Downfall of Wall Street:
How to Help Main Street

September 30, 2007

The European Central Bank(ECB)'s worry (see the news today reproduced below) about rising sovereign global funds floated by emerging nations like China and Russia is a harbinger of panic among the G7 policymakers. The panic is justified. It is predicated on well-founded fear about decimation of G7 banks, especially the largest investment banks in Wall Street.

The G7 countries (USA, Canada, UK, France, Germany, Italy and Japan) formed a block in mid-1940's to retain financial control over the nations that gained political independence from colonial rules. The intrinsic purpose of G7 policymakers then was to keep the newly "independent" nations economically subjugated. The G7 strategy succeeded immensely over the years. G7 policymakers created the International Monetary Fund and World Bank as financial tools to keep the "independent" nations perpetually bondaged through foreign currency loans. The G7 used the tools strategically. The Latin American, Russian and East Asian debt/currency panic/crisis over the years showed invincibility of the G7 strategy in keeping the rest of the world economically subjugated.

The G7 strategy succeeded mainly because many self-enrichment oriented rulers of developing nations fell for the booby trap: to borrow in currencies of G7 nations, subject themselves to currency manipulation engineered by IMF, World Bank and private commercial banks of G7 countries. But people in large countries like China, India, Russia, Brazil and even smaller nations like Indonesia, Malaysia, South Korea and Middle East saw the G7 strategy of economic colonization very vividly.

China took the lead to undo the G7 neocolonial strategy by fixing in 1994 the value of its currency yuan to the US dollar to obviate manipulation of its currency and to have the dollar mirror exactly the value of yuan. China also formed its central bank (People's Bank of China) in 1995. Following China, other nations like India and Malaysia followed currency policies to mirror yuan by tacitly pegging their currencies to yuan-dollar.

The G7 strategy would now boomerang if it manipulated the value of dollar downwards with respect to emerging currencies. Dollar's loss to euro or yen is not a solution to the problem created by currency manipulation in late 1990's. Lowering the value of dollar against the reserve-rich countries like China and Japan is the only way to restore economic equilibrium. There is no such move by either Wall Street or G7 policymakers. Only if yen is raised vis-a-vis dollar will China raise the value of yuan with respect to dollar. But that will bring enormous losses to Wall Street because they have to repay massive loans made in yen. The other problem is how to lower the value of dollar against BRIC currencies like the Brazilian real, Russian rouble, Indian rupee and Chinese yuan. The currency manipulators (major investment banks, hedge funds and the IMF) are losing immensely because they can no longer manipulate currencies to create volatility for transfer of wealth from developing countries which has been the objective of neo-colonialism. Major emerging nations that have borrowed in dollar, yen and euro have repaid their loans from IMF and other global financial bodies. Now the IMF is bankrupt.

The developing nations have generated massive foreign exchange reserves because of their large talented workforces. The growth in these reserves cannot be contained by any other tactic of G7 policymakers. The only obvious outcome now is rising values of currencies of at least those developing nations which have been growing their reserves in relation to G7 currencies. But this cannot be accomplished by the G7 financial markets because the developing nations will not entertain, for example, Wall Street in New York buying trillions of yuan for its portfolios. China has banned trading of yuan outside its borders. If investors from G7 nations want to really invest in a country like China, they have to transfer their plants and capital to that country due to Chinese government policies. This has been happening for the last three decades with companies like Intel, Caterpillar and Texas Instruments relocating their plants to the emerging nations. This has undercut the growth in jobs in G7 nations leading to simmering frustration among G7 Main Street households who have been lured so far by their policymakers' speeches on cheaper imports. It was possible due to myopia of Main Street. It has benefited only the barons and policymakers who have wangled large political contributions from the former in G7 countries.

The G7 policymakers have created a globalisation juggernaut to transfer jobs to emerging nations with currencies manipulated downwards. But such globalisation would benefit policymakers and barons of G7 countries only if households on the Main Streets could borrow perpetually to buy merchandize made in developing countries. Household borrowing so far was based on jobs in G7 countries. These jobs are now vanishing thanks to globalization. Heavily indebted Main Street households with depleting incomes are now unable to repay even home mortgage loans made to them by Wall Street's banking and corporate barons. In fact, greed has induced the Wall Street baons to borrow heavily from countries like Japan at low interest rates of 0.5% to lend the same to Main Street households at exorbitantly higher rates like 6-9% to create profits for hefty bonuses like $85 billion in a year at the top five investment banks. Generating such profits looks now like counting the chickens before the eggs hatched. Profits were based on cheaply borrowed yens that have to be now repaid, as yen rises, from depleting repayments from Main Street mortgage debtholders whose jobs have been lost due to the globalisation juggernaut.

Wall Street is in the brink of decimation, thanks to a failed neocolonial strategy it played alongwith G7 and IMF policymakers. Their greed led to G7 central banks to sell thousands of tonnes of gold at $250-300 per ounce. Now the IMF is already broke and so is USA which is the loadstar of such strategy. The U.S. policymakers are now forced (i) to print more and more dollars to fund the credit-strapped mega lenders like Countrywide Finance and a losing war on terrorism, (ii) to cut the interest rates to pacify capital markets and (iii) to write off mortgage loans of bankrupt households. I have proposed in my book Prosperity: Optimal Governance that policies (i) and (ii) should be optimally adopted. These steps are bound to weaken Wall Street further. Wall Street will receive lower repayments from loans it made to American households and cannot reduce its own repayments on "yen carrytrade" borrowings. Central Banks are now under the scrutiny of Main Streets, like never before. Policymakers have duly recognized the anger of Main Street and so cannot allow their central bank to help Wall Street with additional burdens imposed on the Main Street.

