STAFF NEWS & ANALYSIS
Iceland Alone in Bank Criminality?
By Staff News & Analysis - April 14, 2010

Iceland's banks gave "excessive" loans to a handful of powerful billionaires, including Robert Tchenguiz, the property entrepreneur, Jon Asgeir Johannesson, the retail tycoon, and Bjorgolfur Gudmundsson, the former owner of West Ham FC, according to a damning inquiry. Its parliamentary investigation – The Truth Report – found numerous potential cases of illegality, including possible share price manipulation and exaggeration of asset values, within the island nation's three banks – Kaupthing, Glitnir and Landsbanki. The long-awaited report also suggests that the banks were effectively controlled by five investors wielding "unlimited influence", with some acting as shadow directors. The report accuses the bank's owners of pressuring management into awarding loans to their companies and friendly clients, with little or no collateral. … It emerged in the report that companies connected to Mr. Gudmundsson, whose family owned 40pc of Landsbanki, had borrowed almost as much as the entire £2.3bn Icesave debt to finance their own private investments. The loans amount to 140pc of the bank's equity. The report quotes Sigurjon Arnason, ex-chief executive of Landsbanki, as saying: "Resisting the requests from the owners of the banks would have equalled quitting from my position." The report also criticises Kaupthing's loans to London-based property entrepreneur Mr Tchenguiz, whose companies received £1.4bn. … The report adds that it is "difficult to see how loans of this magnitude were taken with the bank's interests in mind." – UK Telegraph

Dominant Social Theme: About time the evil in Iceland was exposed.

Free-Market Analysis: We are not surprised that financial clout as regards Iceland's major banks was concentrated in only a few hands. We were fairly sure this would be the case, just as we were sure that Iceland's central bank itself would be found wanting. The Telegraph reports that, "former central bank manager David Oddsson turned down help from his UK counterpart Mervyn King." We'd probably turn down that "help" as well, but the inquiry seems to find it damning.

Probably everyone involved in the inquiry knew that significant manipulation would be exposed. But the idea that these sorts of activities are restricted to Iceland is questionable. We are sure that whatever went on regarding Iceland's banks is also present elsewhere in the West. The financial system under which the West operates places banks at the pinnacle of financial activity and enshrines their power via regulatory fiat. This sort of mercantilism – where money power is concentrated within the banking industry and organized by central banks that have direct relationships with the government involved – is bound to generate corruption.

In America, there is a continued movement to audit the mercantilist (public/private) central bank – and no doubt the same sort of difficulties would be found in the case of American audit as there have been in Iceland. While the American audit, initially sponsored by libertarian/Republican presidential candidate Ron Paul (R-Tex) has momentum, the prospects are not realizable. However, the push has numerous sponsors in both the House and Senate and pressure remains. The movement has also attracted various outside spokespeople including most recently economist Robert Reich, as MoneyNews reports:

Economist Robert Reich claims that the secretiveness of the Federal Reserve means it has no place in a democracy. "The Fed is not part of the legislative branch," Reich recently wrote in his blog. "Its secret deals … violate the democratic process, if not the Constitution itself."

Reich, who served in three national administrations and was a secretary of labor under President Bill Clinton, says that "Thomas Jefferson put a stop to Alexander Hamilton's idea of a powerful central bank out of fear it would be unaccountable to the public. The Fed has just proven Jefferson's point."

As long as it's merely setting interest rates, Fed secrecy and political independence can be justified, says Reich, now a professor of public policy at the University of California at Berkeley. But once it departs from that role and begins putting billions of dollars of taxpayer money at risk –choosing winners and losers in the capitalist system – its legitimacy is questionable.

The Fed now admits it bailed out Bear Stearns – taking on tens of billions of dollars of the bank's bad loans – in order to smooth Bear Stearns' takeover by JPMorgan Chase, Reich notes. … "The Fed also took on billions of dollars worth of AIG securities, also before the official government-sanctioned bailout." The Bear Stearns deal marked a turning point in the financial crisis for the Fed, Bloomberg reports. By putting taxpayers at risk in financing the rescue, the central bank was engaging in fiscal policy, normally the domain of Congress and the U.S. Treasury.

This is an important point and one that we have not seen made in the mainstream press with any degree of detail. The Fed's role in America has changed under Ben Bernanke – and previous Treasury Secretary and former Goldman Chairman & CEO, Henry Paulson (pictured above left) – as a result of the financial crisis. While the Fed indeed may have been far more active prior to the financial crisis than anyone knows (outside of the Fed and related counter-parties), the public stance of the Fed has shifted markedly along with its self-arrogated powers. Bernanke himself has launched a spirited defense of the Fed's actions of late but Reich's point is well taken nonetheless. The Fed has actively involved itself in matters far beyond the setting of interest rates – and in a very public way.

Of course, we don't agree with Reich regarding interest rates anyhow. It is stupefying how academically trained economists can continue to endorse the charade that the Fed, by controlling interest rates, is not essentially fixing the price of money. It is. And price-fixing is always distortive and eventually ends up by ruining the economies to which it is affixed. There is no great mystery regarding the world's financial crisis – it is a direct result of mercantilist central banking in which a small group of private individuals (we call them a power elite) manages and controls the world's money on behalf of governments.

Truly public and transparent central banking – the kind that Ellen Brown and others have called for – would likely be a step up from what we have now. But statist ("democratic") central banking would eventually fall prey to the same manipulative pressures from which the current system has suffered, as government sponsored monopolies always do. Ultimately, if one wishes to have a "central bank" it would have to be entirely private and derive no authority or advantage from government. Of course, in such a situation, central banking as we know it would not exist. No one in the private sector would tolerate giving a single entity so much power. It would be diffused. In fact the entire banking industry would be a lot less powerful were it fully privatized.

We have noticed of late that the powers-that-be are far more assertive – even in the US – about using the levers of government for obviously anti-democratic and agenda-specific purposes. The re-launch in the United States Senate of cap-and-trade (global warming) legislation is a good example. As is the ferocity with which the Democrats rammed through a nationalization of health care. In Britain, various anti-freedom measures are regularly proposed and acted on. And of course the EU is a virtual authoritarian factory.

After Thoughts

One can interpret such actions in two ways. Either the power elite is increasingly confident of its position and authority and is moving quickly to consolidate gains – or it is desperate and resorting to the brute force of the legislative process to pursue an agenda that has foundered thanks to its exposure on the Internet and elsewhere. We would tend to think the latter – and also that sooner or later the elite's central banking system itself will come under sustained attack. We would not be surprised if continued revelations from Iceland only generate more controversy about a mechanism that inevitably results in the ruination of the middle class and the destruction, over time, of whole economies.

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