GLOBAL FINANCIAL MARKETS AND YOU
By Joan Veon
May 13, 2010
The week of May 2 – 7, 2010 will go down in history as one of uncertainty and change. When I asked then UN Secretary General Boutros Boutros-Ghali in 1995 what he meant by change, he told me there were several forms of change but what he was talking about was CONSTANT CHANGE. Now that all of the barriers between nation-states have fallen with the exception of the regulatory laws which are about to fall, we will be subjected to constant change as there will be no barriers or borders between countries to prohibit global change and global chaos. Chaos always breeds opportunity to those who create it to take more power, to make money, and to change the world into their image.
In order to have global change you need to have global uncertainty. Last week saw a number of things occurring on an integrated world: the Senate Banking Committee appears to be getting closer to a bi-partisan agreement on regulation; the 1000 point drop in the market; the British elections; and the debt crisis in the European Union led by the debt of Greece.
The Senate Banking Committee has been hammering out a bill which the Democrats would like finish up by the end of this week. The Republicans want to take their time. As I have written before, this bill will open up to the central bank of the United States, the Federal Reserve, via the Treasury Department, all of the financial assets they do not have access to: credit unions, state chartered thrifts, the real estate market, and the insurance industry. Furthermore in a globalized world, you need to have interaction with a global regulatory agency—the Financial Stability Board. The U.S. is already a major player and has been since 1999 when it was the Financial Stability Forum. The May 7 edition of the Financial Times stated,
US senators advocating stricter limits on banks and tougher regulation of markets used yesterday’s volatility to demand more sweeping reforms as the financial Regulatory bill edged towards a vote. Judd Gregg, the Republican senator from New Hampshire predicted that the bill was now certain to pass.
The bottom line is that once America succumbs to a new set of rules, other countries will have to follow—like the European Union for instance. In fact, the weekend edition of the Financial Times hinted that “European leaders committed themselves to a stricter collective effort at fiscal discipline and called for rapid approval of draft laws aimed at tightening financial market regulation.”
Everyone is putting forth their theories for the mysterious drop in the market on May 6 which took one hour for the stock market to have the biggest intraday decline since 1987 and which briefly wiped out $1,000bn. As my friend, Doug Wakefield, pointed out in his newsletter, the New York Stock Exchange has rules for when circuit breakers need to be put in place. Interestingly enough, after 2:30 p.m. there is no halt in trading. Guess what, all this excitement took place after 2:30 p.m. Is this a coincidence? No. Different newspapers and writers have different opinions. One of the headlines from the Financial Times read, “US shares tumble amid fears over debt”, while The Washington Post had headlines, “Chaos on Wall Street”, and the New York Times put it this way, “The Trades of a Lifetime in 20 minutes.” Author Julie Creswell wrote,
Someone on Wall Street just made a killing. That was the subject of so much chatter among professional investors once the smoke cleared from the sudden panic and recovery on Thursday that briefly knocked some stocks down to a penny or two a share. One thing however is certain: By luck, savvy, lightning speed or all three, there was money—gobs of it—to be made from the bargains that came and went in an instant.
The Dow for the week lost 5.7%, the S&P fell 6.4% and the Nasdaq fell 7.5%. The market, we are told, continued to drop on Friday due to uncertainty about all the things that occurred during the week. I personally don’t believe that anything happens on Wall Street or in Washington by happenstance. For those who are naive, perhaps.
In another venue, the British elections ended up in a hung parliament for the first time since 1974. Interestingly enough, Britain is not part of the European Union. Some of the turmoil, however, the London Stock Exchange which is situated in the heart of The City which is a major financial center worldwide, trades the euro. Britain had three major candidates vying to set up a new government. There are those who say their electoral process is antiquated and needs to be overhauled. However, the bottom line is that it is the Queen’s government. Interestingly enough, Britain has no written constitution—so why would they want to join the EU? It is the queen who is head of the state and the Prime Ministers are “her Prime Ministers.” Once Conservative Party leader David Cameron and Liberal Democratic leader Nick Clegg come to some kind of agreement between them which would provide the majority needed in Parliament, the queen will invite Cameron to meet with her and she will give him, depending on how she sees things, the task to form a government or to see if he can form a government. In the end, the queen will determine the outcome if Cameron cannot hold a government together and call in some other party leader to see if they can form a government or call for another election. All of this creates uncertainty and adds to the global picture of uncertainty.
Now we come to the European Union. In 1998, at a Bank for International Settlements meeting in Basle, I asked Jean-Claude Trichet, then central bank minister for the Bank of France about how the EU would change the individual country central banks. He told me that the new European Central Bank-ECB would be like the Federal Reserve, for all of the EU countries. The only duty of the country central banks would be to monitor interest rate policies set by the ECB. Well, in today’s world, that makes the individual countries of the EU more like the individual states of the United States.
As we see the unfolding of the credit crisis in Greece, the various EU member-states and the IMF are preparing a $145B bailout of Greece. Another possibility is direct borrowing by the European Commission, the EU’s executive arm which would be guaranteed by European nations. The IMF gave final approval on Sunday of its three year 30-billion euro portion of the loan package. The truth of the matter, whether it is Greece, Portugal, France, Italy or the United States, we are all operating on a debt-based system perpetrated by the central banks of the world. If you were to picture the debt of the world, think of a small ball, based on the continual borrowing of countries, states, municipalities, and townships, that debt has grown to the size of a basketball. No one is paying down principal; they are only servicing the interest on the debt.
As we consider debt-ridden states here in the United States, is it far-fetched that California or Michigan or Ohio would get a loan from the IMF? No. What is happening in Greece and the EU is setting precedence for the future. Is it possible that the 2008 Credit Crisis in the U.S. will be the 2010 Credit Crisis in Europe? Is it possible that this gives everyone who bought Euros and sold dollars an opportunity to take their gains without looking like they are looting the world? Yes.
When all is said and done, the U.S. Congress will have passed major regulatory laws giving the Federal Reserve greater power and opportunity over the financial assets of America, the queen will ask David Cameron to form a government, and Greece will be in great financial pain. The markets? If the EU finance ministers cannot come to an agreement, there will be great pain in the global markets for all those who believed the world was back to normal. The normal we knew before 2008 is gone. The above is the new normal with central banks controlling the world—and you and me.