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THE WOMEN'S INTERNATIONAL MEDIA GROUP, INC.
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UN WATCH! NEWSLETTER
June 2001 - Report

THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE and
The Bank for International Settlements
by
Joan M. Veon



Merrim-Webster Definition of Mafia:
AA secret terrorist society in Sicily, a secret criminal organization.@
Note: The word Amafia@ also denotes control.  They control everything about youBwhere you live, what you do, how you live, what you think, etc.  If you don=t do what they want you to do, then you could be in big trouble.

INTRODUCTION
For a number of years, I have been putting together a list of international or transnational groups and organizations which are now in position to make decisions for the countries of the world as power, over a period of time, has been delegated to them by the countries of the world.  They are: the Bank for International Settlements-BIS, Basle Switzerland; affiliated financial organizations such as the International Organization for Security Commissions-IOSCO (Montreal) and the International Association of Insurance Supervisors-IAIS (Basle Switzerland); the Group of Ten Central Banks, the Group of Seven Central Banks, central banks of other countries, the Group of Eight-G8 and its expanded version, the Group of 20-G20; the United Nations-UN (New York), the International Monetary Fund-IMF (Washington D.C.), the World Bank-WB (Washington D.C.) and the World Trade Organization-WTO (Geneva).  You will find them diagramed on the following page.

While they are not secretive, the fact is, 99% of Americans don=t know what you are talking about when you mention any of the above.   We Americans love our country.  We wear the flag on our shirts, cars, and machinery.  We have it hanging outside our house or business.  Little do Americans know that our sovereignty is being shifted to a group of international organizationsBunder the term of Aglobal governance@ which refers to a new form of government.  This report will deal with the governments, groups, and organizations which are facilitating and affecting the economic shift of global governance.  The transnational organizations, which have been set in place above the national level, are, little by little, transferring power which belonged to the nation-state to their jurisdiction.

In 1996 I covered my first Group of Seven (which became Eight in 1999) meeting in Lyon France.  The above structure was becoming apparent to me.  What I did not understand was who derived their power from whom.  It was clear as I read past Communiques from the Group of Five then the Group of Seven, now Group of Eight, that their ideas were the same as those of the United Nations.  So I asked the president of the European Union, Jacques Delores, ADo you take orders from the United Nations or does the United Nations take orders  from the Group of Seven since your agendas appear to be  the  same.@   Being the politician that he is, he said that neither group took orders but that they worked together.  I still have this same question.  However, it is very apparent, in my opinion, that  this agenda comes from some hidden source.   It appears that some of the ideas begin with non-governmental organizations on the local level, while others, begin with the United Nations, the Bank for International Settlements, the World Bank, etc.  At some point they gain Aacceptance@ and are then ready to become implemented as ideas which Athe people of the world want@ or Athe world leaders endorse.@      

What I concluded after I covered the Lyon Summit is that they work hand in hand.  When various policies come out of the Group of 8, what they are really saying to the rest of the UN member countries is, AThis is where we are going and this is where you need to go as well.@  In order to report on the Annual meeting of the Bank for International Settlements on June 11, I need to put them and their activities into perspective by explaining the role of the Group of Eight.

In order to understand how the G8 is set up, there are three key meetings which are held about the same time: the G7 (Russia is not considered a major economic power) Finance Ministers Meetings which is about two weeks before the G8 Foreign Ministers meeting (Russia is now included in both the Foreign and Summit) which is held right before the President and Prime Minister's G8 Summit.  Each meeting issues its own report or Communique.  Each report will vary in length depending on the issues.
   
THE GROUP OF EIGHT

This powerful group of the world's most industrialized countries plus Russia, has been meeting since 1975 to coordinate economic policy for the world.  They first came together at the behest of President Nixon shortly after he severed all connections the dollar had to gold in 1971.   Over the years, they have expanded their Ajurisdiction by adding labor, transportation, energy, environment and  defense issues as well as domestic problems.  There are several key summits which are interesting for us to see not only a transfer of power from the national level to the international, but to see how they have expanded their powers.

Beginning about 1995, there began a constant cry about the need to restructure the Bretton Woods (IMF/WB) institutions and create a global financial architecture which would reduce volatility in the market place.   On a personal note, I covered my first UN meeting in September 1994.  In doing research, I started to identify important meetings.  The G7 was one of them.   In late June 1995, I talked to a reporter while covering the UN50th in San Francisco.  She had just returned from Halifax. I asked her was happened, she replied, AYou did not miss anything, it was boring.@  Well, as you will read, it was far from boring for it was in Halifax that the drum beat for a new financial architecture began.  Lest you think the following has no relevance to your life, please read the conclusion before you continue.

President's Communique - The Halifax G7 Summit, June 15-17, 1995
The President's Report highlighted the following:  Today's world is very different from the one in which the Bretton Woods [1944] institutions were created. [1]The global economy is more integrated, [2] Capital market liberalization, technological change, and financial innovation have transformed the global financial landscapeBwith great benefits, but also new risks, [3] A variety of new global challenges have emerged in areas such as environmental stewardship and the important of good governance, and [4]  The influence of developing countries in the world economy is growing, yet, a large portion of the world's population still lives in extraordinary poverty.@

The report then goes on to highlight a number of areas which have been the focus of the G7 Finance Ministers since 1995.  There has been a very large restructuring and Are inventing@ of the global financial architecture@ in order to change, adapt, and add various global organizations to strengthen and provide greater oversight, regulatory, and accountability powers to these organizations, thus transferring power from the nation-state to the respective global entity.  While I would love to spell out all of these changes, they would be too cumbersome for most to understand and follow.  I will, however,  bring to your attention one of the changes: the Financial Stability Forum which is one of the topics of this newsletter.

G7 Finance Ministers Report to the Heads of State and Government on International Monetary Stability - Lyon June 28 1996 (7 pages)
AThe dramatic increase in trade and capital flows in the world has deepened economic and financial integration among all countries, and it creates a more complex financial environment.  The changes in the structure of global finance and the emergence of new participants and markets require the supervisory response, including international cooperation, to evolve continually.  The following directions [are needed]:  Enhance cooperation across markets to strengthen supervision of financial institutions.  In this context, we welcome the joint efforts of the Basle and IOSCO Committees to enhance their collaborative arrangements and the work of the Joint Forum of banks, securities and insurance supervisors (emphasis added).@   All of this alludes to the Financial Stability Forum.

Final Report to the G7 Heads of State and Government on Promoting Financial Stability- June 21 1997 - Denver (6 pages)
AWe still have work to do in our own economies.  More must be done to restore sound long-term fiscal positions and, in some countries, to ensure the soundness of the financial system.   International financial markets are becoming increasingly global and complex.  Beginning in Halifax and continuing through Lyon, we have encouraged financial regulators and the international financial institutions to take measure to deal effectively with possible systemic or contagion risks and foster financial stability.  National supervisors and international regulatory bodies have put in place a network of cooperative arrangements and developed proposals to enhance the supervision of internationally active financial institutions on both an on-going basis and in emergency situations (emphasis added).@  While this does not specifically refer to the Financial Stability Forum, I believe that it is described.

Report of the G7 Finance Ministers to G7 Heads of State or Government for their meeting in Birmingham May 1998 (8 pages)
APrevious summits have focused on ways to strengthen the global financial system.  Over the past four years considerable progress has been made.  This report presents proposals where there is now an emerging consensus for modifications to the architecture of the international financial system.  We have identified five key areas: enhanced transparency; helping countries prepare for integration into the global economy and for free global capital flows; strengthening national financial systems; ensuring that the private sector takes responsibility for its lending decisions; and enhancing further the role of the International Financial Institutions [loss of economic sovereignty] and co-operation between them.@
    
While the report did not specifically name the Financial Stability Forum, it described the need for it this way: AThere is a gap in the current international system with respect to surveillance of countries= financial supervisory and regulatory systems.  Enhanced surveillance in this area would help encourage national authorities to meet international standards and help reduce financial risk. We see an urgent need for a system of multilateral surveillance of national financial, supervisory and regulatory systems.@    

Lobbying Activities by the Clinton Administration During 1998
Interestingly enough, President Clinton, Secretary of the Treasury Robert Rubin, Assistant-Secretary of the Treasury Larry Summers, among others, in the Clinton Administration, gave numerous speeches and testimonies before respective House and Senate Subcommittees calling for a complete restructuring of the international financial architecture.  In addition, the Bank for International Settlements, the World Bank, the International Monetary Fund, and other international organizations and think tanks all provided studies and further testimony as to why and how the international financial architecture should be restructuredBfor our good, of course!

