The hierarchy of death: Boston's bombings shock us more than the silent drone war in Pakistan.

 But should they?

By Allan Massie History Last updated: April 24th, 2013

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A drone flies above the mountains of Pakistan. (Photo: Reuters)

The author and journalist Owen Jones, a columnist for The Independent, is probably not many Telegraph readers’ cup of tea. He is an old-style socialist (though a young man) and I don’t suppose I find myself agreeing with more than 10 or at most 20 per cent of what he writes. But I read him regularly, because he writes well and makes intelligent, and often disturbing, points. He is one of these valuable, even necessary, journalists who makes you stop and examine your prejudices – though I quite often wish he would examine his own ones.

He had an article this week which will have raised a few hackles. He talked about “the hierarchy of death” – not his own phrase; he attributed it to Roy Greenslade, a former editor of The Daily Mirror – and asked: “Why is the slaughter in Boston more shocking or newsworthy than the deaths in Iraq?” As it happens, I had made the same point in a column I write for The Scotsman. The weekend of the Boston carnage, there was a string of car bombings across Iraq, as the country prepared for local elections. At least 32 people were killed, 15 of them in Baghdad. The death toll in Baghdad was therefore much higher than in Boston. But Boston horrified us, and news and speculation filled our TV screens, while I would guess that most of us greeted the news of the deaths in Iraq with something like indifference, if indeed we noticed it at all.

Owen Jones didn’t in any way seek to minimise or play down the horror of Boston. He admitted too that we are affected by “cultural proximity”. Americans are like us. We speak the same language, have much in common with them. We feel close to them as we don’t feel close to Iraqis. Moreover, we have come to expect that there will be bombings in Baghdad, while the idea of an event like the Boston Marathon being targeted by bombers is shocking.

All this is true. It is more natural for us to be more moved to tears or anger by what happened in Boston, just as it is more natural to mourn the death of a friend than the death of a stranger; and yet that phrase, “a hierarchy of death”, is disturbing. It is disturbing because it hits home, When a child is killed in Baghdad, the bereaved parents grieve just as bereaved parents do in Boston. Shakespeare understood this, when he gave Shylock these words to speak: “Hath not a Jew eyes? Hath not a Jew hands, organs, dimensions, senses, affections, passions? Fed with the same food, hurt with the same weapons, subject to the same diseases, healed by the same means, warmed and cooled by the same summer and winter, as a Christian? If you prick us, do we not bleed? If you tickle us, do we not laugh? If you poison us, do we not die? And if you wrong us, shall we not revenge?”

Revenge: there is another relevant, and equally disturbing, point to be made about the Boston atrocity. The USA has for years been engaged in a war against the Islamists. As in most wars, it doesn’t matter who started it; each side blames the other, and each seeks to revenge attacks made on it. The war began before 9/11, and has been pursued vigorously ever since. Recently the favoured American means of attack has been by pilotless drones. These are targeted at known or suspected terrorists, especially their leaders, but there are other victims too. It is estimated that between 1,900 and 3,500 people have been killed by drones in Waziristan, one of the tribal provinces of Pakistan. Some of the dead – no one knows how many – were civilians, among them women and children. There should be no surprise if deluded but devout young Islamists strike back. It would be wrong and wicked to say that America was asking for something like the Boston bombing to happen, but, if you are engaged in a war, you must expect that there will be casualties on your side, and some of these will be civilians – and women and children. Drone warfare has, it seems, become less discriminating. According to an ex-CIA man, Richard Blee, “In the early days, for our consciences, we wanted to know who we were killing before anyone pulled the trigger. Now we are lighting these people up all over the place. If we are going to hand down death sentences, there ought to be some accountability.” But is there?

It’s common to describe terrorist bombings as “cowardly”. I think President Obama used the word with regard to Boston. But if these deluded brothers, one now dead, the other wounded and facing a life in prison, possibly even a death sentence, were cowardly, what word would you use to describe the act of killing people thousands of miles away by projectiles directed by someone sitting in front of a screen safe in Middle America? A bomber pilot risks death; the director of a drone doesn’t. But he kills just the same.

