Financial warfare, Pt. 2

By Michel Chossudovsky, 23 September 1998

Strong Economic Medicine

Since the 1994-95 Mexican crisis, the IMF has played a crucial role in shaping the financial environment in which the global banks and money managers wage their speculative raids. The global banks are craving for access to inside information. Successful speculative attacks require the concurrent implementation on their behalf of strong economic medicine under the IMF bail-out agreements. The big six Wall Street commercial banks (including Chase, Bank America, Citicorp and J. P. Morgan) and the big five merchant banks (Goldman Sachs, Lehman Brothers, Morgan Stanley and Salomon Smith Barney) were consulted on the clauses to be included in the bail-out agreements. In the case of Korea's short-term debt, Wall Street's largest financial institutions were called in on Christmas Eve (24 December 1997), for high level talks at the Federal Reserve Bank of New York.14

The global banks have a direct stake in the decline of national currencies. In April 1997 barely two months before the onslaught of the Asian currency crisis, the Institute of International Finance (IIF), a Washington based think-tank representing the interests of some 290 global banks and brokerage houses had urged authorities in emerging markets to counter upward exchange rate pressures where needed.... 15 This request (communicated in a formal Letter to the IMF) hints in no uncertain terms that the IMF should advocate an environment in which national currencies are allowed to slide.16 Indonesia was ordered by the IMF to unpeg its currency barely three months before the rupiahs dramatic plunge. In the words of American billionaire and presidential candidate Steve Forbes: Did the IMF help precipitate the crisis? This agency advocates openness and transparency for national economies, yet it rivals the CIA in cloaking its own operations. Did it, for instance, have secret conversations with Thailand, advocating the devaluation that instantly set off the catastrophic chain of events? (...) Did IMF prescriptions exacerbate the illness? These countries' moneys were knocked down to absurdly low levels.17

Deregulating Capital Movements

The international rules regulating the movements of money and capital (across international borders) contribute to shaping the financial battlefields on which banks and speculators wage their deadly assaults. In their Worldwide quest to appropriate economic and financial wealth, global banks and multinational corporations have actively pressured for the outright deregulation of international capital flows including the movement of hot and dirty money.18 Caving in to these demands (after hasty consultations with G7 finance ministers), a formal verdict to deregulate capital movements was taken by the IMF Interim Committee in Washington in April 1998. The official communique stated that the IMF will proceed with the Amendment of its Articles with a view to making the liberalization of capital movements one of the purposes of the Fund and extending, as needed, the Fund's jurisdiction for this purpose. 19 The IMF managing director, Mr. Michel Camdessus nonetheless conceded in a dispassionate tone that a number of developing countries may come under speculative attacks after opening their capital account while reiterating (ad nauseam) that this can be avoided by the adoption of sound macroeconomic policies and strong financial systems in member countries. (ie. the IMF's standard economic cure for disaster).20

The IMF's resolve to deregulate capital movements was taken behind closed doors (conveniently removed from the public eye and with very little press coverage) barely two weeks before citizens' groups from around the World gathered in late April 1998 in mass demonstrations in Paris opposing the controversial Multilateral Agreement on Investment (MAI) under OECD auspices. This agreement would have granted entrenched rights to banks and multinational corporations overriding national laws on foreign investment as well derogating the fundamental rights of citizens. The MAI constitutes an act of capitulation by democratic government to banks and multinational corporations.

The timing was right on course: while the approval of the MAI had been temporarily stalled, the proposed deregulation of foreign investment through a more expedient avenue had been officially launched: the Amendment of the Articles would for all practical purposes derogate the powers of national governments to regulate foreign investment. It would also nullify the efforts of the Worldwide citizens' campaign against the MAI: the deregulation of foreign investment would be achieved (with a stroke of a pen) without the need for a cumbersome multilateral agreement under OECD or WTO auspices and without the legal hassle of a global investment treaty entrenched in international law.

Creating a Global Financial Watchdog

As the aggressive scramble for global wealth unfolds and the financial crisis reaches dangerous heights, international banks and speculators are anxious to play a more direct role in shaping financial structures to their advantage as well as policing country level economic reforms. Free market conservatives in the United States (associated with the Republican Party) have blamed the IMF for its reckless behaviour. Disregarding the IMF's intergovernmental status, they are demanding greater US control over the IMF. They have also hinted that the IMF should henceforth perform a more placid role (similar to that of the bond rate agencies such as Moody's or Standard and Poor) while consigning the financing of the multi-billion dollar bail-outs to the private banking sector.21

Discussed behind closed doors in April 1998, a more perceptive initiative (couched in softer language) was put forth by the World's largest banks and investment houses through their Washington mouthpiece (the Institute of International Finance). The banks proposal consists in the creation of a Financial Watchdog—a so-called Private Sector Advisory Council—with a view to routinely supervising the activities of the IMF. The Institute [of International Finance], with its nearly universal membership of leading private financial firms, stands ready to work with the official community to advance this process. 22 Responding to the global banks initiative, the IMF has called for concrete steps to strengthen private sector involvement in crisis management-what might be interpreted as a power sharing arrangement between the IMF and the global banks.23 The international banking community has also set up it own high level Steering Committee on Emerging Markets Finance integrated by some of the World's most powerful financiers including William Rhodes, Vice Chairman of Citibank and Sir David Walker, Chairman of Morgan Stanley. The hidden agenda behind these various initiatives is to gradually transform the IMF --from its present status as an inter-governmental body-into a full fledged bureaucracy which more effectively serves the interests of the global banks. More importantly, the banks and speculators want access to the details of IMF negotiations with member governments which will enable them to carefully position their assaults in financial markets both prior and in the wake of an IMF bailout agreement. The global banks (pointing to the need for transparency) have called upon the IMF to provide valuable insights [on its dealings with national governments] without revealing confidential information.... But what they really want is privileged inside information.24 The ongoing financial crisis is not only conducive to the demise of national State institutions all over the World, it also consists in the step by step dismantling (and possible privatisation) of the post War institutions established by the founding fathers at the Bretton Woods Conference in 1944. In striking contrast with the IMF's present-day destructive role, these institutions were intended by their architects to safeguard the stability of national economies. In the words of Henry Morgenthau, US Secretary of the Treasury in his closing statement to the Conference (22 July 1944): We came here to work out methods which would do away with economic evils-the competitive currency devaluation and destructive impediments to trade-which preceded the present war. We have succeeded in this effort25

