INTRODUCTION – Here in America, we have our own share of self-proclaimed experts, particularly those politicians who pose as all-knowing authorities. They constantly lecture us on how they are doing everything in their power to cushion the blow of daily crises, repeatedly offering the same explanations every single time reality inevitably shatters their "expert" forecasts. Do we just sit here and swallow it? This cycle is likely to persist for quite some time, so it would be wise to learn from the parallel circumstances emerging from the world's most arrogant "experts"—because the wind blowing from their direction is what is currently filling the sails of our leaders:
The Failed Trick of Saving the Pillar Enters a Desperate New Phase
John Doe
The following article will appear in the next issue of Foreign Affairs, dated January 23, 2009.
January 18, 2009 (DNC)—Today’s sudden rescue attempt for Bank of America, coupled with renewed discussions about the necessity of purchasing hundreds of billions of dollars in toxic financial assets from other institutions, suggests that this bailout process has spiraled into a dangerous and desperate new stage. If you look past the official empty rhetoric, it becomes clear that the bailout isn't just failing Bank of America—it reveals that the entire American banking system is fundamentally illiquid, despite the trillions of dollars our government has essentially tossed into a bottomless pit.
This underscores a growing sentiment surfacing in Washington, D.C., New York City, and within the corridors of the OECD: the idea that this "toxic waste"—the term used for these tainted financial papers—must be purged from bank balance sheets so the global economy can finally begin its return to normalcy. The rescuers argue that once we strip these banks of all that filthy, bad debt, the system will naturally recover.
This approach is strikingly similar to the behavior of an addict who knows deep down they need to quit, yet lacks the courage to actually do it. They tell themselves, "Just one more fix," or "Let me just get through this one moment to stabilize, and then I'll stop." But they never stop, not until it kills them. We have reached a point where these money addicts simply cannot be restrained, and therefore, smarter minds must step in. It is time to stop feeding these addictive habits and instead force their system into bankruptcy before it takes us all down with it.
The Fall of Bank of America
Bank of America was once considered one of the great success stories in American banking, climbing from a modest local outfit in Charlotte, NC, to become one of the largest financial giants on the planet. Along the way, it swallowed up banks across the South and in Texas, evolving from NationsBank into its current form through various mergers, including the acquisition of the San Francisco-based entity that eventually became part of the Bank of America we know today. In January 2008, it finalized a deal to acquire Countrywide Financial, a mortgage lender that had run into serious trouble, for $4 billion after already injecting $2 billion into the firm back in August 2007. That move to take over Countrywide wasn't just a standard business decision; it was a government-backed maneuver designed specifically to prevent Countrywide from collapsing entirely. They hoped that saving Countrywide would contain the damage, but they were wrong. Then, in September 2008—during the same chaotic week that Lehman Brothers collapsed and AIG cratered—Bank of America was called upon once again, this time to pick up the pieces of Merrill Lynch. Blinded by sheer ambition and a total lack of common sense, Bank of America signed the deal. As the old saying goes, it was a bridge too far.
While Countrywide and Merrill Lynch were undoubtedly the primary drivers behind Bank of America's downfall, the bank's attempts to absorb those institutions were merely the final stumbling blocks. Growing like a weed during times of general prosperity, the bank expanded aggressively and left itself completely unprepared for a downturn. The deals for Countrywide and Merrill Lynch were just as much attempts to save Bank of America as they were attempts to save the companies being bought. All of them were weak, and that weakness is now being laid bare. The notion that Merrill Lynch is solely responsible for Bank of America's failure is nothing more than a convenient cloak designed to hide the ugly truth about the American banking system: the fact that both the system itself and the banks within it are fundamentally illiquid. Where Citigroup went in November, Bank of America is headed today, and there is no doubt that JPMorgan Chase and Wells Fargo will follow closely behind.