The EU-India Free Trade Agreement: India up “For Sale” to Western Corporate Capital

Giving the Thieves the Key to Your Home

By Colin Todhunter

Global Research, April 20, 2013

 

Do you know that there is a country up for sale? Do you know that its finance, agriculture and retail sectors are being put ‘on the market’? Perhaps you are already aware of this due to various media reports. But then again, maybe you are not because it’s all being carried out behind closed doors in Brussels. The EU-India Free Trade Agreement (FTA), something that could fundamentally restructure Indian society and impact the lives of hundreds of millions, is being negotiated ‘on the behalf of the public’ by politicians on both sides who are champions of the type of economic liberalisation that has already been responsible for bankrupting many Western economies.

Negotiations began in 2007, covering a wide range of areas, including various goods, products and services, as well as investment rules, government procurement; and intellectual property rights. After 16 rounds of talks, the issues are still being fine tuned. ‘Developed’ countries are resorting more and more to these types of bilateral trade agreements with individual developing countries because they want to continue to push their free trade agenda that was rejected by developing countries at the World Trade Organisation.

The EU-India FTA essentially represents the demands of big business in the West and results from their strategic hegemony over government bureaucracies and politicians. With Western economies in crisis, India represents potential ripe pickings for transnational corporations’ never ending compulsion for profit.

Kavaljit Singh of the Madhyam research institute notes that the EU wants to export its heavily subsidised dairy products to India (1). The Indian government has encouraged the co-operative model in the dairy sector with active policy protection. It therefore makes little sense that dairy trade will be opened up to unfair competition from subsidised European exports under the FTA. According to RS Sodhi, managing director of the country’s largest milk cooperative, Gujarat Co-operative Milk Marketing Federation, the FTA will rob the vibrant domestic dairy industry and the millions of farmers that are connected to it from their rightful access to a growing market within India.

The EU has an overproduction problem in the dairy sector and is looking to dump its surplus. By dumping products in other countries, producer prices and incomes there become depressed. India’s dairy sector is mostly self sufficient and employs about 90 million people, a majority of whom are 75 million women. The sector is a lifeline for small and marginal farmers, landless poor and a significant source of income for millions of families.

Although the Indian government is saying that the dairy sector will be protected, the EU is lobbying hard to open up the sector. S Kannaiyan of the South Indian Coordination Committee of Farmers movements wonders if the government can be trusted. It’s a fair point, given its obsession with foreign investment and neo-liberalism.

In general, profits for EU companies could be huge if they can dump their products in India and permanently displace local farmers and producers. In the name of ‘free trade’, the EU wants India to cut import duties, but will not alter its own massive subsidies to its agribusiness and farm sector, which means that Indian farmers will not be able to compete with EU agribusiness. Yudhvir Singh of the Bhartiya Kisan Union (BKU) says that free trade is supposed to be trade between equals, but such free trade pacts are on a completely unequal footing.

The FTA also seeks better protection for European biotechnology companies in the form of stronger intellectual property rights. On its blog, the BKU notes that this will allow European biotech firms to sell their seeds in India at any price they wish, get royalties from Indian farmers and deprive Indian farmers from saving or exchanging seeds. Indian farmers are already in debt, committing suicide en masse and suffering from the failure of expensive GMOs and unaffordable private seeds.

The EU is also demanding the liberalisation of the retail sector and is attempting to facilitate the entry of European agro-processing and retail gaints like Carrefour and Tesco, which could threaten the livelihoods of small retailers and street vendors. Nandini Jairam of the Karnataka farmers’ movement argues that the entry of such retail giants will be terrible for farmers because they will monopolise the whole food chain from procurement to distribution. In effect, farmers will be at the mercy of such large companies as they will have the power to set prices and also will not be interested to buy small quantities from small producers.

Under the FTA there are also plans to liberalise investment provisions, financial services and banking, whereby European banks and finance companies can enter the Indian market. According to the BKU, investors from the EU will get preference over resources like land, coastal areas and water rather than local people. Such provisions could serve to facilitate takeovers of farm land and conversion from food crops to export oriented cash crops.

