To persuade the investors to buy them, these mortgage-backed securities were protected against default with "derivatives," which were basically just bets. The "protection seller" collected a premium for agreeing to pay in the event of default. The "protection buyer" bought the premium. Owning the asset was not required. Like gamblers at a horse race, derivative players could bet without owning a horse.
Derivatives became a very popular form of gambling. The result was the mother of all bubbles, exceeding $500 trillion by the end of 2007.
Because of securitization and derivatives, credit mushroomed. Virtually anyone who walked in the door could get a loan.
The tipping point came in August 2007, with the collapse of two hedge funds. When the derivatives scheme was exposed, the market for derivative-protected securities suddenly dried up. But the U.S. stock market did not collapse until November 2007, when new accounting rules were imposed. The rules grew out of the Basel II Accords initiated by the BIS in 2004. "Mark to market" accounting required banks to value their assets according to market demand that day. Many U.S. banks, like those in Japan in the 1990s, suddenly had insufficient capital to make new loans. The result was a credit crisis from which the U.S. has not yet recovered.
The BIS has now become global regulator, just as Quigley foresaw. In April 2009, the G20 nations agreed to be regulated by a Financial Stability Board based in the BIS, and to comply with "standards and codes" set by the Board. The codes are only guidelines, but countries that fail to comply risk downgrades in their credit ratings, something so costly that the guidelines have effectively become laws.
An article on the BIS website states that central banks in the Central Bank Governance Network should have as their single or primary objective "to preserve price stability." That means governments should not devalue the national currency by inflating the money supply; and that means not "printing money" or borrowing credit created by their own central banks. Like the American colonies after King George took away their power to issue their own money, governments must fund their deficits by borrowing from private banks. T he bankers' global control over currenc y issuance has become virtually complete.
The effects of this policy are particularly evident in the European Union, where EU rules allow deficits of only 3% of government budgets and prevent member countries from either issuing their own money or borrowing credit advanced by their own central banks. Member nations must borrow instead from the European Central Bank, private international banks, or the IMF. The result has been forced austerity measures, as seen in Greece and Ireland. The system is so unsustainable that commentators are predicting that the EU may break up.
The Way Out: Return the Money Power to Public Control
To escape the debt trap of the global bankers, the power to create the national money supply needs to be restored to national governments. Alternatives include:
· Legal tender issued directly by national treasuries and spent on national budgets.
· Publicly-owned central banks empowered to advance the nation's credit and lend it to the government interest-free.
· Nationalization of bankrupt banks considered "too big to fail" (after expunging or writing down bad debts on inflated bubble assets). These banks could then issue credit to the public and serve the public's banking needs, with the profits recycling back to the government, defraying the tax burden on the people.
· Publicly-owned local banks (state, provincial, or municipal).
Publicly-owned banks have been successfully established and operated in many countries, including Australia, New Zealand, Canada, Germany, Switzerland, India, China, Japan, Korea, and Malaysia.
In the United States there is currently only one state-owned bank, the Bank of North Dakota. The model, however, has proven to be highly successful. North Dakota is the only U.S. state to have escaped the credit crisis unscathed. In 2009, while other states floundered, North Dakota had its largest budget surplus ever. In 2008, the Bank of North Dakota (BND) had a return on equity of 25%. North Dakota has the lowest unemployment rate in the country and the lowest default rate on loans. It also has the most local banks per capita.
North Dakota has had its own bank since 1919, when farmers were losing their farms to the Wall Street bankers. They organized, won an election, and passed legislation. The state is required by law to deposit all its revenues in the BND. Like with the sustainable model of the bank of colonial Pennsylvania, interest and profits are returned to the government and to the local economy.