America’s Financial 9/11
The days surrounding Sept. 11, 2008, will go down in infamy. The speed at which so many of America’s most prestigious financial institutions collapsed should be etched into the minds of the American populace—because, whether or not people want to admit it, that disastrous, gut-wrenching, sobering week represented a drastic turning point in U.S. financial hegemony.
What remains is a gaping crater in the nation’s now-discredited economic core.
Consider 154-year-old financial icon Lehman Brothers. This revered banking giant survived the American Civil War, two world wars and the Great Depression. But on Friday, September 12, America’s fourth-largest investment bank began to fail. By the following Monday morning, it was the largest corporate bankruptcy in the history of the world. This momentous event sent shock waves through the system. Lehman’s investors and business partners hemorrhaged money. Global stock markets plunged. The Dow Jones took its biggest single-day fall since the morning, seven years before, when two airliners slammed into the World Trade Center in the heart of New York’s financial district.
All by itself, the $600 billion Lehman Brothers failure was a significant event—but Lehman did not go down alone. After emergency closed-door meetings hosted by the Federal Reserve and the Treasury Department that weekend, it was announced that Merrill Lynch, another ailing Wall Street giant, would also cease to exist as an independent company.
That same Monday morning, it was also announced that American International Group (aig), the largest insurance company in the world, had failed to secure funding to cover its multibillion-dollar losses. By Tuesday night, the situation became so dire that the Federal Reserve announced it would purchase 80 percent of the company to keep it functioning.
All of these seismic events occurred in the immediate aftermath of perhaps the biggest shock of all. On Monday, September 8, the U.S. government announced the $5.2 trillion nationalization of Fannie Mae and Freddie Mac—the largest corporate seizure in the history of finance.
The week surrounding September 11 of this year will prove to be a more significant turning point than the one that occurred seven years before.
It was a stark, blaring announcement to the world that the American economic system has passed the point of no return. And when America’s economy goes, the world as we know it will be radically transformed.
A Closed-Door “Mafia” Meeting
The September 11 weekend saw some of the most intensive banker activity in history. According to the Scotsman, the assembly of bankers and global financiers at the offices of the New York Federal Reserve resembled “a scene from a gathering of Mafia dons” (September 16).
All the big names were present: Richard Fuld, the chairman and chief executive of Lehman Brothers; John Mack, the head of Morgan Stanley; Jamie Dimon of JP Morgan Chase; Vikram Pandit of Citigroup; Lloyd Blankfein of Goldman Sachs; Bob Diamond, the chief of Barclays Capital; and senior executives from Mellon Bank and Royal Bank of Scotland.
Awaiting them was the United States Federal Reserve chairman, Ben Bernanke, U.S. Treasury Secretary Hank Paulson, and the chairman of the New York Fed, Tom Geithner. “It was Geithner who opened the meeting—and presented Wall Street’s finest with the fright of their lives” (ibid.).
The agenda was clear: to determine how to save their own skins and halt the financial collapse before the U.S. banking system completely broke down.
As we now know, the meetings failed: A Trumpet source inside Lehman reported that a deal with Barclays was scuttled at the last minute by UK regulators; apparently they were worried that losses from Lehman would be so fearsome as to critically imperil Barclays’ financial position, further threatening the UK banking system. And JP Morgan Chase and Goldman Sachs successfully resisted Fed pressure to extend lines of credit to aig, so the Fed itself was forced to use its own rapidly dwindling funds to take over the insurer’s operations.
The crisis facing America is unprecedented. But it is not the fact that a couple of banks have failed that is causing worry.
“There’s a serious banking crisis somewhere in the world approximately once every 10 years,” wrote Jeremy Warner for the New Zealand Herald (August 5). Then, “every 30 or 40 years” there is a really big one like the Great Depression, or the stock market crash of 1973-74, which saw the Dow plunge 45 percent.
The worry this time is that what is occurring is far bigger—a once-in-an-80-or-100-years-type event—or worse.
Economist and university professor Nouriel Roubini—a man Barron’s once compared to the Prophet Jeremiah, whose warnings to ancient Israel went unheeded—is warning that the worst is still ahead.
According to Roubini, a recession is about to help kill off hundreds of banks. Looking at America’s “medium-sized regional banks, a good third are in distress,” and half of the group could go bankrupt, he told Barron’s. He also warned that big banks like Citigroup and Bank of America face collapse too, although the U.S. government might intervene to try and prop them up.
This is no longer just a “subprime” crisis, he said back in July. “[T]his is the crisis of an entire subprime financial system.”