At a time when countries across the world are reeling under a financial crisis caused by private banks, regulation and not liberalisation is needed. The proposal to liberalise the banking and insurance sectors is taking place in a world already ravaged by the criminality of the finance sector and which, according to Kavaljit Singh, by providing greater market access to crisis-ridden European banks, could potentially weaken an otherwise stable banking system in India.

Moreover, according to Singh, measures on investment could see the Indian government sued by multinational companies for billions of dollars in private arbitration panels outside of Indian courts if national laws, policies, court decisions or other actions are perceived to interfere with their investments.

Conclusion

At the heart of this whole debate is the issue of national sovereignty – or, to put it another way, self determination, self sufficiency and the nurturing of local democracy and economies in order that local people have control over their own lives and futures. The EU-India FTA appears to sound the death knell for such notions.

Since the passing of Margaret Thatcher, much has been written about the impact of the types of neo-liberal policies that she championed, not least in terms of them leading to the current crisis being experienced by Western economies. The pro-globalisation corporate interests that backed Thatcher helped destroy the post-1945 Keynesian consensus and tip the balance in favour of elite interests. This subsequently led to the depression or stagnation of wages and thus demand. The profits accrued from the subsequent debt-bubble Western economies of the 1990s and onwards could not be sustained, and now, facing crisis at home, places like India represent rich pickings for Western capitalism.

Call it ‘globalisation’ if you must, but let’s call it for what it is: imperialism. In an effort to maintain profit margins, elite concerns are going abroad to plunder public assets, exploit human labour and trample over local economies and communities. The worst thing is that it doesn’t have to be this way. Once India’s political leaders began to place emphasis on ‘deregulation’ and cede power to ‘the market’,  the green light was given for transnationals to hollow out Indian society.

Farmers and trade unions in India, via the alliance called the Anti FTA front, have written 872 letters to important officials, organisations and political parties about the FTA. Rakesh Tikait of the BKU argues that, although there are serious impacts on food security and the livelihood security of millions of farmers and small retailers, farmers haven’t even been informed nor consulted about the FTA.

Praveen Khandelwal, Secretary General of Confederation of All India Traders (CAIT) states that Indiashould not legally commit to policies under this FTA. He believes that the government cannot seal this issue at the behest of EU while a national debate is still ongoing on the subject. It begs the question: are we to witness democracy being sidelined in the blind pursuit of a corporate driven agenda? It seems so (2).

It begs another question too: where is the logic in handing the thieves the key to your home?  

Beware the nostrums of economists

 

T. T. RAM MOHAN

 

TOPICS

economy, business and finance

Politicians should not fall for the economic fad of the day. Policies should be subjected to democratic processes and be responsive to people’s aspirations

“The ideas of economists,” John Maynard Keynes famously wrote, “… are more powerful than is commonly understood. Indeed the world is ruled by little else.” He might have added that the ideas of economists can often be dangerous. Policies framed on the basis of the prevailing or dominant economic wisdom have often gone awry and the wisdom was later found to rest on shaky foundations.

A striking case in point is the debate on austerity in the Eurozone as an answer to rising public debt and faltering economic growth. One school has long argued that the way to reduce debt and raise the growth rate is through austerity, that is, steep cuts in public spending (and, in some cases, higher taxes). This school received a mighty boost from a paper published in 2010 by two economists, Carmen Reinhart and Kenneth Rogoff (RR). The paper is now at the centre of a roaring controversy amongst economists.

The RR paper showed that there is a correlation between an economy’s debt to GDP ratio. As the ratio rises from one range to another, growth falls. Once the debt to GDP ratio rises beyond 90 per cent, growth falls sharply to -0.1 per cent. For some economists and also for policymakers in the Eurozone, this last finding provided an ‘aha’ moment.

CUTS IN SPENDING

Since public debt was clearly identified as the culprit, it needed to be brought down through cuts in spending. The IMF pushed this line in the bail-out packages it worked out for Greece and Portugal among others. The U.K. chose to become an exemplar of austerity of its own accord.