In fact, Wall Street has borrowed even from the Chinese, Indian, Russuan and Brazilian reserves held in the Federal Reserve Bank of New York. The Central Banks of emerging countries have so far stored their reserve currencies in central banks of G7 nations and these reserves were recycled as low-cost loans to Wall Street that made high interest loans to Main Street households who are going broke at unprecedented rates. Now Central Banks of emerging countries are pulling their money from G7 Central Banks to form Sovereign Funds for investment in securities of interest to them.

Sovereign Funds are definitely going to buy equities of good strategically and technologically important companies like 3Com (already bought), Alcatel-Lucent, Motorala, etc. The unfortunate saga of Wall Street is that it is heavily short on these very companies. Sovereign Funds will therefore trigger enormous losses to Wall Street. This is perhaps the source of fear of the ECB Chief according to Bloomberg news today.

So, Wall Street is beset with insurmountable self-created difficulties ahead due to: (i) emerging nations' Sovereign Funds triggering calls on repayment of the loans made to Wall Street through currency reserves held in G7 central banks, (ii) buying by Sovereign Funds of depressed equities of technologically pioneering companies like Alcatel-Lucent which may have been short-sold by Wall Street hedge funds, and (iii) the increased difficulty of Main Street households in repaying mortgage loans made from Wall Street.

Wall Street's problems are self-created due to its myopic greed to become filthy rich by hook or by crook even by (a) undermining household wealth of the vast majority of Main Street households through short-selling of securities held by these households in mutual funds and by interest rate manipulation in collusion with G7 Central Banks, (b) destabilizing emerging economies through currency manipulation that has led to lack of trust in Wall Street of investors from those nations, and (c) promoting globalisation for myopic self-enrichment.

Wall Street players will face absolute disaster if and when Japan joins China and Russia to float its own Sovereign Fund because yen carrytrades will be recalled. The oil exporting nations like those in Middle East, Mexico and Russia are becoming richer while Americans are turning poorer as the U.S. prints more dollars for unwinnable wars that only raise the prices of essential commodities like oil and wheat. The U.S. policymakers have been very myopic to see only one path to eluding prosperity, namely, controlling oil fields by war and squandering global natural resources. But with massive losses in Iraq and looming nuclear Iran, this path will bring only misery to the vast majority of households on G7 Main Streets.

The philosophy of war has to be replaced with a new strategy to create a conducive peaceful atmosphere in the emerging world to welcome workers from the developed world if a reverse immigration were to occur. This can ameliorate the failed G7 strategies of manipulating currencies and interes rates and short-selling securities that have been designed to enrich onle a few in Wall Street at a huge cost to Main Street.

Globalization has to be absolute with unhindered flows of labor, capital and merchandize that will create values everywhere in the world to benefit people on Main Streets based on their competence, perseverance and diligence. I foresee a total border-less and war-less globalization, whether or not it is liked by Wall Street and G7 policymakers.

Sankarshan Acharya

Citizens for Development and Pro-Prosperity.Com
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Trichet Says State-Run Funds Must Act Transparently

By Gabi Thesing and Simon Kennedy

Sept. 30 (Bloomberg) -- European Central Bank President Jean-Claude Trichet said the global economy may suffer if sovereign-wealth funds don't act transparently.

Sovereign, or state-owned, investment funds have surged in size as Asian countries and oil-exporting nations such as China and Russia seek higher returns from their currency reserves. The funds hold about $2.5 trillion worldwide, according to estimates by Morgan Stanley.

Their rise has prompted concern among the Group of Seven nations that they might undermine financial markets and spark protectionism if they behave opaquely or target foreign companies involved in national security. Finance ministers from the G-7 countries and central bankers will discuss how to deal with the funds when they meet in Washington in mid-October.

The funds are ``becoming an issue which could hamper global prosperity if we don't solve it,'' Trichet, who will attend the G-7 meeting, said in Salzburg, Austria, late yesterday. He recommended ``informal meditation.''

The ECB president spoke the same day that China Investment Corp., the nation's $200 billion sovereign wealth fund, started operations as its government seeks to boost returns on the world's biggest foreign exchange reserves. The Chinese have yet to disclose in detail their investment strategy for the agency.

UAE, Russia

Other countries looking to make greater returns on their oil riches or currency reserves include the United Arab Emirates and Russia. Morgan Stanley calculates such funds could oversee $12 trillion within the next decade, about the current size of the U.S. economy.

``These funds are now huge enough to materially affect markets, and authorities fear being blind-sided because they don't have a view of what they're doing,'' John Nugee, head of the official institutions group at State Street Global Advisers in London, said in a Sept. 24 interview.

European governments led by Germany and France are already trying to establish a continent-wide approach to the funds. EU Monetary Affairs Commissioner Joaquin Almunia told the Financial Times last week that the funds could have their investments restricted in Europe unless they reveal more about their intentions and strategy.

`Case for Mediation'

The U.S. has urged the International Monetary Fund to help oversee governance and transparency issues with the funds, while the Paris-based Organization for Economic Cooperation and Development is working on ways governments can review the investments without hindering free trade and capital flows.

``There is a case for meditation when you are in front of entities that aren't guiding themselves on free, decentralized decision-making,'' Trichet said. ```We are, in the ECB, decisively in favor of the free circulation of capital. That has to be considered fundamental.''

To contact the reporters on this story: Simon Kennedy in Paris at

Last Updated: September 30, 2007 09:32 EDT