1. Wasn’t the repeal of Glass-Steagall irrelevant to the 2008 financial crash, because the crash was triggered by the failures of financial firms which were not combined monsters (banking/investment, banking/securities, broker-dealing/insurance, underwriting), but were stand-alone monsters like Bear Stearns and Lehman Brothers investment firms, AIG Insurance, etc.? Glass-Steagall would not have been regulating these firms anyway.
This is the argument of choice for Wall Street, President Obama, the authors of the Dodd-Frank Act which blocked the restoration of Glass-Steagall after the crash, conservatives and liberals alike who lobby for Wall Street, etc.
1) This argument is absurd on its face, because the big financial firms that failed in 2007-08 were simply those that were not bailed out by the Federal government.
That is all that determined it. Federal Reserve Chairman Ben Bernanke himself told the Financial Crisis Investigative Commission in 2011, that 11 of the 12 biggest banks had been insolvent in October 2008; they would have failed without the TARP bailout by the Treasury and the abundant bailouts by the Federal Reserve and FDIC. These banks would never have become as large and unmanageably complex as they were, if Glass-Steagall had not been eliminated in the 1990s.
In fact, the most dangerous of all the banks in the 2008 crash was one that didn’t go bankrupt—Citigroup—because it received by far the biggest bailout in history by the TARP ($45 billion), the FDIC ($340 billion in asset guarantees) and the Federal Reserve (hundreds of billions in revolving, no-cost liquidity loans starting in 2007). The FDIC Chair, Sheila Bair, later wrote,
"If you wanted to make a definitive list of all the bad practices that had led to the crisis, all you had to do was look at Citi's financial strategies."
2) That shows that the argument is absurd. But what shows that Glass-Steagall, if it had remained in effect and enforced, would have prevented the 2008 financial crash?
The simplest “proof” is the case of the Long-Term Capital Management (LTCM) hedge fund. By 1995, when Fed Chair Alan Greenspan had essentially finished emasculating Glass-Steagall, large commercial deposit banks could have up to 25% of their assets in securities speculations or derivatives, and/or in loans to non-bank financial firms which did nothing but such speculation. Glass-Steagall had stopped such conduct by commercial banks for 55 years. From 1995 until 1999, fifty-five banks had made loans to one notorious hedge fund—LTCM—dealing entirely in derivatives. LTCM had borrowed capital totaling 100 times its own capital; i.e., it was leveraged 100:1 by the big banks of the world. And when it failed in early 1999, this single hedge fund nearly caused a global financial panic – Greenspan had to call an emergency meeting of all the biggest banks and arrange an emergency bailout of LTCM.
Under Glass-Steagall from 1933-95, the U.S. commercial banking sector proliferated into many thousands of regional and community banks, with no global giants until the past 20 years. There were many failures of financial firms, but none of them spread into bank panics like Lehman Brothers in 2008—or like LTCM would have caused already in 1999.
Before Glass-Steagall, many banks had thrown their deposit bases into stock market speculations. After Glass-Steagall was eliminated, they did it again, on a much larger scale, and with much more complex bond market speculations and the financial derivatives casino. The banking system dramatically changed without Glass-Steagall separation regulations. The largest banks became impossibly complex, going from typically 1-300 subsidiaries to typically 2,500-4,000 subsidiaries, buying and creating what were overwhelmingly securities and broker-dealer vehicles. The derivatives markets exploded geometrically with the flow from depository giants, from about $70 trillion notional value of derivatives in 1997 to $700 trillion in 2007 according to the Bank for International Settlements. The largest banks became entirely interconnected with one another and with investment banks and “shadow banks” like hedge funds and private equity funds—particularly through their mutual derivatives exposures. The big banks’ leverage ratios were allowed to rise from typically 16:1, to 30-35:1.