It now turns out that there was a computational error in the RR paper. Three economists at the University of Massachusetts at Amherst have produced a paper that shows that the effect of rising public debt is nowhere as drastic as RR made it out to be. At a debt to GDP ratio of 90 per cent, growth declines from an average of 3.2 per cent to 2.2 per cent, not from 2.8 per cent to -0.1 per cent, as RR had contended.

You could say that even the revised estimates show that growth does fall with rising GDP. However, as many commentators have pointed out, correlation is not causation. We cannot conclude from the data that high debt to GDP ratios are the cause of low growth. It could well be the other way round, namely, that low growth results in a high debt to GDP ratio.

There is a broad range of experience that suggests that high debt to GDP ratios are often self-correcting. Both the U.S. and the U.K. emerged from the Second World War with high debt to GDP ratios. These ratios fell as growth accelerated in the post-war years. India’s own debt to GDP ratio kept rising through the second half of the 1990s and the early noughties. As growth accelerated on the back of a global boom, the ratio fell sharply. The decline in the ratio did not happen because of expenditure compression, which the international agencies and some of our own economists had long urged.

NEEDED, RETHINK

The controversy over the RR paper should prompt serious rethinking on austerity in the Eurozone. Many economists have long argued that the sort of austerity that has been imposed on some of the Eurozone economies or that the U.K. has chosen to practise cannot deliver higher growth in the near future. It only condemns the people of those economies to a long period of pain.

The IMF itself has undergone a major conversion on this issue and is now pressing the U.K. to change course on austerity. Its chief economist, Olivier Blanchard, went so far as to warn that the U.K. Chancellor, George Osborne, was “playing with fire.” The IMF’s conversion came about late last year when it acknowledged that its own estimates of a crucial variable, the fiscal multiplier, had been incorrect. In its World Economic Outlook report published last October, the IMF included a box on the fiscal multiplier, which is the impact on output of a cut or increase in public spending (or an increase or reduction in taxes). The smaller the multiplier, the less costly, in terms of lost output, is fiscal consolidation. The IMF had earlier assumed a multiplier for 28 advanced economies of around 0.5. This would mean that for any cut in public spending of X, the impact on output would be less than X, so the debt to GDP ratio would fall.

REVISED ESTIMATE

The IMF now disclosed that, since the sub-prime crisis, the fiscal multipliers had been higher — in the range of 0.9 to 1.7. The revised estimate for the multiplier meant that fiscal consolidation would cause the debt to GDP ratio to rise — exactly the opposite of what policymakers in the Eurozone had blithely assumed. The people of Eurozone economies that have seen GDP shrink and unemployment soar are unlikely to be amused by the belated dawning of wisdom at the IMF.

This is not the first time the IMF has made a volte face on an important matter of economic policy. Before the East Asian crisis and for several years thereafter, the IMF was a strong votary of free flows of capital. During the East Asian crisis, many economists had pointed out that the case for free flows of capital position lacked a strong economic foundation, unlike the case for free trade. This did not prevent the IMF from peddling its prescription to the developing world. India and China refused to go along.

In 2010, the IMF discarded its hostility to capital controls. It said that countries would be justified in responding to temporary surges in capital flows. A year later, it took the position that countries would be justified in responding to capital surges of a permanent nature as well. Last December, it came out with a paper that declared that there was “no presumption that full liberalisation is an appropriate goal for all countries at all times.” The IMF’s realisation was a little late in the day for the East Asian economies and others whose banking systems have been disrupted by volatile capital flows.

Capital account convertibility is one instance of a fad in policy catching on even when it lacked a strong economic foundation. Another is privatisation, for which Margaret Thatcher has been eulogised in recent weeks. Thatcher’s leap into privatisation in the U.K. was driven by her conviction that the state needed to be pushed back. After privatisation became something of a wave, economists sought to find theoretical and empirical grounds for it and initially came out overwhelmingly in favour.

GRADUATED APPROACH

It took major mishaps in privatisation in places such as Russia and Eastern Europe for the conclusions to become rather more nuanced. Privatisation works in some countries, in some industries, and under conditions in which law and order, financial markets and corporate governance are sound. Moreover, partial privatisation — or what is called disinvestment — can be as effective as full privatisation. As in the case of capital account convertibility, India’s graduated approach to liberalisation has been vindicated. It is, perhaps, no coincidence that the fastest growing economies in the world until recently, China and India, did not embrace the conventional wisdom on privatisation.