Also occurring in 1998, was great instability in the U.S. stock market which was attributed to a slowing economy, the possibility of a default in the Russian ruble (which has absolutely nothing to do with the financial stability of the U.S.  The Dow dropped a total of 1500 points.  I wrote a very lengthy and exhaustive analysis on the stock market and concluded that the reason why it dropped was that the Abig boys@ wanted the U.S. to lead the way in providing seed money in the amount of $18B for a contingency line of credit for debt-laden countries.  Other countries would then provide the rest of the $82 billion to provide the IMF with a new $100 billion contingency line of credit.  After our Congress provided the funds in October, the Federal Reserve provided a doggie bone by dropping  interest rates by 1/4 of 1% to show their gratitude.  The Dow miraculously rose 1500 points within a three week time period.

Report by G7 Finance Ministers dated May 1998, AFinancial StabilityBSupervision of Global Financial Institutions@ - This was a special report for the Group of Seven Meeting in Birmingham (12 pages)
The rapid globalization of financial markets is a key issue for the G7.  Old barriers are breaking down.  Firms are moving into new products and markets, and many are becoming increasingly international, with complex organizations, managed on-line businesses, and diversified operations spread across the globe.  By contrast, supervisors have traditionally authorized and regulated particular legal entities.  That is why, in June 1997, we issued a report on measures to promote global financial stability, including enhanced co-ordination among national regulators.  In their Denver Statement, the G7 Heads of State and Government expressly endorsed our proposals.  Since then the wider implications of the Asian financial crisisBdiscussed extensively at this summitBhave confirmed the importance of enhancing the ability of supervisors to assess, and firms to manage, risk (emphasis added).@   While it does not specifically refer to the Financial Stability Forum, the coordination Aamong national regulators@ refers to the FSF.

Report of the G7 Finance Ministers Meeting to the Koln Economic Summit-Cologne June 18-20, 1999- AStrengthening the International Financial Architecture@ (15 pages)
The G7 Finance Ministers said, AAs Finance Ministers of the major economies, we are aware of our special responsibility for improving the conditions for a proper functioning of the international financial and monetary system (emphasis added).@  They then recommend specific reforms in six priority  areas.   Under AStrengthening and reforming the international financial institutions and arrangements,A they discussed the Financial Stability Forum.  AThe new Financial Stability Forum was created to enhance international cooperation and coordination in the area of financial market supervision and surveillance.  The Forum met for the first time in April [1999] and agreed to focus initially on three issues: the implications of highly levered institutions, off-shore centers and short-term capital flows.@ The Reports length reflects the detail of the reinventing of the International Financial Architecture.
  
The G7 Finance Minister's meetings - AStrengthening the International Financial Architecture  - Fukuoka, Japan, July 8, 2000 (16 pages)
This report was a report of the progress made since the Cologne Economic Summit and the steps which had been taken since that time.  AThe Financial Stability Forum was created last year to enhance financial stability, improve the functioning of markets, and reduce systemic risk.  As we requested, the FSF examined the issues of, and published reports this spring on highly leveraged institutions, capital flows, and offshore financial centers.  The FSF also carried out work on the implementation of codes and standards on which it recently released a report.@  Again, the number of items accomplished is too detailed and long and therefore we will only mention one other item, AThe G-20 was established as an informal mechanism for dialogue among systemically important countries within the framework of the Bretton Woods institutional system.@

SUMMARY
While you think this may not have anything to do with your savings, you are incorrect.  The Financial Stability Forum is just ONE more way for the international level to CHANGE laws on the national level so that all national authorities are now accountable not to our Congress but to the Bank for International Settlements and other international entities such as the United Nations, World Bank, International Monetary Fund, etc.    As mentioned, this is a report about the annual Bank for International Settlements meeting.  They have a very basic and key role in monetary affairs.  Dr. Carroll Quigley stated in Tragedy and Hope,  A[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as whole.  The apex of the system was to be the Bank for International Settlements in Basle Switzerland, a private bank owned and controlled by the world=s central banks which were themselves private corporations (emphasis added) (p.324).A  

The following are transcripts from the annual press briefing which discusses the U.S. economy and the state of affairs of the world=s finances.  I then had the opportunity to interview William White, chief economist and then Svein Andresen, Secretary General of the Financial Stability Forum.   On page 10 you will find a chart showing the very large outreach of the FSF.

BANK FOR INTERNATIONAL SETTLEMENTS

2001 ANNUAL REPORT - ABSTRACTS
The most significant development during the period under review was the sharp slowing of the US economy beginning in the second half of the last year.  Although a slowdown had long been expected and even desired, its suddenness was remarkable for a variety of reasons.  It seemed to mark the ending of, or at very least a significant pause in, the decade-long global expansion in which the US economy played a disproportionate but welcome role (all boldface replies denote emphasis added). p. 3

Another recent feature of ongoing globalization has been the ease with which large divergences in national savings rates have been dealt with through international capital flows.  In the U.S. the net private savings rate fell below (6%) of GDP last year (a decline of 12% since 1992), whereas in Japan, net private savings rose to almost 9%.  4

The capital flows into the U.S. as well as other recipient countries were driven in part by the quest for diversification and perceived opportunities to earn above average investment returns.  As a by-product, they provided strong support for the US dollar which in turn helped to tame inflationary pressures.  A COMPLEMENTARY EXPLANATION COULD BE THAT THE SAFE HAVEN ASPECT OF THE RESERVE CURRENCY RECEIVED INCREASED EMPHASIS AS UNCERTAINTIES MOUNTED ABOUT GLOBAL ECONOMIC PROSPECTS.  5

Nowhere were economic developments more dramatic than in the United States where GDP growth accelerated to almost 6% in the first half of 2000 under the influence of strong consumer spending and a further large increase in business fixed investment.  5

Yet, as the year progressed, signs began to emerge that risks were accumulating.  The Nasdaq fell and kept falling as did other indices to lesser degrees.  As a consequence, nominal household wealth in the U.S. actually declined in 2000 for the first time in the postwar period.  Conversely, personal disposable income rose to near record levels while the personal savings rate fell still further below zero.  While corporate debt levels were in aggregate further from historical highs, the circumstances of smaller enterprises became more problematic.  Banks imposed much stricter lending standards, bond market financing for non-investment grade borrowers became almost unobtainable for a time, and vendor financing by technology equipment also tightened.    Moreover, consumer spending held up surprisingly well given announcements of job losses and further recorded declines in consumer confidence   6  NOR DID ECONOMIC ACTIVITY IN THE EURO AREA SPEED UP AS HOPED.  Europe seemed for a time insulated from developments elsewhere.    7

As in previous years, US demand growth was mainly driven by consumption, supported by strong income growth arising from favorable labor market conditions a well as sizeable wealth gains.  Household spending, supported by employment gains, was the fastest-growing demand component.   12  

                             
TRANSCRIPT OF 2001 BIS ANNUAL PRESS BRIEFING
Transcript by Joan M. Veon
June 11, 2001 - Basel, Switzerland


Andrew Crockett, Managing Director - BIS; William White, Economic Advisor and head of BIS Economic Department

Veon's Questions:   Mr. Crockett you said last year that no country goes indefinitely with a large current account deficit.@  Has the U.S. seen their hard landing, is it yet to come as a result of their large current account deficit and strong dollar, will their hard landing come when Americans no longer consume and spend, what does America need to do to turn around?
Mr. White: I noticed more uncertainty in your economic conclusionsBis the world get more complex or the debt level of the world much higher?

Crockett: I think as far as what we said on the US current deficit, we stick with the view that a large current account deficit is not sustainable indefinitely.  This is not a controversial proposition as it has been said by U.S. policy makers.  This does not mean that a hard landing is inevitable.  It is possible to correct a large current account deficit over time.  It will require a combination of shifts in absorption in the U.S. relative to the rest of the world.  It will probably, in our judgment, involve in the course of time,  decrease in the U.S. dollar relative to other currencies but there is no reason why this should happen suddenly or disruptive manner. It will over time almost certainly happen.  The task facing policy makers is to make it happen in a manner that is gradual and positive rather than sudden and disruptive.  Clearly, the best way this could be resolved is an acceleration in growth in the rest of the world.  This would provide the context in which the slowdown in U.S. domestic demand could be accompanied by an increase in the rate of U.S. exports.  That would be the ideal way and probably would be accompanied by a strengthening of other currencies as their economies strengthen relative to the dollar.  If those things do not happen then the risk remains of mor disruption and that is something we have frequently warned about.
 
White: About the issue of the world becoming more uncertain.  I think we have always been modest in this institution in our forecasting abilities.  We do recognize that there is a lot of things which are difficult to understand and to predict.   It is true that the world has become a more uncertain place in recent decades.   This has to do with the growing importance of financial markets and changes in wealth valuation.   All of these things, of course, are very hard to predict but they do have real side implications.  In that case, yes, the world has become more uncertain than it used to be.