So far, total system-wide admitted losses are over half a trillion dollars. But this number may be a fraction of what is coming, and does not include the cost of Lehman’s failure, the hundreds of billions that the Fannie and Freddie nationalization will cost, the $85 billion that the Fed spent on aig, or the cost of recapitalizing the Federal Deposit Insurance Corporation when it is overwhelmed.
The U.S. banking crisis could now be nearing critical mass: where it starts feeding on itself. Bankers are losing the ability to stop it, as the collapses of Lehman, Merrill and aig prove. Bank failures lead to losses at other institutions, many of which are already financially unstable, causing more asset fire sales and markdowns, and more stress to the system. Thus, other banks fail, and the cycle feeds on itself.
“The entire Anglosphere bank and economic systems are imploding,” Hat Trick Letter author Jim Willie wrote. “The United States, the United Kingdom, … Ireland, Australia and New Zealand are suffering from critically wounded banking systems, led by housing markets” (August 7). Canada is not much better off.
The Treasury Department and the Federal Reserve are sure to implement a number of ingenious-sounding fixes. Unfortunately, any patch that regulators may put together at this point is like putting a band-aid on a wound that requires intensive surgery. In fact, the whole economic system is dying.
Burn Me Once, Shame on You …
When the current banking crises began in June last year, even the gloomiest of analysts were quick to point out that if conditions did deteriorate, foreign investors would be only too happy to come to the rescue and seize the opportunity to purchase stakes in prestigious U.S. banks.
The analysts were right. As the banking crisis deepened and American banks went cap in hand to foreign investors for money, foreign governments jumped at the opportunity to purchase billion-dollar chunks of U.S. financial institutions: 10 percent of Morgan Stanley was bought by the Chinese government; 4.9 percent of Citigroup by the United Arab Emirates’ government; 10 percent of Merrill Lynch by Singapore’s government. Other foreign investors spent billions more, snapping up chunks of these firms and other U.S. financial institutions such as Bear Stearns.
But then something went wrong. American financial institutions quickly became poisoned chalices. U.S. banks weren’t nearly as healthy as they or the investment ratings agencies claimed, and as corporate balance sheets continued to deteriorate, share prices plummeted.
Now, international investors are paying for the folly of their impulsive investments. And as Merrill Lynch found out after its deal with the Korean Asset Management Corporation fell apart and it was forced into a takeover by Bank of America: When investors get burned, others become very cautious about making the same mistake.
That was one of the reasons—maybe the primary reason—the federal government seized Fannie Mae and Freddie Mac: America couldn’t afford to burn its foreign lenders again.
Foreign investors, including the governments of China, Japan, Russia and some Middle Eastern nations, had loaned Fannie and Freddie more than $1.3 trillion. China and Japan alone lent more than $600 billion to the mortgage twins.
These are the same lenders that provide the hundreds of billions of dollars the federal government needs to borrow each year to function. And as the Wall Street Journal pointed out, the Treasury Department received a flurry of calls from angry and worried Asian investors just before it decided to nationalize the two mortgage companies.
“I suspect this is the first case where foreign central banks exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests,” Brad Setser, a geo-economics fellow at the Council on Foreign Relations, told the Washington Times (September 9).
“The United States must acknowledge that its deep indebtedness is especially dangerous in times of economic crisis,” wrote the New York Times. “The level and stability of American interest rates and of the dollar are now dependent on the willingness of foreign central banks and other overseas investors to continue lending to the United States” (September 8; emphasis mine throughout).
Did you get that? “The level and stability of American interest rates and of the dollar are now dependent on the willingness of foreign central banks and other overseas investors to continue lending to the United States.” That is a serious, serious statement.
But it is really much worse than that. For example: August last year, two Chinese government officials highlighted how China could use its massive U.S. dollar holdings (which include hundreds of billions in government treasuries) as a political weapon to influence the United States. One Chinese cabinet-rank minister went as far as saying that America’s debt should be used as a “bargaining chip” to influence trade talks. Another Chinese official warned that China could set off a dollar crash if it so desired. Chinese state media referred to the country’s stockpile of U.S. dollars as its economic “nuclear option,” capable of destroying the dollar at will.
The Danger of Debt
This dire situation recalls a prophecy in Deuteronomy 28. There is recorded a promise that a nation which keeps God’s laws will receive this blessing: “The Lord shall open unto thee his good treasure … and thou shalt lend unto many nations, and thou shalt not borrow” (verse 12). As recently as the 1980s, America was the world’s largest creditor nation.
Still, at that time, thanks to the government’s financial mismanagement, public debt began to balloon rapidly. As it rose from the mid-$1 trillion range up to $3 trillion, Plain Truth editor in chief Herbert W. Armstrong warned, “The U.S. and the entire world face a grave economic future from the burden of mounting debts” (letter, Oct. 25, 1985).