Other fads have fallen by the wayside or are seen as less than infallible since the sub-prime crisis, and these relate to the financial sector. ‘Principles-based’ regulation is superior to ‘rule-based’ regulation. The central bank must confine itself to monetary policy and regulatory powers must be vested in a separate authority. Monetary policy must focus on inflation alone and must not worry about asset bubbles and financial stability. One can add to this list.

What lessons for policymaking can we derive from the changes in fashion amongst economists? Certainly, one is that politicians and policymakers must beware the nostrums of economists, and they must not fall for the economic fad of the day. Economic policies must always be subject to democratic processes and be responsive to the aspirations of people. Broad acceptability in the electorate must be the touchstone of economic policies. Another important lesson is that gradualism is preferable to ‘big bang’ reforms.

India’s attempts at liberalisation, one would venture to suggest, have conformed to these principles better than many attempted elsewhere. Such an approach can mean frustrating delays in decision-making and the results may be slow in coming. However, social turbulence is avoided, as are nasty surprises, in economic outcomes. At the end of the day, economic performance turns out to be more enduring.

(The author is a professor at IIM Ahmedabad; ttr@iimahd.ernet.in)

Those who benefited from Thatcherism must admit that others suffered

No one could bring in change of the speed and size that Thatcher did and not expect any flaws or problems to emerge

• 
• • Deborah Orr
  • The Guardian, Friday 19 April 2013 19.00 BST

Margaret Thatcher changed the UK, but not in quite the way she might have envisaged, writes Deborah Orr. Photograph: Peter Macdiarmid/Getty Images

Margaret Thatcher's funeral was absolutely perfect, especially if, like me, you're a keen student of irony. The magnitude of the occasion paid testament to Thatcher's significance as a leader. She really did change Britain, and that was acknowledged. Yet the fact that she went out in a blaze of public subsidy, union flag draped over her coffin, paid testament to the fact that she did not change the nation in quite the way she might have envisaged. Thatcher sought to maintain the state's political power, but devolve its economic responsibility. Her body was wheeled through the streets in a nation where political power has been devolved, while Westminster continues to struggle to work out how to manage its economic responsibilities effectively.

It's important never to forget the three words that became synonymous with Thatcher's election victory in 1979: "Labour isn't working". This, of course, referred to the dole queues that had been growing ever longer in Britain during the 1970s. When Thatcher came to power, around a million people were unemployed, and the Conservative argument appeared to be that this was the fault of the government.

Punitive taxation of the wealthy, too much effort to please insatiable unions and state ownership of industries with high profit-making potential were diagnosed as the reasons why jobs were disappearing. Much of this was swept away, never to return (unless you count a brief recent period in which the higher rate of taxation went up to 50%). Yet these changes didn't stop the spread of mass unemployment. On the contrary, they accelerated it. Those changes – all on the sacred Thatcherite list of innovations that brought economic renewal to Britain – did not arrest the problem that Thatcher herself had singled out as the most visible symptom of Britain's ailments. Far from it.

Nevertheless, economic renewal, of a sort, did come. Released from the burden of high taxation, the better-off suddenly had much more money to spend. The 1980s became the designer decade, as the rich began consuming conspicuously – and "lifestyle" became important. Yet, those who had lost their jobs were in no position to start fashion lines, open restaurants or market such ventures in the burgeoning and quickly commercialising media. In the south-east, some found employment in the exploding financial services industry, either as a part of it, or as workers servicing the wealthy individuals it was creating. If you had the skills, talent or geographical propinquity, you were in luck. But this wasn't economic renewal. It was economic reinvention. The significance of this cannot be overstated. Thatcher completely reconfigured Britain's economic model. She did change Britain. Crucially, however, those who were made unemployed by the hugely accelerated decline of old industries were, in millions of individual cases, unable to gain employment in the new industries.