Question; How great is the risk that the Fed is blowing up a new bubble in the equity markets?
Crockett: The Fed is very aware of these potential dangers and has reached the judgment that given the level of inflationary pressures of the moment and their expectations as to productivity growth in the future that it is  will  within the  prospects of
the U.S. economy to achieve faster growth and therefore a reduction in interest rates will not generate an unsustainable increase in asset prices but will be desirable as necessary to renew the growth rate potential.

Question: Having seen a number of annual reports over years, the main message in this one is that there is  a savings rate and a rate of investment capital.  Capital flows attracted from some other source B not savings are driving investment.  The U.S. is attracting money from Europe. You are coming across with a strong conclusion that there is the need for more and more international cooperation.  Is that the central message and how do we achieve it?
Crockett: It's an important message.  It used to be a puzzling one  that levels of savings were more closely related with investment that was in individual countries than in global capital markets this is the work by Feldstein and Marioka(?).  It seems in the last ten years that this bias is diminishing and therefore the level of investment is becoming less closely associated with the level of savings within a country. That means that the capital flows can be greater.  Capital flows cannot continue indefinitely.  Savers are accumulating claims on other countries because they want to utilize them at some time The fact that the short term discrepancy between domestic savings, investment and balance of payment deficit can be greater without necessarily changing long-term constraint that balances must subside back to a sustainable level means that is more scope for disruptive adjustments as well as more scope for productive use of capital.  There is a need for careful monitoring of this process to make sure that first of all imbalances don=t grow to be too large and that when they correct that they are corrected in a smooth gradual way rather than in a sudden, disruptive way.
Follow-up Question: The ultimate conclusion therefore is that monetary authorities should certainly be more cooperative.  Crockett: I don=t think it is fair to say that there isn=t cooperation.  I would draw a distinction between formal coordination and cooperation.  It is true that central banks do not formally coordinate their policy responses but have an intense dialogue about they model they feel affects their economies, how that relates to the model of transmission in other countries and how they would react in different circumstances and I would say that the international cooperation in the monetary sphere  is alive and well.   
Question: One message of your report, if I got it right, is that the risk of recession is not over until now and that we have to wait several more months to get a clearer picture?
Crockett: I think that is true.  I think it is true that we are going through a U shaped cycle.  There would be a period of importance which will transpire before there is a convincing upturn.  What is particularly important is that during that period effects operating through the financial system do not exacerbate the downward tendencies of the real economy.  If we can avoid that   then I think we are reasonably confident that after a few quarters we will see a normal economy.  

Veon Question: What if the American consumer decides they have too much debtBwhat will this do to your expectations for recovery on a global basis?
Crockett: This is one of the uncertainties and why we are pursuing a narrow course.  If Americans consumers stop spending then you will see a SUBSTANTIAL downturn in demand and that would seep through to other areas and the result would be a MUCH LONGER, DEEPER PERIOD OF SLOW GROWTH LEADING TO RECESSION.  That is  why it is very important that the confidence of the consumer and businessman is maintained.  There is clear evidence that the monetary authorities are alert to the need to preserve this confidence.  

TRANSCRIPT - INTERVIEW WITH WILLIAM WHITE
VEON: There is a lot more uncertainty in your Annual Report.  If the American consumer does not spend, and they have done a darn good job in the last ten years, what is the prognosis?
WHITE: The consumer is central at the moment because investment is falling off sharply, particularly in the Internet Technology side.  The consumer is key but the question at issue is the extent to which the consumer will be prepared to continue spending.  Let us suppose there is continued high rate of growth of productivity in the US, if aggregate demand is falling off and productivity levels are staying up then the level of unemployment has to go up.  Then the question becomes Awhat does that do to consumer confidence?@ and I daresay that if, indeed, there is a sharp increase in unemployment, that consumer spending will fall off in light of the reduction in consumer confidence which will just exacerbate the downturn. That is a problem.

VEON: The Fed has reduced interest rates five times in five months.  They are pumping a tremendous amount of money into the system.  If America stops spending, then the implications for the world are pretty major.
 
WHITE: The United States has been the welcomed engine of growth globally over the course of the last five or six years and it has been very welcomed.  The concern is that with the reduction in the US savings rate and  now the reduction in profits, that the engine may go out of service.  If so, there is no question that this will have a big impact on other people.  It has already begun. If you look at export growth in Southeast Asia where the slowdown has been quite dramatic and has had feed back effects on Japan which was benefitting until recently by high levels of   exports not just to the US but to other parts of Asia.  So we are starting to see some of the implications.  Let=s hope that it doesn=t go on too long.

VEON: Is there a possibility, given US debt, that THE DOLLAR could have an AAsian Crisis?@  
WHITE:    A lot of us have been worried for a long period of time that the relatively high value of the US dollar would be reversed in light of the current account deficit and the still small, but growing, net interest burden on that external set of liabilities.  It has not happened up until now.  People have continued to pour money into the United States both from Japan and out of Europe.  The longer run confidence in the US economy continues to be maintained.  That may indeed continue.  My hope would be that there would be some slackening of that confidence so that you could get SOME reduction in the value of the US dollar which would eventually, over time, reduce these externally imbalances.  The last thing which anyone wants is a sharp movement in the dollar which would exacerbate inflationary pressures in the Untied States dis-inflationary implication for Europe, perhaps at a time when Europe does not really need it.  I think SLOW, SMOOTH ADJUSTMENT IS WHAT WE WOULD HOPE FOR BUT IS NOT NECESSARILY WHAT WE ARE GOING TO GET.

VEON: There is a lot of terminology regarding the slow down in the U.S., what lessons has the BIS learned    From the technologyBthe burst of the technology bubble.
WHITE: I made reference in the press conference to the Pre-World War I period.  What is sort of interesting, when you go back, what we have seen recently, we have seen many times before.  There was a major stock market crash in 1772 that was associated with canals which had reduced transportation costs by 90% so the canalsBmay not have been high tech but it had a very big influence in terms of the economy.  There was another boom/bust in 1825 with railroads, another one in 1873 with the beginnings of electronics and railroads again but in Canada and Latin America, there was another one in 1929 which was associated with the car, household appliances, radio, so we have seen these longer terms things many times before so that it looks like what has happened in the [past year] look sort of familiar.   I am hoping that given a set of modern set of supervisory techniques that we will manage  to do is keep this problem out of the financial system.  In all of the earlier examples, it was weakness in the financial system feeding through to the real side that exacerbated the situation.  I hope that the steps which we have taken, not just at the BIS, but worldwide to improve the health of the global financial system will bear some fruit.

VEON: Last question.  It appears with the birth of the EU and the FTAA that the world is moving more into regions and it appears that we are going into a regional central bank system, what repercussions does that have for the central banks of individual countries?
WHITE: The concept of regionalism, whether its regionalism with regard to trade, or central banking groups or whatever is that it is a form of cooperation and a form of openness which is desirable.  The bad side B which can be avoidedB when people use these arrangements to decrease trade and to decrease cooperation with people who are outside of the club.  So what we hope is that the growing emphasis on regional arrangementsBin Canada where I am from,  with NAFTA and the extension to other countries in Latin America, if you look upon that not as being Afortress Western Hemisphere@ but as a bridge to still more liberalized trading regimes globally, then I think that is all to the good.  In so much as the BIS is concerned, we have in fact, substantially increased in recent years the emphasis we put on regional central banking groups not just the individual central banks around the world but with regional central banking groups.   We have a good working relationship with the following regional central banks:  SADC (Southern African Development Community), CEMLA (Centro de Estudios Monetarios Latinoamericanos), EMEAP (Executives= Meeting of East Asia-Pacific Central Banks), MEFMI (Macroeconomic and Financial Management Institute of Eastern and Southern Africa), and SEACEN (South-East Asian Central Banks).  The regional work they do is very important and reinforces the fact that regional ought to be interpreted as being  part of a broader global endeavor to improve central bank cooperation.  We want both of these thingsBregional and global.

INTERVIEW WITH  SVEIN ANDRESEN -
SECRETARY GENERAL
OF THE FINANCIAL STABILITY FORUM
JUNE 11, 2001


NOTE: Countries which are members of the FSF include the G7  plus  Australia,  Netherlands,  Singapore and Hong Kong.
At the March 22-23, 2001 meeting, the U.S. was represented by the Department of the Treasury, the Securities and Exchange Commission, and the Board of Governors of the Federal Reserve System.

The Global Economy
VEON: I find it very interesting that as the world continues to evolve, that everything is now boiling down to the integration of economies, as we talked the first timeBmacro and micro, and that there needs to be some kind of regular or major global oversight because of the complexity of the system.  I would like to thank you for your time.  What are the top three or five concerns of the FSF at this moment?  Last year you discussed debt and the tech market.
ANDRESEN: I am not so sure that I want to get into what is wrong.  I can=t speak.  
VEON:   Are you in the process of re-analysis?  
 