That debt has since swelled to almost $10 trillion—not counting promised Social Security checks and other liabilities. In a single generation, America has become the world’s most indebted nation. It is suffering from the curse described in verse 44 of Deuteronomy 28.
A huge amount of that debt is owed to foreign nations—and they are already suggesting that they would like to pull their money out of this spastic and sickly American system as quickly as possible without jeopardizing their investment completely.
Because of America’s epic indebtedness, these nations now have the power to decide America’s economic future! As the Master Economist of the universe says, “The borrower is servant to the lender” (Proverbs 22:7). America has become the servant of China and Japan and all the other foreign countries it relies on for money.
It never pays for a servant to anger his master. The federal government has to keep its foreign creditors happy, even if that means U.S. taxpayers must unjustly pay for investment losses. That is why the Treasury nationalized Fannie and Freddie even though the move effectively doubled the public debt and raised grievous questions about the federal government’s solvency.
Ten years ago, the late Tim Thompson, the Trumpet’s financial writer at the time, spoke of this very inevitability. “On the international level, strength of character is equated with strength of economy, and both are extremely lacking today in America!” he wrote. “[G]lobal investors are becoming increasingly aware that an investment in America is no longer an investment in strength. There is only an illusion of strength being propped up by foreign capital” (Trumpet, November 1998).
Perhaps the biggest revelation of the current banking crisis is the incredibly shaky foundation America’s banking system is built upon. The historic blows it suffered in September have irreparably devastated America’s standing as a sound investment.
“[W]e have reached a turning point in recent economic history,” wrote the National Post back in March. “We are witnessing a literal discrediting of the financial community without precedent since the Great Depression. We are experiencing a loss of confidence in our capitalist game and those who play it that will have profound, lasting repercussions” (March 19).
When three of America’s five princes of high finance—Bear Stearns, Lehman Brothers and Merrill Lynch—all fail within a matter of months, surely it is a sign that global finance has, as the Post said, “reached a turning point.”
America’s days as the global economic kingpin are over.
“Once a loss of confidence occurs,” Mr. Thompson continued, “the reaction is similar to the effect of adultery in many marriages today—victims of such a breach of trust start looking for a way out, and many times they take every financial advantage they can on their way out the door.”
The global system is still dependent upon America enough that this effect may take a little time, but soon there will be a pile-up of sell orders on America’s “stock”—just as there were on the giants of Wall Street.
Mr. Thompson concluded, “America is going to be blindsided and totally shocked when she is rejected by the investors of the world.” Just look at what the world is saying about America now. Conditions are ripe for this stark prophecy to become reality.
Where Investors Are Running To
As was the case after Sept. 11, 2001, the world has changed. Only this time, instead of the world rallying around America, the U.S. banking collapse is creating bitterness.
The world is turning away from America. Financial confidence is returning to an old power.
A crumbling America leaves only one alternative. The new rising powers in Asia are too new and untested, and investors appear unwilling to trust Communist China. Economic leadership is shifting back to Europe.
The euro is now the currency of choice for 320 million people. Including economies that are linked to the euro, 500 million people now depend on this currency. The total value of euros in circulation now exceeds the value of dollars in circulation. And the euro’s share as a percentage of central bank reserves has continually increased, largely at the expense of the dollar, since its introduction as a currency in 1999. Even former Federal Reserve Bank Chairman Alan Greenspan openly acknowledged in September last year that it was “absolutely conceivable that the euro will replace the dollar as reserve currency, or will be traded as an equally important reserve currency.”
But most importantly, biblical prophecy indicates that Europe will, if only for a short time, dominate global finance and trade.
Revelation 13:16-17 speak of a coming European powerhouse that will totally control global economies. As America topples, this will be the next superpower to come on the world scene.
Back in 1984, Herbert W. Armstrong, editor in chief of the Plain Truth newsmagazine, wrote that a massive banking crisis in America could “suddenly result in triggering European nations to unite as a new world power larger than either the Soviet Union or the U.S.” (member and co-worker letter, July 22, 1984). That was 24 years ago, before the European Union took its present form, and before the euro monetary agreement even existed.
“That, in turn, could bring on the Great Tribulation suddenly,” Mr. Armstrong continued, using the biblical term for the time of unparalleled suffering that will conclude this age of man. “And that will lead quickly to the Second Coming of Christ, and the end of this world as we know it.”
Even now, a uniting Europe is fulfilling Bible prophecy, which says that for a time—just prior to Christ’s return—Europe will dominate global trade and finance. Watch as this prophecy unfolds before your eyes.
America’s spectacular banking collapse lurched the world toward this prophecy’s fulfillment. The global economy has a gaping void. Europe is about to fill it—and take its place in history.