1983 'Ponzi Game' prediction

I'm reading William Greider's 1989 book 'The Secrets of the Temple - How the Federal Reserve Runs the Country' and came across the following acknowledgement and prediction of and for a global 'ponzi scheme' playing out to an ultimate crisis.

"A genuine solution, [US Federal Reserve governor] Philip Coldwell predicted, would not be acceptable, either to bankers or politicians, until the consequences of the LDC debt reached a sufficiently frightening level of crisis - when the "Ponzi game" broke down and everyone was forced to acknowledge it. Like all illusions, this one might continue for quite a long time, perhaps many years, but it could also collapse abruptly at any time shattered by random events.

"The way out of this thing is a shift in the way we treat the LDC debt," Coldwell argued. "The banks would have to take a big hit on their balance sheets, but then it's over. If you give them a definitive hit, then they could say it's behind us. If you get down to a crisis stage, the banks would accept that. They would have no choice."[1]

Looking at contemporary economic history it seems clear that the beginning of the current global financial crisis can be traced at least as far back to the Johnson administration in the early-mid 1960s. This is when inflation and accompanying inflationary expectations were set in concrete by huge military expenditures on the Vietnam War as well as through what is arguably, an accompanied global oil price hike that was deliberately manipulated to help pay for it.[2][3] It was also the time the evolution to bigness in capitalism made it possible for large firms to: (i)increase their prices as a response to a rise in inflation, (ii)increase their prices in response to a general drop in demand for their services and products, (iii) increase their prices in response to losses caused by speculative activities gone wrong, (iv) generate revenue from activities not linked to employment nor the creation of wealth.

Permanent recession and economic zero sum games played out as astounding levels of economic concentration became commonplace both in the industrialised nations and around the globe.

“Between 1950 and 1971 the 200 leading U.S. corporations increased their control of all U.S. manufacturing assets from 46 to 87 percent. By 1971 the assets of the top 100 equaled those of the other 194,000 corporations. [4]”

The US Federal Reserve - whose key staff are often former corporate CEOs - worked intimately with global transnational corporations (with the latter's origins based in the US).[5] From the mid 1960s to late 1979 the Fed's focus was on hitting its interest rates targets (the price of money) over and above controlling the quantity of money. [6] The resulting inflation foreshortened horizons in thinking and led to increases in debt and increases in long-term interest rates. Creditors received negative returns on loans that were contracted at times when inflation was lower. Corporations began to engage in much deeper levels of exploitation through globalisation where imprudent loans were pushed on third world nations to recycle the massive increase in excess US dollars resulting from the oil shocks of the 1970s.

By 1979 that game was up. By that time negative real interest rates couldn't be sustained. and the US dollar had come under severe speculative attack.

"The dollar-based monetary system was about to collapse. The core of the problem was that for the second time in a year corporations, banks, central banks and other investors (including moneyed Arab interests) had stopped accepting dollars as the universal currency. Instead, there was heavy dollar selling on a global scale and the proceeds were going into gold, silver, deutsche marks, Swiss francs and even art and real estate." [7].

The Carter administration instituted the Money Control Act of 1980, lifting controls of interest rates and making usury legal. The new Fed chairman Paul Volker took advantage of the ability of the US to freely decide the price of the world’s trading and reserve currency and increased global interest rates to levels that were unprecedented. Third World debt [8] had escalated already because of high oil prices and the extraordinary rise in the global interest rate (denominated in US dollars) became essentially unpayable for them.

This is the background to the Ponzi scheme described by Coldwell in 1983. It's ironic that in a time of such overproduction of money that a small minority of creditors took all the power and forced up interest rates across the world, permanently damaging their economies. Nothing much has changed since then. In the early 1980s:

"Volker and his international aides worked assiduously to protect the earnings of the banks, particularly the money-center banks which were most exposed [to third world nation default]. In the negotiations over new loans, Volcker usually supported the bankers in their persistent refusal to make any concessions on interest rates. The Fed also took care to instruct its bank examiners to treat the huge portfolios of questionable LDC loans with special solicitude. If the rules were applied to strictly, major banks might be confronted with huge loan write-offs that would wipe out their capital.

The central bank, as regulator and protector, had worked itself into a compromising position. On the one hand, the Fed was trying to gradually extricate the largest banks from their overexposure and preaching sterner discipline for the future. On the other hand, the Fed was bending the banking standards and pressuring hundreds of other wary bankers to make new loans they regarded as dubious....when the [smaller regional] bankers balked at committing more money to the new loan packages, they were pressured by the major banks. If that didn't work, they received a friendly call from the president of the local Federal Reserve Bank, urging them to reconsider."

In most cases, William Greider takes care to point out, such successful persuasion "implied an unstated guarantee by the government."

This observation leads to yet another powerful phrophecy in Greider's book:

"The problem is that by the time the crisis ends, the regulatory authorities may be so deeply compromised by the concessions that they have made to the banks that there is no return."[9]

As we now see, the gambling in the world's financial markets went on and on and increased. It didn't ever stop because of government intervention. History shows, wrote Michael Moffit, that eventually the game will end. Vast abused freedom on the part of US government administrations - Democrat and Republican alike - and of that of global TNCs have shackled both them and us.

We are all among the losers now.

REFERENCES:
[1] William Greider. 'The Secrets of the Temple - How the Federal Reserve Runs the Country' Touchstone 1989. Page 549

[2] See William Endaghl 'The Fake Oil Crisis of 1973'
http://www.engdahl.oilgeopolitics.net/1973_Oil_Shock/1973_oil_shock.html

[3] The ex-ambassador to Saudi Arabia, James E. Akins… argued [around 1980] that Kissinger acquiesced in the Shah-led oil price hikes beginning in 1974 to provide Iran with the finances to help out ailing Northrup, McDonnell Douglas, General Dynamics, Boeing, Grumman and Litton Industries.
The Multinational Monitor
DECEMBER 1980 - VOLUME 1 - NUMBER 11
I R A N
Business In the Shah's Iran
by John Cavanagh
http://multinationalmonitor.org/hyper/issues/1980/12/cavanagh.html

[4] Quoted from: American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975

[5] In 1975 it was reported that "“A recent survey of 1,029 executives of leading U.S. global corporations, for example, found just 19 foreign citizens.”
American Global Enterprise and Asia
Journal article by Mark Selden; Bulletin of Concerned Asian Scholars, Vol. 7, 1975
http://www.questia.com/

[6] "the Fed [as a monopolist] cannot control both the price of money...and the quantity of money...at the same time."
Maxwell Newton 'The Fed - Inside the Federal Reserve, the Secret Power Center that Controls the American Economy' Times Books, 1983. Page 211

[7] Michael Moffit 'The World's Money' 1983. Page 196

[8] These were syndicated loans originating from the concentrated financial markets of Wall Street.

[9] Karen Lissakers 'Dateline Wall Street: Faustian Finance', Foreign Policy, Summer 1983.