NOTES

1. United Nations Development Program, Human Development Report, 1997, New York, 1997, p. 2.

2. Robert O'Harrow Jr., Dow Dives 513 Points, or 6.4, Washington Post, 1 September 1998, page A.

3. Bob Djurdjevic, Return looted Russian Assets, Aug. 30, Truth in Media's Global Watch, Phoenix, 30 August 98.

4. See Society under Threat- Soros, The Guardian, London, 31 October 1997.

5. Statement at the Meeting of the Group of 15, Malacca, Malaysia, 3 November 1997, quoted in the South China Morning Post, Hong Kong, 3 November 1997.

6. See Michael Hudson and Bill Totten, Vulture speculators, Our World, No. 197, Kawasaki, 12 August 1998.

7. Nicola Bullard, Walden Bello and Kamal Malhotra, Taming the Tigers: the IMF and the Asian Crisis, Special Issue on the IMF, Focus on Trade No. 23, Focus on the Global South, Bangkok, March 1998.

8. Korean Federation of Trade Unions, Unbridled Freedom to Sack Workers Is No Solution At All, Seoul, 13 January 1998.

9. Song Jung tae, Insolvency of Construction Firms rises in 1998, Korea Herald, 24 December 1997. Legislation (following IMF directives) was approved which dismantles the extensive powers of the Ministry of Finance while also stripping the Ministry of its financial regulatory and supervisory functions. The financial sector had been opened up, a Financial Supervisory Council under the advice of Western merchant banks arbitrarily decides the fate of Korean banks. Selected banks (the lucky ones) are to be made more attractive by earmarking a significant chunk of the bail-out money to finance (subsidise) their acquisition at depressed prices by foreign buyers, --ie. the shopping-spree by Western financiers is funded by the government on borrowed money from Western financiers.

10. Michael Hudson, Our World, Kawasaki, December 23, 1997.

11. Michael Hudson, Big Bang is Culprit behind Yen's Fall, Our World, No. 187, Kawasaki, 28 July 1998. See also Secretary of State Madeleine K. Albright and Japanese Foreign Minister Keizo Obuchi, Joint Press Conference, Ikura House, Tokyo, July 4, 1998 contained in Official Press Release, US Department of State, Washington, 7 July, l998.

12. See Nicola Bullard, Walden Bello and Kamal Malhotra, op. cit.

13. On 15 July 1998, the Republican dominated House of Representatives slashed the Clinton Administration request of 18 billion dollar in additional US funding to the IMF to 3.5 billion. Part of the US contribution to the bail-outs would be financed under the Foreign Exchange Stabilisation Fund of the Treasury. The US Congress has estimated the increase in the US public debt and the burden on taxpayers of the US contributions to the Asian bail-outs.

14. Financial Times, London, 27-28 December 1997, p. 3).

15. Institute of International Finance, Report of the Multilateral Agencies Group, IIF Annual Report, Washington, 1997.

16. Letter addressed by the Managing director of the Institute of International Finance Mr. Charles Dallara to Mr. Philip Maystadt, Chairman of the IMF Interim Committee, April 1997, quoted in Institute of International Finance, 1997 Annual Report, Washington, 1997.

17. Steven Forbes, Why Reward Bad Behaviour, editorial, Forbes Magazine, 4 May 1998.

18. Hot money is speculative capital, dirty money are the proceeds of organised crime which are routinely laundered in the international financial system.

19. International Monetary Fund, Communiqué of the Interim Committee of the Board of Governors of the International Monetary Fund, Press Release No. 98/14 Washington, April 16, 1998. The controversial proposal to amend its articles on capital account liberalisation had initially been put forth in April 1997.

20. See Communique of the IMF Interim Committee, Hong Kong, 21 September 1997.

21. See Steven Forbes, op cit.

22. Institute of International Finance, East Asian Crises Calls for New International Measures, Say Financial Leaders, Press Release, 18 April 1998.

23. IMF, Communiqué of the Interim Committee of the Board of Governors, April 16, 1998.

24. The IIF proposes that global banks and brokerage houses could for this purpose be rotated and selected through a neutral process [to ensure confidentiality], and a regular exchange of views [which] is unlikely to reveal dramatic surprises that turn markets abruptly (...). In this era of globalization, both market participants and multilateral institutions have crucial roles to play; the more they understand each other, the greater the prospects for better functioning of markets and financial stability... . See Letter of Charles Dallara, Managing Director of the IIF to Mr. Philip Maystadt, Chairman of IMF Interim Committee, IIF, Washington, 8 April 1998.

25. Closing Address, Bretton Woods Conference, Bretton Woods, New Hampshire, 22 July 1944. The IMF's present role is in violation of its Articles of Agreement.

Michel Chossudovsky
Department of Economics,
University of Ottawa,
Ottawa, K1N6N5

Voice box: 1-613-562-5800, ext. 1415
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E-Mail: chossudovsky@sprint.ca

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