New World Order University Forum

NWOU is interested in the question of whether the global crash was planned or allowed to happen. Though we cannot answer this question definitively, we have come across a couple of messages that bear on the question.

First, Eric Roseman of the Sovereign Society writes (via email) that an inverted bond yield curve is a consistent predictor of recession. An inverted bond yield curve occurs when the short-term bond, in this case the 2-year Treasury, yields more than longer-term Treasury notes. This inversion first occurred in September 2006 and extended through March 2007. Professor Campbell Harvey of Duke University published a study on this relationship in Financial Analysts Journal. Harvey asserts that the inverted bond yield curve accurately predicted the last five recessions.

Gary North writes (in an email) that he predicted recession in December of 2006. North credits his ability to predict this recession to the work of Ludwig von Mises of the Austrian school of economics. North notes that neither the Keynsian school nor the Chicago school (under the leadership of Milton Friedman) permits criticism of central bank (Federal Reserve) policies. North points out that all members of the Keynesian school and the Chicago school are blind to the importance of the central bank monopoly over money-supply creation. The Austrian school reinforces this criticism by asserting that modern economists cannot successfully guide the policies that create a good economy.

Were the CEOs of the leading Wall Street firms aware of the coming recession? North cites one example, Charles Prince, head of Citigroup, who told London’s Financial Times on July 9, 2007, that, as long as the music is playing (as long as the markets appear to be liquid), you’ve got to get up and dance, and we are still dancing. In November of 2007, Charles Prince resigned as CEO of Citigroup and cashed in $94 million worth of stock at around $55 per share. A year later, the value of Citigroup’s stock had fallen below $6 per share. With $300 billion of bad debt on its books, the Fed stepped in to assume $260 billion worth of Citi’s liabilities.

NWOU assumes that Ben Bernanke knows more about economics than we do. Yet, when Bernanke became Fed chairman, his first act was to reduce the money supply. This act effectively stopped the music (dried up the liquidity of the markets). Did Bernanke shrink the money supply to cause the bankruptcy of the Wall Street banks that had assumed large debt positions? In Bernanke’s defense, it seems obvious that these firms were hiding the large amount of devalued mortgage assets they held, from the public and probably from the Fed. Nevertheless, we have to ask, did Bernanke miss the signal that the bond market was flashing with its inverted yield curve? It appears Bernanke did not take seriously the inversion of the yield curve as a signal of recession ahead, but how could he not have known that the major banks of the world were holding trillions of dollars of mortgage derivatives that were rapidly being revalued at pennies on the dollar?

Roseman reports that six foreign nations are now experiencing an inverted yield curve, Portugal, Switzerland, Australia, New Zealand, Austria, and Norway. Italy and Denmark are about to go negative. Britain has already experienced the inverted yield curve and has bailed out its banks. This inversion is becoming a worldwide phenomenon. Despite claims that Europe’s economies were decoupling from the United States, these economies are following the U.S. into recession. What else would you expect in a world devoted to global financial integration?

It appears from this modest analysis that the Federal Reserve was incapable of forecasting recession from the inverted bond yield curve, perhaps because it is committed to Friedman’s economic theories. Yet NWOU suspects that there is more to this story than meets the eye. Was Prince’s departure from Citigroup with a fortune just months before the Wall Street collapse just a lucky coincidence? Did these Wall Street CEOs understand the nature of debt crisis that was about to bring down banks around the world? Did they leave their firms and let their firms fail? Is the Federal Reserve blinded by bad economic theory devoted to justifying its existence, or does it act in collusion with Wall Street bankers to create economic crisis? We invite comment from those with superior knowledge.

Tags: Austrian school of economics, Ben Bernanke, Charles Prince, Citigroup, Federal Reserve, Federal Reserve banks, Gary North, global economic crisis, Ludwig von Mises

This entry was posted by Director on Sunday, December 28th, 2008 at 6:38 am and is filed under Global Economy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.