The appalling dereliction of the Conservatives was not in failing to foresee this problem. It was in failing to recognise that this painful disconnect between the country's population and the country's economy had occurred. The unemployed, rather than being viewed sympathetically, as people whose futures had been disrupted by economic forces far beyond their control, were viewed contemptuously, as too stubborn and lazy to adapt – the pathetic architects of their own misfortune.

How can it be that Thatcher and Thatcherism are wholly responsible for the positive aspects of Britain's economic transformation – as evinced by the fact that her death was an historic event – and not responsible for the negative aspects? How can intelligent adults persuade themselves that unemployment is the result of welfare dependency, when it was unemployment that came first? The idea, in Thatcher's Britain, was that those millions would start to find themselves jobs, once they were desperate enough. The feckless would not be provided with subsidised housing, decent state education or reliable health services. That would get them off their bums.

Supporters of Thatcher, keepers of her flame, insist that Britain's current economic woes are the fault of Labour. Yet, neither Blair's long government nor Brown's short one sought to change the trajectory of the new economy that Thatcher had wrought. All they did was try to ameliorate the abject condition into which those displaced by it had fallen, like a bunch of trendy vicars.

So Labour spent the money generated by the new model on administering to the casualties of the old model's passing. I'd have liked to have seen Labour win intellectual arguments; I'd have liked to have seen Labour persuading the beneficiaries of this new model that their prosperity had been paid for in terrible, lasting human consequences, that could only be addressed with the understanding and co-operation of the winners. Instead, all Labour did was illustrate how expensive it is to hide decline, even as they let it continue. Manufacturing shrank more under Labour than it did under the Tories. Inequality increased. At no point was a sober assessment of what had gone right under Thatcherism – and what had gone wrong – ever agreed, let alone acted upon.

This week it was confirmed that the number of unemployed people in Britain stands at 2.56 million. (I dread to think how large this figure would be, in comparison to 1979, if the figures were still calculated in the same way.) These statistics are an embarrassment and a difficulty for the government. But they are far more consequential for the people behind the statistics.

Osborne wept at Thatcher's funeral. I doubt his tears were for all of the people he had failed to provide jobs for, having promised that pruning the public sector would cause jobs to sprout in the private sector, just as pruning dead wood off a rose causes blooms to multiply. And that's the real tragedy of Thatcherism. Its successes remain too contested for its enthusiasts, even now, to get off the defensive and admit that it wasn't all good.

I hope that the funeral, despite all its contradictions and ironies, can be seen by Thatcherism's supporters as an acknowledgement, however muted and grudging, that she brought about change so fundamental that it would be ludicrous to argue that it was somehow puny enough to be derailed by Blair and Brown.

You don't starve people into becoming entrepreneurs. You don't even starve them into being upstanding citizens. You just starve them into submission. Welfare dependency is submission to an economic model that shrugs at mass unemployment and says it's a fact of life. That model is Thatcherism, and a recognition of all aspects of its enormous legacy is long overdue.

Thatcherism left Britain politically, economically and regionally divided, a state that was meant to be proud that it stood for something in the world again, even as Thatcherism warned that the state was the enemy of freedom and not to be relied upon. No one could bring in change of the shape, speed and size that Thatcher did, and not expect any flaws or problems to emerge. To say that she's responsible for the country's recent triumphs, but not for any of its woes, defies all logic.

The Savings Confiscation Scheme Planned for US, New Zealand, UK and other G20 Depositors

by ELLEN BROWN

Confiscating the customer deposits in Cyprus banks, it seems, was not a one-off, desperate idea of a few Eurozone “troika” officials scrambling to salvage their balance sheets. A joint paper by the US Federal Deposit Insurance Corporation and the Bank of England dated December 10, 2012, shows that these plans have been long in the making; that they originated with the G20 Financial Stability Board in Basel, Switzerland (discussed earlier here); and that the result will be to deliver clear title to the banks of depositor funds.

New Zealand has a similar directive, discussed in my last article here, indicating that this isn’t just an emergency measure for troubled Eurozone countries. New Zealand’s Voxy reported on March 19^th:

The National Government [is] pushing a Cyprus-style solution to bank failure in New Zealand which will see small depositors lose some of their savings to fund big bank bailouts . . . .