ANDRESEN: We always are.  ExactlyBwe are in the process of preparing for discussion of many issues.  So I will stay clear of this.  As you know the Forum distinguishes between things which are considered to be financial risks arising from the economic cycle and on the other hand the kinds of risks which arise from structural weaknesses in the functioning of the financial systemBregulation, transparency problems, etc.  It has been our concern that there would be certain problems once the global economy turned and it has turned and I think we are finding that one of the reasons by the downturn is sharper than one might have expected has to do with indebtedness and the weight that it has on spending.  We have had much discussion of this and I think that the feeling is that the financial system in the U.S. and most industrialized countries are well placed to withstand the kinds of credit problems that you would expect to arise.  This comes back to the question of what is happening in the macro economy.   Is this a very temporary pull down or is it a more fundamental response to over investment.   That we don=t know yet.

VEON:   The annual report had a lot of comments about Asuddenness@ and how the slow down in the US was not anticipated.
ANDRESEN: As you said in the beginning, the world is getting more complex and things happen more quickly and I think the fact is that although we have access to more information and information costs are falling so rapidly, you still have to bring together the bits and pieces of information available to  various sources to assess it with the benefit of the perspectives and contextual information that different kinds of people bring and this is quite compelling

VEON: What is going on with the shaking out globally of the marketsBobviously the debt is a build up over a period of time.  Is it being exacerbated because there is more interconnectedness between economies?
ANDRESEN: Exacerbated?  Probably.  If you judge the inter-connectedness between economies purely by trade links, you would not have the speed of the deceleration that we see now.  You have to ask what are the other mechanisms which make it happen so quickly?  Within the trade area, there are probably more immediate things such as cutting down of demand.  

VEON: We Americans are known as the ugly Americans for a lot of reasons.  We are the ugly Americans because we consume.  It appears that we will be the ugly American if we don=t consume at this time.  Is this correct?
ANDRESEN: I will not comment.  It has been useful that America and grown so vigorously over the past [number of] years.  The stage will come when imbalances start to exert themselves on future growth and I think that is what is happening in the U.S.  You come that this deceleration which seems to be originating in the tech sector does not spread very widely and so far it  has not as U.S. consumers have kept on spending on cars, goods,  and houses.  The Federal Reserve has encouraged a continuation of spending in order to prevent the Dow from dropping too strongly.  As I said, imbalances got built up and one way or the other, imbalances get unwound.  Generally imbalances within economies which are very sound in other ways, infrastructure, etc. get unwound smoothly.  But there is no guarantee.

Purpose of FSF
VEON: When the FSF came together, you are now in the process of moving, growing and integrating, what kind of progress has been made as far as the FSF being able to protect from further problems?

ANDRESEN: ITS WORK IS TO DETECTING VULNERABILITIES EARLIER AND MAKING sure something is done to address them and to shore up defenses generally.  There is no guarantee than that is going to protect the system but the efforts go in this direction.  I think the identification of vulnerabilities is something we put a lot of emphasis on and that we are successful at, but one has to be careful when saying that.  This is at the core of it and this we doBit is better done now than it was in the past, without any question.     

I mentioned last year the Forum works by setting up groups which address issues on its own or through its membership to do different thingsBdiscussing things it is concerned about.  It is a mechanism for following this up quite closely as far has how things have progressed.  

Structure of FSF
VEON: The FSF is just the G7 at this time, are there plans to expand it to the G20?
ANDRESEN:   Besides the G7, there are four additional countries: Australia, Hong Kong.  Only the G7 are there with the Deputy Finance Ministers and Central Bank Ministers.

VEON: You have some international financial institutions like the OECD, IMF, WB.  Will you be adding any international investment banks like M-L?
ANDRESEN: No.  

VEON: There was comment at the beginning that you would be adding presidents and prime ministers.
ANDRESEN: No- never.  That has never been considered.  The FSF has a mixture of the weight that comes with the principal industrial countries= governments being behind it and represented in it, combined with all the technical capacity that the international community has to address financial problems and that technical resides  with central banks, supervisors, international financial institutions that often inter-connect things.  These kinds of people and us at the BIS have a lot of interaction with the private sector.  (Veon Note: In the very beginning there was some discussion of adding country heads.)

VEON: Are all the various participants given the same weighting?
ANDRESEN: Yes, they are individuals in their function or by virtue of the institutions they represent, have a great deal of capacity about Awe are all in this together.@  We discourage any kind of institutional approach like the IMF.   

 
VEON: Well, I think everything bears out that we are in a complicated time.  As I continue to analyze and read, it really goes back to the kind of forum that the BIS has set up.  There is no doubt that no one country supervisor, or central bank can do it.  It is just a reality and as you said, the electronics is what now makes us hold our breathe because at the flip of a finger the whole world can change.
ANDRESEN: Markets and the world can definitely handle the flip of a finger.  The market is enormously resilient.  It is an oversight process, a kind of collective problem that the financial system gets intoBeverybody misjudges, everybody tries to get out at the same time.  

Liquidity
VEON: The annual report discussed liquidity.  Given the high level of debt in the industralized countries, how can liquidity be injected into the system to balance out the high level of debt?
ANDRESEN: The FSF has had discussion of issues related to liquidity. There are many different ways of understanding liquidity.  I am not so sure of all the degree that the liquidity problems   we see sometimes traded in asset markets is related to excessive indebtedness.  It is not clear that outside injection of central bank liquidity into the system would necessarily take that problem away. We don=t have the liquidity problem in the sense that interest rates are driven high and so on, we have in some markets a greater aversion to risk.  We may have somewhat greater efficiency or less efficiency in the mediation  process as a result of consolidation with each getting bigger exposure to one another   (Or less exposure).  Is that a bad thing?  It is not entirely clear.  We had a period in 1998 and years preceding, where we had a massive amount, on the one hand, of central bank supported re-liquification of the financial system.  It led to a lot of critical things: long term capital, massive imbalances in the funding of emerging market economies, and the bubble.  There are also those who think that we are in a much more set of sensible set of circumstances with regard to stability.  Where everyone would agree is that the system would not be more prone to chug along and then something unexpectedly happens.   We have not had anything happen like August/September 1998.

CONCLUSION

As we go to press, the 2001 Group of Seven Finance Ministers have just met in Rome.  While they have not issued a statement, they agreed that Asound economic fundamentals and strong international co-operation should provide a solid foundation for renewed expansion@.   Interestingly enough in a separate statement, Gordon Brown, the Finance Minister from England has declared with regard to the stock market, AThe worst is yet to come.@  Does he know something none of the other  Finance Ministers don=t know?

What are some examples of our new interconnectedness?  (1) The volatility in the stock marketBwhile some may be AAllowed@ since the big boys have fine tuned the system to dance to their orchestrations, it now is true that what happens in Japan or Columbia does affect the U.S. in some way (2) When you see the title of your mutual fund or bank changing from what was a U.S. company to a foreign company, that says something.  (3) When you see foreign companies buying U.S. firms, like British Petroleum buying Amoco, that says something.  (4) When you hear our presidents and other key Cabinet officials talking about Aintegration@ and Ainterconnectedness@, that says something, (5) When you see your local bank going out of business or being taken over  because they cannot meet the capital requirements set down by the Bank for International Settlements, that says something.  

I truly believe that the volatility we have seen, especially Alan Greenspan raising interest rates in 1999 and 2000 to the point where the NASDAQ lost $4T in value, is contrived.  The natural course of supply and demand is no more.  The volatility was created to say, AWe are one and we have to act as one.  We have to pass laws which will make the national conform to the international level because we are one.@  Lastly, none of this could ever be allowed to happen if our NATIONAL LEVEL B PRESIDENT, CABINET AND CONGRESS DID NOT ALLOW IT TO HAPPEN.  As you read history, you see that all of our Presidents from Woodrow Wilson to the current President Bush were and are globalists.  They set up the Bank for International Settlements (1930), President Roosevelt named the United Nations, it was Roosevelt who called together the heads of the nations of the world in 1941 to set up the World Food Organization which subsequently became part of the UN Food and Agriculture Organization (FAO) in Rome, the U.S. also was the lead architect in the Bretton Woods Monetary Conference which gave birth to the IMF and World Bank.  This meeting was held in New Hampshire and chaired by members of Roosevelt=s cabinet.  It was President Nixon who started the Group of Eight.   At the behest of the Group of Seven in 1980, the United States started to tear down financial and economic borders between the countries of the world, thus creating the Aglobalized world@ which we live in.  Now the leaders of the seven industrialized countries plus Russia are setting up a new International Financial Infrastructure@ in order to protect us from us. However, the real structure is that of world government.  The individual governments of the world no longer have national sovereignty.  As shown here,  we are run by a Aglobal mafia.@   

While Americans cannot put their finger on just what is exactly wrong, somehow their stooped posture, the slow step which reflects the loss of joy, the aimless chatter about the unimportant reflects what they cannot verbalize.

