'Bad' Banks
The attempts to forestall this looming financial meltdown are playing out through high-level discussions echoing across the globe. During a speech delivered at the London School of Economics on January 13th, Ben Bernanke, the Chairman of the Fed, articulated a vision wherein the U.S. Treasury might purge all toxic assets from the balance sheets of financial institutions—whether through direct purchases, asset guarantees, or by establishing what some call "bad banks." Treasury Secretary Henry Paulson has echoed these sentiments quite closely.
Bernanke traveled to New York City to confer with his international banking counterparts and to meet with the British Prime Minister. Much like the United States, which has already funneled hundreds of billions into its banking infrastructure, the UK is now contemplating the creation of its own specialized "toxic asset bank" to absorb tens of billions in distressed holdings.
This exact dilemma has reverberated through the OECD, which released a report on January 12th emphasizing that the removal of toxic waste from the banking sector is an absolute prerequisite for any meaningful recovery. The OECD, headquartered in Paris, represents thirty member nations, including the United States, Canada, and Australia.
While the OECD is undoubtedly correct about the necessity of purging this toxic sludge, the real debate lies in the execution. Essentially, we are faced with two distinct paths: either governments step in to buy up this poisonous debt and hope for the best, or the entire system undergoes a structured reorganization where these losses are formally written off. The first option is pure fantasy; it simply cannot work because if the government buys these papers, they aren't disappearing—they are merely migrating from bank ledgers to taxpayer balance sheets, effectively driving sovereign states toward insolvency. The second path, a process of orderly bankruptcy and restructuring advocated by Lyndon LaRouche, begins with the honest admission that most of these assets are worthless and must be written down in a way that protects ordinary citizens and the essential pillars of the banking system.
In his remarks in New York City, Bernanke appeared somewhat hysterical despite his attempts at restraint, alternating between praising the measures taken thus far and admitting that the situation continues to deteriorate. He detailed the Fed's series of interest rate cuts and described a growing catalog of lending programs orchestrated by the Fed, the Treasury, and the FDIC, going so far as to claim that these actions "very likely prevented a global financial meltdown this past autumn."
Despite this supposed success and the trillions of dollars already deployed, Bernanke conceded that "further infusions of capital and guarantees may become necessary to ensure stability and the normalization of credit markets," specifically mentioning the possibility of bad banks.
Bernanke’s commentary was anything but reassuring. Every single step he has taken has failed to address the root cause, yet he persists in repeating the same failed patterns on an even larger scale. For someone branded as a leading expert on the Great Depression, this performance is hardly inspiring. Then again, what else could one expect from a student of Milton Friedman? It seems economics isn't exactly the strong suit of the vaunted Chicago School.
There is no turning back
The sheer hopelessness of the current administration's position was captured by the Group of Thirty, a "brain trust" composed of eminent former central bankers, regulators, and academics. The G-30 recently released a study, developed under the auspices of former Fed Chairman Paul Volcker, which proposes a suite of regulatory reforms designed to instill accountability and curb the excesses that defined the recent era. While some of these recommendations move in a constructive direction, the plan suffers from a fundamental flaw: it assumes that a simple return to the status quo—to the world before bankers lost their minds—is both possible and sufficient, when in reality, neither is remotely feasible.
The significance of this G-30 report can be summarized as attempting to re-bolt the stable door after the horse has already died. The financial system has already perished, and no amount of fine-tuning regulation can breathe life back into it. We have reached a point where it is no longer possible to simply shuffle the chaos around within the system.
It is absolutely essential, just as LaRouche has consistently and relentlessly argued, that we force the entire global financial architecture—that Anglo-Dutch liberal central banking and monetary apparatus—into a state of total bankruptcy. The global market for financial derivatives, which represents a staggering number of trillions of dollars in claims and paper assets, simply must be frozen in place until there is a clear, organized plan for when they will finally be called to account. You cannot patch up or repair the current system; it is fundamentally broken and must be replaced entirely.
