Was financial meltdown the result of economic terrorism?

Pajamas Media gives an exclusive look at an analysis prepared for the Department of Defense’s Irregular Warfare Support Program (IWSP) by Cross Consulting and Services in 2009 that alleges that the economic meltdown in 2008 was no accident.  Kevin Freeman argued that a run-up of speculation by sovereign-wealth funds created a bubble in the oil industry that allowed bear raids on American financial institutions, using credit swaps and other non-regulated investment instruments to crash the US financial system.  Bill Gertz reported on the analysis today for the Washington Times:

Evidence outlined in a Pentagon contractor report suggests that financial subversion carried out by unknown parties, such as terrorists or hostile nations, contributed to the 2008 economic crash by covertly using vulnerabilities in the U.S. financial system.

The unclassified 2009 report “Economic Warfare: Risks and Responses” by financial analyst Kevin D. Freeman, a copy of which was obtained by The Washington Times, states that “a three-phased attack was planned and is in the process against the United States economy.”

While economic analysts and a final report from the federal government’s Financial Crisis Inquiry Commission blame the crash on such economic factors as high-risk mortgage lending practices and poor federal regulation and supervision, the Pentagon contractor adds a new element: “outside forces,” a factor the commission did not examine.

“There is sufficient justification to question whether outside forces triggered, capitalized upon or magnified the economic difficulties of 2008,” the report says, explaining that those domestic economic factors would have caused a “normal downturn” but not the “near collapse” of the global economic system that took place.

The report warns that an attack on the American financial system could have taken place in two phases — and that a third phase may be ready to launch:

The first phase was a speculative run-up in oil prices that generated as muchas $2 trillion of excess wealth for oil-producing nations, filling the coffers of Sovereign Wealth Funds, especially those that follow Shariah CompliantFinance. This phase appears to have begun in 2007 and lasted through June 2008.

The rapid run-up in oil prices made the value of OPEC oil in the ground roughly$137 trillion (based on $125/barrel oil) virtually equal to the value of all other world financial assets, including every share of stock, every bond, every private company, all government and corporate debt, and the entire world‘s bank deposits. That means that the proven OPEC reserves were valued at almost three times the total market capitalization of every company on the planet traded in all27 global stock markets.

The second phase appears to have begun in 2008 with a series of bear raids targeting U.S. financial services firms that appeared to be systemically significant. An initial bear raid against Bear Stearns was successful in forcing the firm to near bankruptcy. It was acquired by JP Morgan Chase and the systemic risk was averted briefly. Similar bear raids were conducted against various other firms during the summer, each ending in an acquisition. The attacks continued until the outright failure of Lehman Brothers in mid-September. This created a system-wide crisis, caused the collapse of the credit markets, and nearly collapsed the global financial system. The bear raids were perpetrated by naked short selling and manipulation of credit default swaps, both of which were virtually unregulated. The short selling was actually enhanced by recent regulatory changes including rescission of the uptick rule and loopholes such as ―the Madoff exemption.

While substantial, unusual trading activity can be identified, the source of the bear raids has not been traceable to date due to serious transparency gaps for hedge funds, trading pools, sponsored access, and sovereign wealth funds. What can be demonstrated, however, is that two relatively small broker dealers emerged virtually overnight to trade―trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value.

The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar.
Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of U.S. debt forcing rapidly rising interest rates and a collapse of the American economy. In short, a bear raid against the U.S.financial system remains possible and may even be likely.

Freeman pointed to the seizure of $134 billion in counterfeit US bonds as a potential clue as valuable as the Japanese intercepts prior to Pearl Harbor.  His report calls the chain of events “the equivalent of box cutters on an airplane.”  But does this theory hold water?

First, Freeman issued this warning in June 2009, when the US had just managed to get back on its feet after the financial collapse.  The US sunk hundreds of billions of dollars into shoring up American financial institutions through the end of 2008 and beginning of 2009 under both George Bush and Barack Obama.  The time to strike in Freeman’s model of Phase 3 would have been at that point, when the US needed Treasury sales to rescue the banking and investment communities.  While we have piled up even more debt and find ourselves lurking towards a Greece-like crisis, the short-term instability has mainly dissipated.  Furthermore, the nations Freeman cited are no less hostile to American interests than they were in 2008.  So if this was the plan all along, why no Phase 3?

Furthermore, one of those nations — China — has extensive holdings in the US. While it’s certainly possible that the Chinese autocracy might be so hostile to the US as to risk destabilizing their own country to bring down the American economy, it hardly seems likely.  China’s government has no love for the US, but does have a love of economic success.  They have even introduced capitalism back into their economy over the last several years (in a limited fashion) to improve their economic performance and prevent full-scale uprisings as seen in the Arab world this year.  China’s rulers may be brutal, but they’re rational and rather predictable, too.  Russia has enough problems in its own economy and hardly has the resources to conduct an economic war against the US, and their rivalries are mainly with Europe.  Iran has every incentive in the world to attack the American economy, but few allies to join them in that region — and the Saudis would prefer to unseat the mullahs in Tehran rather than destroy the US economy that both feeds and protects them.

The report is very useful in underscoring the potential vulnerabilities in our system, especially in relation to sovereign-wealth funds, and should get attention from policymakers in protecting the US from financial wars.  However, just because something is possible doesn’t mean it happened.

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