 













THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE and
The Bank for International Settlements


Merrim-Webster Definition of Mafia:
AA secret terrorist society in Sicily, a secret criminal organization.@
Note: The word Amafia@ also denotes control.  They control everything about youBwhere you live, what you do, how you live, what you think, etc.  If you don=t do what they want you to do, then you could be in big trouble.

 
    INTRODUCTION

For a number of years, I have been putting together a list of international or transnational groups and organizations which are now in position to make decisions for the countries of the world as power, over a period of time, has been delegated to them by the countries of the world.  They are: the Bank for International Settlements-BIS, Basle Switzerland; affiliated financial organizations such as the International Organization for Security Commissions-IOSCO (Montreal) and the International Association of Insurance Supervisors-IAIS (Basle Switzerland); the Group of Ten Central Banks, the Group of Seven Central Banks, central banks of other countries, the Group of Eight-G8 and its expanded version, the Group of 20-G20; the United Nations-UN (New York), the International Monetary Fund-IMF (Washington D.C.), the World Bank-WB (Washington D.C.) and the World Trade Organization-WTO (Geneva).  You will find them diagramed on the following page.

While they are not secretive, the fact is, 99% of Americans don=t know what you are talking about when you mention any of the above.   We Americans love our country.  We wear the flag on our shirts, cars, and machinery.  We have it hanging outside our house or business.  Little do Americans know that our sovereignty is being shifted to a group of international organizationsBunder the term of Aglobal governance@ which refers to a new form of government.  This report will deal with the governments, groups, and organizations which are facilitating and affecting the economic shift of global governance.  The transnational organizations, which have been set in place above the national level, are, little by little, transferring power which belonged to the nation-state to their jurisdiction.

In 1996 I covered my first Group of Seven (which became Eight in 1999) meeting in Lyon France.  The above structure was becoming apparent to me.  What I did not understand was who derived their power from whom.  It was clear as I read past Communiques from the Group of Five then the Group of Seven, now Group of Eight, that their ideas were the same as those of the United Nations.  So I asked the president of the European Union, Jacques Delores, ADo you take orders from the United Nations or does the United Nations take orders  from the Group of Seven since your agendas appear to be  the  same.@   Being the politician that he is, he said that neither group took orders but that they worked together.  I still have this same question.  However, it is very apparent, in my opinion, that  this agenda comes from some hidden source.   It appears that some of the ideas begin with non-governmental organizations on the local level, while others, begin with the United Nations, the Bank for International Settlements, the World Bank, etc.  At some point they gain Aacceptance@ and are then ready to become implemented as ideas which Athe people of the world want@ or Athe world leaders endorse.@     

What I concluded after I covered the Lyon Summit is that they work hand in hand.  When various policies come out of the Group of 8, what they are really saying to the rest of the UN member countries is, AThis is where we are going and this is where you need to go as well.@  In order to report on the Annual meeting of the Bank for International Settlements on June 11, I need to put them and their activities into perspective by explaining the role of the Group of Eight.

In order to understand how the G8 is set up, there are three key meetings which are held about the same time: the G7 (Russia is not considered a major economic power) Finance Ministers Meetings which is about two weeks before the G8 Foreign Ministers meeting (Russia is now included in both the Foreign and Summit) which is held right before the President and Prime Minister=s G8 Summit.  Each meeting issues its own report or Communique.  Each report will vary in length depending on the issues.




 






















































































































 
   
THE GROUP OF EIGHT

This powerful group of the world=s most industrialized countries plus Russia, has been meeting since 1975 to coordinate economic policy for the world.  They first came together at the behest of President Nixon shortly after he severed all connections the dollar had to gold in 1971.   Over the years, they have expanded their Ajurisdiction@ by adding labor, transportation, energy, environment and  defense issues as well as domestic problems.  There are several key summits which are interesting for us to see not only a transfer of power from the national level to the international, but to see how they have expanded their powers.

Beginning about 1995, there began a constant cry about the need to restructure the Bretton Woods (IMF/WB) institutions and create a global financial architecture which would reduce volatility in the market place.   On a personal note, I covered my first UN meeting in September 1994.  In doing research, I started to identify important meetings.  The G7 was one of them.   In late June 1995, I talked to a reporter while covering the UN50th in San Francisco.  She had just returned from Halifax. I asked her was happened, she replied, AYou did not miss anything, it was boring.@  Well, as you will read, it was far from boring for it was in Halifax that the drum beat for a new financial architecture began.  Lest you think the following has no relevance to your life, please read the conclusion before you continue.

President=s Communique - The Halifax G7 Summit, June 15-17, 1995
The President=s Report highlighted the following:  AToday=s world is very different from the one in which the Bretton Woods [1944] institutions were created. [1]The global economy is more integrated, [2] Capital market liberalization, technological change, and financial innovation have transformed the global financial landscapeBwith great benefits, but also new risks, [3] A variety of new global challenges have emerged in areas such as environmental stewardship and the important of good governance, and [4]  The influence of developing countries in the world economy is growing, yet, a large portion of the world=s population still lives in extraordinary poverty.@

The report then goes on to highlight a number of areas which have been the focus of the G7 Finance Ministers since 1995.  There has been a very large restructuring and Areinventing@ of the global financial architecture@ in order to change, adapt, and add various global organizations to strengthen and provide greater oversight, regulatory, and accountability powers to these organizations, thus transferring power from the nation-state to the respective global entity.  While I would love to spell out all of these changes, they would be too cumbersome for most to understand and follow.  I will, however,  bring to your attention one of the changes: the Financial Stability Forum which is one of the topics of this newsletter.

G7 Finance Ministers Report to the Heads of State and Government on International Monetary Stability - Lyon June 28 1996 (7 pages)
AThe dramatic increase in trade and capital flows in the world has deepened economic and financial integration among all countries, and it creates a more complex financial environment.  The changes in the structure of global finance and the emergence of new participants and markets require the supervisory response, including international cooperation, to evolve continually.  The following directions [are needed]:  Enhance cooperation across markets to strengthen supervision of financial institutions.  In this context, we welcome the joint efforts of the Basle and IOSCO Committees to enhance their collaborative arrangements and the work of the Joint Forum of banks, securities and insurance supervisors (emphasis added).@   All of this alludes to the Financial Stability Forum.

Final Report to the G7 Heads of State and Government on Promoting Financial Stability- June 21 1997 - Denver (6 pages)
AWe still have work to do in our own economies.  More must be done to restore sound long-term fiscal positions and, in some countries, to ensure the soundness of the financial system.   International financial markets are becoming increasingly global and complex.  Beginning in Halifax and continuing through Lyon, we have encouraged financial regulators and the international financial institutions to take measure to deal effectively with possible systemic or contagion risks and foster financial stability.  National supervisors and international regulatory bodies have put in place a network of cooperative arrangements and developed proposals to enhance the supervision of internationally active financial institutions on both an on-going basis and in emergency situations (emphasis added).@  While this does not specifically refer to the Financial Stability Forum, I believe that it is described.

Report of the G7 Finance Ministers to G7 Heads of State or Government for their meeting in Birmingham May 1998 (8 pages)
APrevious summits have focused on ways to strengthen the global financial system.  Over the past four years considerable progress has been made.  This report presents proposals where there is now an emerging consensus for modifications to the architecture of the international financial system.  We have identified five key areas: enhanced transparency; helping countries prepare for integration into the global economy and for free global capital flows; strengthening national financial systems; ensuring that the private sector takes responsibility for its lending decisions; and enhancing further the role of the International Financial Institutions [loss of economic sovereignty] and co-operation between them.@
  
 
While the report did not specifically name the Financial Stability Forum, it described the need for it this way: AThere is a gap in the current international system with respect to surveillance of countries= financial supervisory and regulatory systems.  Enhanced surveillance in this area would help encourage national authorities to meet international standards and help reduce financial risk. We see an urgent need for a system of multilateral surveillance of national financial, supervisory and regulatory systems.@   

Lobbying Activities by the Clinton Administration During 1998
Interestingly enough, President Clinton, Secretary of the Treasury Robert Rubin, Assistant-Secretary of the Treasury Larry Summers, among others, in the Clinton Administration, gave numerous speeches and testimonies before respective House and Senate Subcommittees calling for a complete restructuring of the international financial architecture.  In addition, the Bank for International Settlements, the World Bank, the International Monetary Fund, and other international organizations and think tanks all provided studies and further testimony as to why and how the international financial architecture should be restructuredBfor our good, of course!

Also occurring in 1998, was great instability in the U.S. stock market which was attributed to a slowing economy, the possibility of a default in the Russian ruble (which has absolutely nothing to do with the financial stability of the U.S.  The Dow dropped a total of 1500 points.  I wrote a very lengthy and exhaustive analysis on the stock market and concluded that the reason why it dropped was that the Abig boys@ wanted the U.S. to lead the way in providing seed money in the amount of $18B for a contingency line of credit for debt-laden countries.  Other countries would then provide the rest of the $82 billion to provide the IMF with a new $100 billion contingency line of credit.  After our Congress provided the funds in October, the Federal Reserve provided a doggie bone by dropping  interest rates by 1/4 of 1% to show their gratitude.  The Dow miraculously rose 1500 points within a three week time period.

