC%7D.pdf.

  26. Noel Randewic, “Mexico’s Ortiz, Anti-Inflation Warrior, to Leave Cenbank,” Reuters, December 9, 2008, www.reuters.com/article/mexico-ortiz-idUSN0916903420091209.

  27. “Exhibit 1: Recent Developments” (supplement to Mexico’s annual report on Form 18-K for the fiscal year ended December 31, 2007), www.sec.gov/Archives/edgar/data/101368/000090342308001047/ums-18ka1ex1_1218.htm.

  28. “Peso Power: Mexican Currency Nears Six-Year High vs. Dollar,” Money & Company (blog), Los Angeles Times, July 23, 2008, http://latimesblogs.latimes.com/money_co/2008/07/its-good-to-be.html.

  29. “Federal Funds Data,” Federal Reserve Bank of New York, accessed October 8, 2017, https://apps.newyorkfed.org/markets/autorates/fed funds/.

  30. Calderón (a member of the Partido Acción Nacional, or PAN) was elected president of Mexico in December 2006 (and served until November 2012). He enjoyed a close alliance with Bush, who cemented his appreciation for the Mexican president after exiting the Oval Office in a portrait featured in his Texas exhibit.

  31. Jo Tuckman, “Mexico Freezes Food Prices in Response to Global Crisis,” Guardian (Manchester), June 19, 2008, www.theguardian.com/world/2008/jun/20/mexico.food.

  32. Santiago García-Verdú and Miguel Zerecero, “On Central Bank Interventions in the Mexican Peso/Dollar Foreign Exchange Market” (Banco de México Working Papers No. 2014-19, Banco de México, Mexico City, August 2014), www.banxico.org.mx/publicaciones-y-discursos/publicaciones/documentos-de-investigacion/banxico/%7BE6A86055-2BD4-E061-EAF9-6B5A162B0BC1%7D.pdf.

  33. Heidi N. Moore, “Bank of America–Merrill Lynch: A $50 Billion Deal from Hell,” Deal Journal (blog), Wall Street Jo
urnal, January 22, 2009, http://blogs.wsj.com/deals/2009/01/22/bank-of-america-merrill-lynch-a-50-billion-deal-from-hell/.

  34. Ben S. Bernanke, “Current Economic and Financial Conditions” (speech, National Association for Business Economics 50th Annual Meeting, Washington, DC, October 7, 2008), www.federalreserve.gov/newsevents/speech/bernanke20081007a.htm.

  35. David Luhnow, “Mexican Crisis Holds Lessons for US,” Wall Street Journal, October 13, 2008, www.wsj.com/articles/SB122385649246427253.

  36. Erwan Quintin and Edward Skelton, “How Much Will the Global Financial Storm Hurt Mexico?” Southwest Economy (Federal Reserve Bank of Dallas), November–December 2008, 10–13, www.dallasfed.org/assets/documents/research/swe/2008/swe0806c.pdf.

  37. “Bad Bets,” Economist, October 16, 2008, www.economist.com/node/12432297.

  38. Marla Dickerson, “Sell-Off Drives Mexican Peso Above 13-per-Dollar Mark,” Money & Company (blog), Los Angeles Times, October 9, 2008, http://latimesblogs.latimes.com/money_co/2008/10/so-much-for-the.html.

  39. “World Markets Return to Selloff,” CNN, October 8, 2008, http://money.cnn.com/2008/10/08/news/international/world_crisis/index.htm?postversion=2008100814.

  40. Composed of Mexico’s Ministry of Finance and Banco de México members.

  41. Agustín G. Carstens and Alejandro M. Werner, “Mexico’s Monetary Policy Framework under a Floating Exchange Rate Regime” (Documento de Investigación No. 9905, Banco de México, Mexico City, May 1999), 40, www.imf.org/external/pubs/ft/seminar/2000/targets/carstens.pdf.

  42. Report to Congress on International Economic and Exchange Rate Policies (Washington, DC: US Department of the Treasury, December 10, 2008), www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/FX%20REPORT%20--%20Final%20December%202008.pdf.