Tuesday, July 3, 2012

JP Morgan US 75 Trillions Swaps: Money created on computer screen

Angka-angka menjadi Raja
Manusia jadi hamba
Wang bukan lagi emas
tapi kertas dan nombor
atas komputer dan bank
Riba kufur menghakis iman....

In another bankers’ coup last November, former Goldman Sachs executive Mario Draghi replaced Jean-Claude Trichet as head of the European Central Bank.  The European Stability Mechanism quickly followed.  It was a permanent rescue facility intended to replace certain temporary facilities as soon as the member states had ratified it, slated to occur by July 1, 2012.  The ESM came to an initial vote in January 2012, when it was passed in the dead of night with barely a mention in the press.

The recent modifications were also agreed to in the dead of night, ostensibly because Italy and Spain were afflicted with onerously high interest rates.  But there are other ways to bring down interest rates on sovereign debt besides forcing whole countries into open-ended pacts to bail out private banks for unlimited sums in perpetuity, in the hope that the banks might bail the governments out in return.
The U.S. 2012 budget deficit is significantly worse than either Italy’s or Spain’s, yet somehow the U.S. has managed to keep interest rates on its debt at record lows.  How has it pulled this off?
One theory is that JPMorgan’s $57 trillion in interest rate swaps have something to do with it.  Another explanation, however, is that the Fed has simply stepped in as lender of last resort and bought up any debt not sold at the low rate set by the Treasury, using “quantitative easing” (money created on a computer screen). 

Between December 2008 and June 2011, the Fed bought a whopping $2.3 trillion of U.S. bonds in two rounds of quantitative easing.  Why can’t the European Central Bank do the same thing?  The answer is that there are rules against it, but rules are just arbitrary agreements.  They can be changed by agreement—and often have been, to save the banks.

As the cynic quoted in The Economist article above observed, the bond-buying mechanism for countries under the ESM will be little different from the existing system.  Mario Monti said the plan will support government bond prices only in countries that comply with fiscal targets, and that it will act as an incentive for governments to follow virtuous policies.  That means avoiding deficits, even if it requires further austerity measures and selling of assets.  On the public level, that could mean national treasures like the Acropolis.

 On the private level, The New York Times reported Friday that some desperate out-of-work Europeans were going so far as to sell their kidneys to pay household bills. The shock doctrine, it seems, has come to the doorsteps of privileged Westerners.

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