Report by G7 Finance Ministers dated May 1998, AFinancial StabilityBSupervision of Global Financial Institutions@ - This was a special report for the Group of Seven Meeting in Birmingham (12 pages)
AThe rapid globalization of financial markets is a key issue for the G7.  Old barriers are breaking down.  Firms are moving into new products and markets, and many are becoming increasingly international, with complex organizations, managed on-line businesses, and diversified operations spread across the globe.  By contrast, supervisors have traditionally authorized and regulated particular legal entities.  That is why, in June 1997, we issued a report on measures to promote global financial stability, including enhanced co-ordination among national regulators.  In their Denver Statement, the G7 Heads of State and Government expressly endorsed our proposals.  Since then the wider implications of the Asian financial crisisBdiscussed extensively at this summitBhave confirmed the importance of enhancing the ability of supervisors to assess, and firms to manage, risk (emphasis added).@   While it does not specifically refer to the Financial Stability Forum, the coordination Aamong national regulators@ refers to the FSF.

Report of the G7 Finance Ministers Meeting to the Koln Economic Summit-Cologne June 18-20, 1999- AStrengthening the International Financial Architecture@ (15 pages)
The G7 Finance Ministers said, AAs Finance Ministers of the major economies, we are aware of our special responsibility for improving the conditions for a proper functioning of the international financial and monetary system (emphasis added).@  They then recommend specific reforms in six priority  areas.   Under AStrengthening and reforming the international financial institutions and arrangements,A they discussed the Financial Stability Forum.  AThe new Financial Stability Forum was created to enhance international cooperation and coordination in the area of financial market supervision and surveillance.  The Forum met for the first time in April [1999] and agreed to focus initially on three issues: the implications of highly levered institutions, off-shore centers and short-term capital flows.@ The Reports length reflects the detail of the reinventing of the International Financial Architecture.  
The G7 Finance Ministers= meetings - AStrengthening the International Financial Architecture  - Fukuoka, Japan, July 8, 2000 (16 pages)
This report was a report of the progress made since the Cologne Economic Summit and the steps which had been taken since that time.  AThe Financial Stability Forum was created last year to enhance financial stability, improve the functioning of markets, and reduce systemic risk.  As we requested, the FSF examined the issues of, and published reports this spring on highly leveraged institutions, capital flows, and offshore financial centers.  The FSF also carried out work on the implementation of codes and standards on which it recently released a report.@  Again, the number of items accomplished is too detailed and long and therefore we will only mention one other item, AThe G-20 was established as an informal mechanism for dialogue among systemically important countries within the framework of the Bretton Woods institutional system.@

SUMMARY
 
While you think this may not have anything to do with your savings, you are incorrect.  The Financial Stability Forum is just ONE more way for the international level to CHANGE laws on the national level so that all national authorities are now accountable not to our Congress but to the Bank for International Settlements and other international entities such as the United Nations, World Bank, International Monetary Fund, etc.    As mentioned, this is a report about the annual Bank for International Settlements meeting.  They have a very basic and key role in monetary affairs.  Dr. Carroll Quigley stated in Tragedy and Hope,  A[T]he powers of financial capitalism had another far-reaching aim, nothing less than to create a world system of financial control in private hands able to dominate the political system of each country and the economy of the world as whole.  The apex of the system was to be the Bank for International Settlements in Basle Switzerland, a private bank owned and controlled by the world=s central banks which were themselves private corporations (emphasis added) (p.324).A 

The following are transcripts from the annual press briefing which discusses the U.S. economy and the state of affairs of the world=s finances.  I then had the opportunity to interview William White, chief economist and then Svein Andresen, Secretary General of the Financial Stability Forum.   On page 10 you will find a chart showing the very large outreach of the FSF.

    BANK FOR INTERNATIONAL SETTLEMENTS

2001 ANNUAL REPORT - ABSTRACTS
The most significant development during the period under review was the sharp slowing of the US economy beginning in the second half of the last year.  Although a slowdown had long been expected and even desired, its suddenness was remarkable for a variety of reasons.  It seemed to mark the ending of, or at very least a significant pause in, the decade-long global expansion in which the US economy played a disproportionate but welcome role (all boldface replies denote emphasis added). p. 3

Another recent feature of ongoing globalization has been the ease with which large divergences in national savings rates have been dealt with through international capital flows.  In the U.S. the net private savings rate fell below (6%) of GDP last year (a decline of 12% since 1992), whereas in Japan, net private savings rose to almost 9%.  4

The capital flows into the U.S. as well as other recipient countries were driven in part by the quest for diversification and perceived opportunities to earn above average investment returns.  As a by-product, they provided strong support for the US dollar which in turn helped to tame inflationary pressures.  A COMPLEMENTARY EXPLANATION COULD BE THAT THE SAFE HAVEN ASPECT OF THE RESERVE CURRENCY RECEIVED INCREASED EMPHASIS AS UNCERTAINTIES MOUNTED ABOUT GLOBAL ECONOMIC PROSPECTS.  5

Nowhere were economic developments more dramatic than in the United States where GDP growth accelerated to almost 6% in the first half of 2000 under the influence of strong consumer spending and a further large increase in business fixed investment.  5

Yet, as the year progressed, signs began to emerge that risks were accumulating.  The Nasdaq fell and kept falling as did other indices to lesser degrees.  As a consequence, nominal household wealth in the U.S. actually declined in 2000 for the first time in the postwar period.  Conversely, personal disposable income rose to near record levels while the personal savings rate fell still further below zero.  While corporate debt levels were in aggregate further from historical highs, the circumstances of smaller enterprises became more problematic.  Banks imposed much stricter lending standards, bond market financing for non-investment grade borrowers became almost unobtainable for a time, and vendor financing by technology equipment also tightened.    Moreover, consumer spending held up surprisingly well given announcements of job losses and further recorded declines in consumer confidence   6  NOR DID ECONOMIC ACTIVITY IN THE EURO AREA SPEED UP AS HOPED.  Europe seemed for a time insulated from developments elsewhere.    7

As in previous years, US demand growth was mainly driven by consumption, supported by strong income growth arising from favorable labor market conditions a well as sizeable wealth gains.  Household spending, supported by employment gains, was the fastest-growing demand component.   12                               
TRANSCRIPT OF 2001 BIS ANNUAL PRESS BRIEFING
Transcript by Joan M. Veon
June 11, 2001 - Basel, Switzerland

Andrew Crockett, Managing Director - BIS; William White, Economic Advisor and head of BIS Economic Department

Veon=s Questions:   Mr. Crockett you said last year that Ano country goes indefinitely with a large current account deficit.@  Has the U.S. seen their hard landing, is it yet to come as a result of their large current account deficit and strong dollar, will their hard landing come when Americans no longer consume and spend, what does America need to do to turn around?
Mr. White: I noticed more uncertainty in your economic conclusionsBis the world get more complex or the debt level of the world much higher?

Crockett: I think as far as what we said on the US current deficit, we stick with the view that a large current account deficit is not sustainable indefinitely.  This is not a controversial proposition as it has been said by U.S. policy makers.  This does not mean that a hard landing is inevitable.  It is possible to correct a large current account deficit over time.  It will require a combination of shifts in absorption in the U.S. relative to the rest of the world.  It will probably, in our judgment, involve in the course of time,  decrease in the U.S. dollar relative to other currencies but there is no reason why this should happen suddenly or disruptive manner. It will over time almost certainly happen.  The task facing policy makers is to make it happen in a manner that is gradual and positive rather than sudden and disruptive.  Clearly, the best way this could be resolved is an acceleration in growth in the rest of the world.  This would provide the context in which the slowdown in U.S. domestic demand could be accompanied by an increase in the rate of U.S. exports.  That would be the ideal way and probably would be accompanied by a strengthening of other currencies as their economies strengthen relative to the dollar.  If those things do not happen then the risk remains of mor disruption and that is something we have frequently warned about.

 
White: About the issue of the world becoming more uncertain.  I think we have always been modest in this institution in our forecasting abilities.  We do recognize that there is a lot of things which are difficult to understand and to predict.   It is true that the world has become a more uncertain place in recent decades.   This has to do with the growing importance of financial markets and changes in wealth valuation.   All of these things, of course, are very hard to predict but they do have real side implications.  In that case, yes, the world has become more uncertain than it used to be.