Open Bank Resolution (OBR) is Finance Minister Bill English’s favoured option dealing with a major bank failure. If a bank fails under OBR, all depositors will have their savings reduced overnight to fund the bank’s bail out.

Can They Do That?

Although few depositors realize it, legally the bank owns the depositor’s funds as soon as they are put in the bank. Our money becomes the bank’s, and we become unsecured creditors holding IOUs or promises to pay. (See here and here.) But until now the bank has been obligated to pay the money back on demand in the form of cash. Under the FDIC-BOE plan, our IOUs will be converted into “bank equity.”  The bank will get the money and we will get stock in the bank. With any luck we may be able to sell the stock to someone else, but when and at what price? Most people keep a deposit account so they can have ready cash to pay the bills.

The 15-page FDIC-BOE document is called “Resolving Globally Active, Systemically Important, Financial Institutions.”  It begins by explaining that the 2008 banking crisis has made it clear that some other way besides taxpayer bailouts is needed to maintain “financial stability.” Evidently anticipating that the next financial collapse will be on a grander scale than either the taxpayers or Congress is willing to underwrite, the authors state:

An efficient path for returning the sound operations of the G-SIFI to the private sector would be provided by exchanging or converting a sufficient amount of the unsecured debt from the original creditors of the failed company [meaning the depositors] into equity [or stock]. In the U.S., the new equity would become capital in one or more newly formed operating entities. In the U.K., the same approach could be used, or the equity could be used to recapitalize the failing financial company itself—thus, the highest layer of surviving bailed-in creditors would become the owners of the resolved firm. In either country, the new equity holders would take on the corresponding risk of being shareholders in a financial institution.

No exception is indicated for “insured deposits” in the U.S., meaning those under $250,000, the deposits we thought were protected by FDIC insurance. This can hardly be an oversight, since it is the FDIC that is issuing the directive. The FDIC is an insurance company funded by premiums paid by private banks.  The directive is called a “resolution process,” defined elsewhere as a plan that “would be triggered in the event of the failure of an insurer . . . .” The only  mention of “insured deposits” is in connection with existing UK legislation, which the FDIC-BOE directive goes on to say is inadequate, implying that it needs to be modified or overridden.

An Imminent Risk

If our IOUs are converted to bank stock, they will no longer be subject to insurance protection but will be “at risk” and vulnerable to being wiped out, just as the Lehman Brothers shareholders were in 2008.  That this dire scenario could actually materialize was underscored by Yves Smith in a March 19th post titled When You Weren’t Looking, Democrat Bank Stooges Launch Bills to Permit Bailouts, Deregulate Derivatives.  She writes:

In the US, depositors have actually been put in a worse position than Cyprus deposit-holders, at least if they are at the big banks that play in the derivatives casino. The regulators have turned a blind eye as banks use their depositaries to fund derivatives exposures. And as bad as that is, the depositors, unlike their Cypriot confreres, aren’t even senior creditors. Remember Lehman? When the investment bank failed, unsecured creditors (and remember, depositors are unsecured creditors) got eight cents on the dollar. One big reason was that derivatives counterparties require collateral for any exposures, meaning they are secured creditors. The 2005 bankruptcy reforms made derivatives counterparties senior to unsecured lenders.

One might wonder why the posting of collateral by a derivative counterparty, at some percentage of full exposure, makes the creditor “secured,” while the depositor who puts up 100 cents on the dollar is “unsecured.” But moving on – Smith writes:

Lehman had only two itty bitty banking subsidiaries, and to my knowledge, was not gathering retail deposits. But as readers may recall, Bank of America moved most of its derivatives from its Merrill Lynch operation [to] its depositary in late 2011.

Its “depositary” is the arm of the bank that takes deposits; and at B of A, that means lots and lots of deposits. The deposits are now subject to being wiped out by a major derivatives loss. How bad could that be? Smith quotes Bloomberg:

. . . Bank of America’s holding company . . . held almost $75 trillion of derivatives at the end of June . . . .

