International Forecaster Weekly

The Gun to Our Heads

The new law would require banks to compensate borrowers for their unilateral increases in interest rates and fees over the past decade.  The law will cost the banks involved in these loans billions of dollars.

James Corbett | July 12, 2014

Earlier this month, Hungarian lawmakers took a single, tentative step toward rapping the bankers on the knuckles. They passed a law on July 4th to roll back some of the gouging of retail borrowers that has taken place in the country since the 2008 crisis.

           The law concerns foreign currency loans, once popular among Hungarians looking for affordable mortgages, as they promised relatively low interest rates. The loans, totaling over $28 billion and effecting a million Hungarian borrowers, became vastly more expensive during the Lehman collapse and subsequent financial fallout, however.


Most of the foreign-currency mortgages on the market were provided by foreign banks and denominated in Swiss francs, and the Hungarian forint, hard hit by the financial crisis, plummeted against the Swiss currency.

            The new law would require banks to compensate borrowers for their unilateral increases in interest rates and fees over the past decade. It would also require banks to recalculate foreign currency conversions over that period to use the midrate between the Hungarian central bank's daily buy and sell rate and reimburse their customers for the difference.

            The law will cost the banks involved in these loans billions of dollars. The Hungarian central bank estimated that local banks will have to reimburse nearly $4 billion in fees and exchange rates to customers under the new laws. Austrian banks heavily involved in the Hungarian foreign-currency loan market, meanwhile, include Erste Bank, which has estimated the new regulations will cost the bank over $400 million, and rival Raiffeisen Bank International, which is estimating a $200 million hit.

            Now there are genuine issues here regarding the ability of a government to intervene as a third-party into private contracts, but the important point in all of this is the specific way that the banks have chosen to frame their objection to these new laws.

            Take Ewald Nowotny. He's a member of the Governing Council of the European Central Bank and yesterday he delivered a message to Hungarian politicians via Bloomberg that they should be 'mindful' of the economic impact of 'inflicting losses' on the Austrian banks. Talking about the Austrian banks' recent woes, he noted: “The problems are less economically than more politically motivated. We do hope that also the Hungarian government will understand that it’s in their own interest to have a sound banking system.”

            Quick. Close your eyes and try to picture what Nowotny looks like. Do you have the image of a 1930s mobster caricature, trench coat cinched tight and center dented fedora pulled low on his forehead, mumbling about how 'it would be a shame for something to happen to this nice shop here?' How else can we read comments like these? They are an implied threat that if you mess with the banks your whole country's economy is going to be put in jeopardy.

            Bankers have been warning Hungarian Prime Minister Orban over his plans to roll back loan fees for some time now. Last year, Bank Austria executive Gianni Franco Papa came out to say that Hungary's attempts to regulate the banks will also impact foreign investment. "This is playing with fire. Hungary is already viewed very sceptically - there is less invested. Multinational companies are paying the price, not just banks, but telecom and retail companies too.” In recent days, too, bankers have warned about the impact these moves will have on foreign investment in the country. The gauntlet has been thrown down: mess with the banks and your economy will suffer.

            This is obviously not a new phenomenon, nor one that is unique to the modern European banking system. As I point out in my new documentary, “Century of Enslavement: The History of the Federal Reserve,” the bankers have been holding economies hostage in order to get what they want for centuries.

            Sometimes this just takes the form of piggybacking on economic downturns. As one example of this phenomenon, rhe banking clique led by Robert Morris—then the Superintendant of Finance for the newly-declared United States of America—used the economic turmoil caused by the collapse of the Continental currency in the final stages of the revolutionary war to justify instituting the nation's first central bank, the Bank of North America.

            More ominously, though, the banks sometimes create the very panics that they then use to get their way. This happened, for example, in 1837. At that time, President Andrew Jackson had just presided over a remarkable period in America's economic history. Never a fan of the Second Bank of the United States—then the nation's central bank—or its control over the nation's money supply, Jackson vetoed the bank's charter renewal in 1832 and in 1835 he had paid off the national debt entirely, the first and only time in the history of the United States that the country would be debt-free.

            Furious, the bankers tried to blame Jackson for ruining the economy so that they could show the recklessness of his actions. Greatly contracting loans, Second Bank President Nicholas Biddle publicly blamed the President for the resulting economic crisis, but the public wasn't buying it. Biddle and the bank were universally blamed for tightening credit and the Second Bank's charter expired, shuttering the bank, in 1836.

            Not content, the banking overlords in London contrived to create another, larger panic to blame on the lack of a central bank. The resulting crisis, dubbed the Panic of 1837, was one of the worst periods of recession in American history, lasting well into the 1840s. Caused by a credit tightening and interest rate hike at the Bank of England, as well as demand for gold in account settlements, the United States was plunged into years of high unemployment, bank collapses, wage and price deflation and failing businesses. This time the ruse had the intended impact: a nation scarred by economic catastrophe learned to fear the vacuum created by the lack of a central bank, and when the National Banking Acts were passed in 1863 and 1864, many saw it as a type of relief.

            Perhaps even more important was the Panic of 1907. This was a financial crisis that saw markets plunging, banks and trust companies collapsing, and the entire American economic system very nearly falling off the cliff. The entire system was saved more or less single-handedly (according to the official story) by J.P. Morgan, who managed to broker various mergers and bailouts to keep the system afloat while the crisis passed. The panic led to cries for reform and regulation of the banking system and within six years the Federal Reserve Act was being signed into law.

            What is not acknowledged in the official history books, however, is that it is almost certainly Morgan himself who precipitated the panic. The gathering sense of financial panic in October of 1907 became a ringing alarm bell when George W. Perkins, a senior Morgan partner, told the press that the Trust Company of America was the next “sore point” in the panic, setting off one of the worst runs on any institution in the crisis. As the TCA President Oakleigh Thorne later testified, however, his bank was in no particular trouble at the time this rumor was being spread by Morgan's associate. Morgan let the Knickerbocker Trust Company, a long-time rival, fail, even while helping other banks in similar binds. There are even accounts of Morgan's cheerful singing on the morning that the panic set in, or his inability to be roused from his bed at certain key moments when his intervention could have stopped the crisis from spreading.

            There have been many who have argued that it was in fact Morgan who touched off the Panic of 1907. The idea was even aired in a 1949 Life Magazine article on the banking scion. In the end, it makes perfect sense; Morgan ended the crisis with an even greater share of the financial market, and within years his underlings would be heading to Jekyll Island to conspire on the creature that was to become the Federal Reserve, the banking cartels ultimate consolidation of power. In effect, Morgan had pointed a gun at the economy's head and the people had panicked and given him whatever he wanted.

            This is a tactic that, unfortunately, continues to work to this day. After the recent ominous warnings from the European banking sector about what would happen if Hungary pressed ahead with its banking reforms, we saw the immediate impact on the European stock market. EuroStoxx Banks closed down 2%, it's biggest drop in months, on the news that Erste bank was going into the red as a result of the new legislation. Now other banks are highlighting how this is going to be cutting into dividends, and yet others are warning about how this destabilizing move will hurt the banks ahead of upcoming stress tests. The gun is once again being put to the head of the economy, this time in Europe. And just as in 1907, the end goal here, too, is consolidation of power, with the stated intention of the ECB to begin usurping more of the powers of each Eurozone country's central bank.

            If the question is “Do we want the banks to continue holding us hostage?” the answer is obviously “No.” But the more important question is: “How do we stop them from doing this?”

            That is, after all, the trillion dollar question...and we will explore the answers to it next week.


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