Question; How great is the risk that the Fed is blowing up a new bubble in the equity markets?
Crockett: The Fed is very aware of these potential dangers and has reached the judgment that given the level of inflationary pressures of the moment and their expectations as to productivity growth in the future that it is  will  within the  prospects of
the U.S. economy to achieve faster growth and therefore a reduction in interest rates will not generate an unsustainable increase in asset prices but will be desirable as necessary to renew the growth rate potential.

Question: Having seen a number of annual reports over years, the main message in this one is that there is  a savings rate and a rate of investment capital.  Capital flows attracted from some other source B not savings are driving investment.  The U.S. is attracting money from Europe. You are coming across with a strong conclusion that there is the need for more and more international cooperation.  Is that the central message and how do we achieve it?
Crockett: It=s an important message.  It used to be a puzzling oneB  that levels of savings were more closely related with investment that was in individual countries than in global capital markets this is the work by Feldstein and Marioka(?).  It seems in the last ten years that this bias is diminishing and therefore the level of investment is becoming less closely associated with the level of savings within a country. That means that the capital flows can be greater.  Capital flows cannot continue indefinitely.  Savers are accumulating claims on other countries because they want to utilize them at some time The fact that the short term discrepancy between domestic savings, investment and balance of payment deficit can be greater without necessarily changing long-term constraint that balances must subside back to a sustainable level means that is more scope for disruptive adjustments as well as more scope for productive use of capital.  There is a need for careful monitoring of this process to make sure that first of all imbalances don=t grow to be too large and that when they correct that they are corrected in a smooth gradual way rather than in a sudden, disruptive way.
Follow-up Question: The ultimate conclusion therefore is that monetary authorities should certainly be more cooperative.  Crockett: I don=t think it is fair to say that there isn=t cooperation.  I would draw a distinction between formal coordination and cooperation.  It is true that central banks do not formally coordinate their policy responses but have an intense dialogue about they model they feel affects their economies, how that relates to the model of transmission in other countries and how they would react in different circumstances and I would say that the international cooperation in the monetary sphere  is alive and well.  
Question: One message of your report, if I got it right, is that the risk of recession is not over until now and that we have to wait several more months to get a clearer picture?
Crockett: I think that is true.  I think it is true that we are going through a U shaped cycle.  There would be a period of importance which will transpire before there is a convincing upturn.  What is particularly important is that during that period effects operating through the financial system do not exacerbate the downward tendencies of the real economy.  If we can avoid that   then I think we are reasonably confident that after a few quarters we will see a normal economy. 

Veon Question: What if the American consumer decides they have too much debtBwhat will this do to your expectations for recovery on a global basis?
Crockett: This is one of the uncertainties and why we are pursuing a narrow course.  If Americans consumers stop spending then you will see a SUBSTANTIAL downturn in demand and that would seep through to other areas and the result would be a MUCH LONGER, DEEPER PERIOD OF SLOW GROWTH LEADING TO RECESSION.  That is  why it is very important that the confidence of the consumer and businessman is maintained.  There is clear evidence that the monetary authorities are alert to the need to preserve this confidence. 

TRANSCRIPT - INTERVIEW WITH WILLIAM WHITE

VEON: There is a lot more uncertainty in your Annual Report.  If the American consumer does not spend, and they have done a darn good job in the last ten years, what is the prognosis?
WHITE: The consumer is central at the moment because investment is falling off sharply, particularly in the Internet Technology side.  The consumer is key but the question at issue is the extent to which the consumer will be prepared to continue spending.  Let us suppose there is continued high rate of growth of productivity in the US, if aggregate demand is falling off and productivity levels are staying up then the level of unemployment has to go up.  Then the question becomes Awhat does that do to consumer confidence?@ and I daresay that if, indeed, there is a sharp increase in unemployment, that consumer spending will fall off in light of the reduction in consumer confidence which will just exacerbate the downturn. That is a problem.

VEON: The Fed has reduced interest rates five times in five months.  They are pumping a tremendous amount of money into the system.  If America stops spending, then the implications for the world are pretty major.
 
WHITE: The United States has been the welcomed engine of growth globally over the course of the last five or six years and it has been very welcomed.  The concern is that with the reduction in the US savings rate and  now the reduction in profits, that the engine may go out of service.  If so, there is no question that this will have a big impact on other people.  It has already begun. If you look at export growth in Southeast Asia where the slowdown has been quite dramatic and has had feed back effects on Japan which was benefitting until recently by high levels of   exports not just to the US but to other parts of Asia.  So we are starting to see some of the implications.  Let=s hope that it doesn=t go on too long.

VEON: Is there a possibility, given US debt, that THE DOLLAR could have an AAsian Crisis?@ 
WHITE:    A lot of us have been worried for a long period of time that the relatively high value of the US dollar would be reversed in light of the current account deficit and the still small, but growing, net interest burden on that external set of liabilities.  It has not happened up until now.  People have continued to pour money into the United States both from Japan and out of Europe.  The longer run confidence in the US economy continues to be maintained.  That may indeed continue.  My hope would be that there would be some slackening of that confidence so that you could get SOME reduction in the value of the US dollar which would eventually, over time, reduce these externally imbalances.  The last thing which anyone wants is a sharp movement in the dollar which would exacerbate inflationary pressures in the Untied States dis-inflationary implication for Europe, perhaps at a time when Europe does not really need it.  I think SLOW, SMOOTH ADJUSTMENT IS WHAT WE WOULD HOPE FOR BUT IS NOT NECESSARILY WHAT WE ARE GOING TO GET.

VEON: There is a lot of terminology regarding the slow down in the U.S., what lessons has the BIS learned    From the technologyBthe burst of the technology bubble.
WHITE: I made reference in the press conference to the Pre-World War I period.  What is sort of interesting, when you go back, what we have seen recently, we have seen many times before.  There was a major stock market crash in 1772 that was associated with canals which had reduced transportation costs by 90% so the canalsBmay not have been high tech but it had a very big influence in terms of the economy.  There was another boom/bust in 1825 with railroads, another one in 1873 with the beginnings of electronics and railroads again but in Canada and Latin America, there was another one in 1929 which was associated with the car, household appliances, radio, so we have seen these longer terms things many times before so that it looks like what has happened in the [past year] look sort of familiar.   I am hoping that given a set of modern set of supervisory techniques that we will manage  to do is keep this problem out of the financial system.  In all of the earlier examples, it was weakness in the financial system feeding through to the real side that exacerbated the situation.  I hope that the steps which we have taken, not just at the BIS, but worldwide to improve the health of the global financial system will bear some fruit.

VEON: Last question.  It appears with the birth of the EU and the FTAA that the world is moving more into regions and it appears that we are going into a regional central bank system, what repercussions does that have for the central banks of individual countries?
WHITE: The concept of regionalism, whether its regionalism with regard to trade, or central banking groups or whatever is that it is a form of cooperation and a form of openness which is desirable.  The bad side B which can be avoidedB when people use these arrangements to decrease trade and to decrease cooperation with people who are outside of the club.  So what we hope is that the growing emphasis on regional arrangementsBin Canada where I am from,  with NAFTA and the extension to other countries in Latin America, if you look upon that not as being Afortress Western Hemisphere@ but as a bridge to still more liberalized trading regimes globally, then I think that is all to the good.  In so much as the BIS is concerned, we have in fact, substantially increased in recent years the emphasis we put on regional central banking groups not just the individual central banks around the world but with regional central banking groups.   We have a good working relationship with the following regional central banks:  SADC (Southern African Development Community), CEMLA (Centro de Estudios Monetarios Latinoamericanos), EMEAP (Executives= Meeting of East Asia-Pacific Central Banks), MEFMI (Macroeconomic and Financial Management Institute of Eastern and Southern Africa), and SEACEN (South-East Asian Central Banks).  The regional work they do is very important and reinforces the fact that regional ought to be interpreted as being  part of a broader global endeavor to improve central bank cooperation.  We want both of these thingsBregional and global.

INTERVIEW WITH  SVEIN ANDRESEN -
SECRETARY GENERAL
OF THE FINANCIAL STABILITY FORUM
JUNE 11, 2001

NOTE: Countries which are members of the FSF include the G7  plus  Australia,  Netherlands,  Singapore and Hong Kong.
At the March 22-23, 2001 meeting, the U.S. was represented by the Department of the Treasury, the Securities and Exchange Commission, and the Board of Governors of the Federal Reserve System.

The Global Economy
VEON: I find it very interesting that as the world continues to evolve, that everything is now boiling down to the integration of economies, as we talked the first timeBmacro and micro, and that there needs to be some kind of regular or major global oversight because of the complexity of the system.  I would like to thank you for your time.  What are the top three or five concerns of the FSF at this moment?  Last year you discussed debt and the tech market.
ANDRESEN: I am not so sure that I want to get into what is wrong.  I can=t speak. 
VEON:   Are you in the process of re-analysis? 
 