That compares with JPMorgan’s deposit-taking entity, JPMorgan Chase Bank NA, which contained 99 percent of the New York-based firm’s $79 trillion of notional derivatives, the OCC data show.

$75 trillion and $79 trillion in derivatives! These two mega-banks alone hold more in notional derivatives each than the entire global GDP (at $70 trillion). The “notional value” of derivatives is not the same as cash at risk, but according to a cross-post on Smith’s site:

By at least one estimate, in 2010 there was a total of $12 trillion in cash tied up (at risk) in derivatives . . . .

$12 trillion is close to the US GDP.  Smith goes on:

. . . Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. . . . Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors.

Perhaps, but Congress has already been burned and is liable to balk a second time. Section 716 of the Dodd-Frank Act specifically prohibits public support for speculative derivatives activities. And in the Eurozone, while the European Stability Mechanism committed Eurozone countries to bail out failed banks, they are apparently having second thoughts there as well. On March 25^th, Dutch Finance Minister Jeroen Dijsselbloem, who played a leading role in imposing the deposit confiscation plan on Cyprus, told reporters that it would be the template for any future bank bailouts, and that “the aim is for the ESM never to have to be used.”

That explains the need for the FDIC-BOE resolution. If the anticipated enabling legislation is passed, the FDIC will no longer need to protect depositor funds; it can just confiscate them.

Worse Than a Tax

An FDIC confiscation of deposits to recapitalize the banks is far different from a simple tax on taxpayers to pay government expenses. The government’s debt is at least arguably the people’s debt, since the government is there to provide services for the people. But when the banks get into trouble with their derivative schemes, they are not serving depositors, who are not getting a cut of the profits. Taking depositor funds is simply theft.

What should be done is to raise FDIC insurance premiums and make the banks pay to keep their depositors whole, but premiums are already high; and the FDIC, like other government regulatory agencies, is subject to regulatory capture.  Deposit insurance has failed, and so has the private banking system that has depended on it for the trust that makes banking work.

The Cyprus haircut on depositors was called a “wealth tax” and was written off by commentators as “deserved,” because much of the money in Cypriot accounts belongs to foreign oligarchs, tax dodgers and money launderers. But if that template is applied in the US, it will be a tax on the poor and middle class. Wealthy Americans don’t keep most of their money in bank accounts.  They keep it in the stock market, in real estate, in over-the-counter derivatives, in gold and silver, and so forth.

Are you safe, then, if your money is in gold and silver? Apparently not – if it’s stored in a safety deposit box in the bank.  Homeland Security has reportedly told banks that it has authority to seize the contents of safety deposit boxes without a warrant when it’s a matter of “national security,” which a major bank crisis no doubt will be.

The Swedish Alternative: Nationalize the Banks

Another alternative was considered but rejected by President Obama in 2009: nationalize mega-banks that fail. In a February 2009 article titled “Are Uninsured Bank Depositors in Danger?“, Felix Salmon discussed a newsletter by Asia-based investment strategist Christopher Wood, in which Wood wrote:

It is . . . amazing that Obama does not understand the political appeal of the nationalization option. . . . [D]espite this latest setback nationalization of the banks is coming sooner or later because the realities of the situation will demand it. The result will be shareholders wiped out and bondholders forced to take debt-for-equity swaps, if not hopefully depositors.

On whether depositors could indeed be forced to become equity holders, Salmon commented:

It’s worth remembering that depositors are unsecured creditors of any bank; usually, indeed, they’re by far the largest class of unsecured creditors.

President Obama acknowledged that bank nationalization had worked in Sweden, and that the course pursued by the US Fed had not worked in Japan, which wound up instead in a “lost decade.”  But Obama opted for the Japanese approach because, according to Ed Harrison, “Americans will not tolerate nationalization.”

But that was four years ago. When Americans realize that the alternative is to have their ready cash transformed into “bank stock” of questionable marketability, moving failed mega-banks into the public sector may start to have more appeal.

ELLEN BROWN is an attorney and president of the Public Banking Institute.  In Web of Debt, her latest of eleven books, she shows how a private banking oligarchy has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are http://WebofDebt.com, http://EllenBrown.com, and http://PublicBankingInstitute.org.

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