ANDRESEN: We always are.  ExactlyBwe are in the process of preparing for discussion of many issues.  So I will stay clear of this.  As you know the Forum distinguishes between things which are considered to be financial risks arising from the economic cycle and on the other hand the kinds of risks which arise from structural weaknesses in the functioning of the financial systemBregulation, transparency problems, etc.  It has been our concern that there would be certain problems once the global economy turned and it has turned and I think we are finding that one of the reasons by the downturn is sharper than one might have expected has to do with indebtedness and the weight that it has on spending.  We have had much discussion of this and I think that the feeling is that the financial system in the U.S. and most industrialized countries are well placed to withstand the kinds of credit problems that you would expect to arise.  This comes back to the question of what is happening in the macro economy.   Is this a very temporary pull down or is it a more fundamental response to over investment.   That we don=t know yet.

VEON:   The annual report had a lot of comments about Asuddenness@ and how the slow down in the US was not anticipated.
ANDRESEN: As you said in the beginning, the world is getting more complex and things happen more quickly and I think the fact is that although we have access to more information and information costs are falling so rapidly, you still have to bring together the bits and pieces of information available to  various sources to assess it with the benefit of the perspectives and contextual information that different kinds of people bring and this is quite compelling

VEON: What is going on with the shaking out globally of the marketsBobviously the debt is a build up over a period of time.  Is it being exacerbated because there is more interconnectedness between economies?
ANDRESEN: Exacerbated?  Probably.  If you judge the inter-connectedness between economies purely by trade links, you would not have the speed of the deceleration that we see now.  You have to ask what are the other mechanisms which make it happen so quickly?  Within the trade area, there are probably more immediate things such as cutting down of demand. 

VEON: We Americans are known as the ugly Americans for a lot of reasons.  We are the ugly Americans because we consume.  It appears that we will be the ugly American if we don=t consume at this time.  Is this correct?
ANDRESEN: I will not comment.  It has been useful that America and grown so vigorously over the past [number of] years.  The stage will come when imbalances start to exert themselves on future growth and I think that is what is happening in the U.S.  You come that this deceleration which seems to be originating in the tech sector does not spread very widely and so far it  has not as U.S. consumers have kept on spending on cars, goods,  and houses.  The Federal Reserve has encouraged a continuation of spending in order to prevent the Dow from dropping too strongly.  As I said, imbalances got built up and one way or the other, imbalances get unwound.  Generally imbalances within economies which are very sound in other ways, infrastructure, etc. get unwound smoothly.  But there is no guarantee.

Purpose of FSF
VEON: When the FSF came together, you are now in the process of moving, growing and integrating, what kind of progress has been made as far as the FSF being able to protect from further problems?

ANDRESEN: ITS WORK IS TO DETECTING VULNERABILITIES EARLIER AND MAKING sure something is done to address them and to shore up defenses generally.  There is no guarantee than that is going to protect the system but the efforts go in this direction.  I think the identification of vulnerabilities is something we put a lot of emphasis on and that we are successful at, but one has to be careful when saying that.  This is at the core of it and this we doBit is better done now than it was in the past, without any question.    

I mentioned last year the Forum works by setting up groups which address issues on its own or through its membership to do different thingsBdiscussing things it is concerned about.  It is a mechanism for following this up quite closely as far has how things have progressed. 

Structure of FSF
VEON: The FSF is just the G7 at this time, are there plans to expand it to the G20?
ANDRESEN:   Besides the G7, there are four additional countries: Australia, Hong Kong.  Only the G7 are there with the Deputy Finance Ministers and Central Bank Ministers.

VEON: You have some international financial institutions like the OECD, IMF, WB.  Will you be adding any international investment banks like M-L?
ANDRESEN: No. 

VEON: There was comment at the beginning that you would be adding presidents and prime ministers.
ANDRESEN: No- never.  That has never been considered.  The FSF has a mixture of the weight that comes with the principal industrial countries= governments being behind it and represented in it, combined with all the technical capacity that the international community has to address financial problems and that technical resides  with central banks, supervisors, international financial institutions that often inter-connect things.  These kinds of people and us at the BIS have a lot of interaction with the private sector.  (Veon Note: In the very beginning there was some discussion of adding country heads.)

VEON: Are all the various participants given the same weighting?
ANDRESEN: Yes, they are individuals in their function or by virtue of the institutions they represent, have a great deal of capacity about Awe are all in this together.@  We discourage any kind of institutional approach like the IMF.  

 
VEON: Well, I think everything bears out that we are in a complicated time.  As I continue to analyze and read, it really goes back to the kind of forum that the BIS has set up.  There is no doubt that no one country supervisor, or central bank can do it.  It is just a reality and as you said, the electronics is what now makes us hold our breathe because at the flip of a finger the whole world can change.
ANDRESEN: Markets and the world can definitely handle the flip of a finger.  The market is enormously resilient.  It is an oversight process, a kind of collective problem that the financial system gets intoBeverybody misjudges, everybody tries to get out at the same time. 

Liquidity
VEON: The annual report discussed liquidity.  Given the high level of debt in the industralized countries, how can liquidity be injected into the system to balance out the high level of debt?
ANDRESEN: The FSF has had discussion of issues related to liquidity. There are many different ways of understanding liquidity.  I am not so sure of all the degree that the liquidity problems   we see sometimes traded in asset markets is related to excessive indebtedness.  It is not clear that outside injection of central bank liquidity into the system would necessarily take that problem away. We don=t have the liquidity problem in the sense that interest rates are driven high and so on, we have in some markets a greater aversion to risk.  We may have somewhat greater efficiency or less efficiency in the mediation  process as a result of consolidation with each getting bigger exposure to one another   (Or less exposure).  Is that a bad thing?  It is not entirely clear.  We had a period in 1998 and years preceding, where we had a massive amount, on the one hand, of central bank supported re-liquification of the financial system.  It led to a lot of critical things: long term capital, massive imbalances in the funding of emerging market economies, and the bubble.  There are also those who think that we are in a much more set of sensible set of circumstances with regard to stability.  Where everyone would agree is that the system would not be more prone to chug along and then something unexpectedly happens.   We have not had anything happen like August/September 1998.

CONCLUSION

As we go to press, the 2001 Group of Seven Finance Ministers have just met in Rome.  While they have not issued a statement, they agreed that Asound economic fundamentals and strong international co-operation should provide a solid foundation for renewed expansion@.   Interestingly enough in a separate statement, Gordon Brown, the Finance Minister from England has declared with regard to the stock market, AThe worst is yet to come.@  Does he know something none of the other  Finance Ministers don=t know?

What are some examples of our new interconnectedness?  (1) The volatility in the stock marketBwhile some may be AAllowed@ since the big boys have fine tuned the system to dance to their orchestrations, it now is true that what happens in Japan or Columbia does affect the U.S. in some way (2) When you see the title of your mutual fund or bank changing from what was a U.S. company to a foreign company, that says something.  (3) When you see foreign companies buying U.S. firms, like British Petroleum buying Amoco, that says something.  (4) When you hear our presidents and other key Cabinet officials talking about Aintegration@ and Ainterconnectedness@, that says something, (5) When you see your local bank going out of business or being taken over  because they cannot meet the capital requirements set down by the Bank for International Settlements, that says something. 

I truly believe that the volatility we have seen, especially Alan Greenspan raising interest rates in 1999 and 2000 to the point where the NASDAQ lost $4T in value, is contrived.  The natural course of supply and demand is no more.  The volatility was created to say, AWe are one and we have to act as one.  We have to pass laws which will make the national conform to the international level because we are one.@  Lastly, none of this could ever be allowed to happen if our NATIONAL LEVEL B PRESIDENT, CABINET AND CONGRESS DID NOT ALLOW IT TO HAPPEN.  As you read history, you see that all of our Presidents from Woodrow Wilson to the current President Bush were and are globalists.  They set up the Bank for International Settlements (1930), President Roosevelt named the United Nations, it was Roosevelt who called together the heads of the nations of the world in 1941 to set up the World Food Organization which subsequently became part of the UN Food and Agriculture Organization (FAO) in Rome, the U.S. also was the lead architect in the Bretton Woods Monetary Conference which gave birth to the IMF and World Bank.  This meeting was held in New Hampshire and chaired by members of Roosevelt=s cabinet.  It was President Nixon who started the Group of Eight.   At the behest of the Group of Seven in 1980, the United States started to tear down financial and economic borders between the countries of the world, thus creating the Aglobalized world@ which we live in.  Now the leaders of the seven industrialized countries plus Russia are setting up a new International Financial Infrastructure@ in order to protect us from us. However, the real structure is that of world government.  The individual governments of the world no longer have national sovereignty.  As shown here,  we are run by a Aglobal mafia.@  

While Americans cannot put their finger on just what is exactly wrong, somehow their stooped posture, the slow step which reflects the loss of joy, the aimless chatter about the unimportant reflects what they cannot verbalize.