Within less than a decade after the repeal of Glass-Steagall, every large “shadow bank” or monoline insurance company was a potential “LTCM.” If even a very large hedge fund blew up, everything would blow up. Bear Stearns would have done the trick but it was bailed out by the Federal Reserve, which [completely against its own regulations] bought $30 billion of Bear Stearns’ assets with printed money. Lehman Brothers did the trick because the Federal government did not bail it out. Under the Glass-Steagall regime, large investment firms could fail, like Solomon Brothers or Drexel Burnham Lambert, without causing bank panics, because the large commercial banks were separated—by Glass-Steagall – from their business of securities speculation.
2. Would restoring Glass-Steagall reduce the political power of the Wall Street banks?
There is no substitute for prosecuting the top executives of the major Wall Street banks for the endless catalog of criminal actions they’ve been exposed in—fines, even large fines, do not reduce these banks’ political power.
But restoring Glass-Steagall would definitely reduce their power. It would lead to the removal of the managements of many of the biggest bank holding companies, whose holdings would be broken up under Glass-Steagall. Secondly, many of the speculative units of these huge banks will go under once the commercial banking units, holding $12 trillion in savings deposits, can no longer be used to support them because of Glass-Steagall separation.
Moreover, the financial sector will again have different sections with different interests to lobby for. Without Glass-Steagall, a Citigroup pursues every speculative investment strategy known to investment banks, hedge funds, money market mutual funds, etc. etc., because it owns them all or buys or backs their securities and derivatives. So all the financial firms push for deregulation of all of it, the whole casino.
Under Glass-Steagall enforcement, commercial banks, investment firms and other funds were often lobbying against each other; in 1971, the mutual funds sued Citibank for trying to steal their turf in violation of Glass-Steagall—as a result, the Supreme Court upheld Glass-Steagall in the strongest terms. Thus the outrageous current power of the financial industry, acting through universal lobby groups like the Securities Industries Association, will be broken up.
3. Will restoring Glass-Steagall cause the economy to recover and grow?
Not by itself: It is just the first, the kickoff, of the necessary “Four Cardinal Laws” to ensure economic and productivity growth for the future, formulated by American System economist Lyndon LaRouche in the Spring of 2014.
But Glass-Steagall regulation, if done fast, will head off the oncoming new crash of the financial system, and thus prevent mass unemployment and impoverishment even worse than that since late 2008.
And, it will stop current bank practices which are very damaging to the economy. It will prohibit banks which help issue bonds for cities, states and agencies from inserting the highly damaging derivatives called “interest-rate swaps” into the bond issuance. These derivatives have been effectively “fixed,” or “one-way” bets, and they have looted tens of billions from cities, states and provinces all over the United States and Europe since 2004. It will prohibit commercial banks/bank holding companies from owning commodities, commodities broker-dealers, or commodities production/transportation infrastructure. Commodity or infrastructure control was used to loot companies and the public by price manipulation; a JPMorgan Chase scheme exposed in California—to cite one example of many—involved repeatedly selling the California power operator electricity at $999/MWh when the going price was $12/MWh.
Most importantly, it will dry up large parts of the dangerous financial derivatives market—those unregulated market bets known as “financial weapons of mass destruction” which have a nominal “value” of at least $500 trillion internationally. Many investment banking, hedge fund, etc. units of the big banks, once they are hived off under Glass-Steagall and no longer have the huge funding of the deposit banks, will no longer even have a high enough credit rating to issue or hold derivatives. They’ll have to write them off or wind the bets up. In fact, a lot of those investment/hedge fund units themselves will be written off and go bankrupt once Glass-Steagall cuts them off from the commercial deposit banks.
And the commercial banks, which hold your deposits, will now be under regulations such that they will earn a profit by lending, to companies, households and homeowners. So those banks will be regulated to participate in national investment in production, higher productivity, and productive employment.
But this is all what we call, Glass-Steagall “taking out the garbage.” It will make economic and productivity growth possible; it will make much more bank lending into the real economy possible; but by itself, it won’t make those things happen. That will take the issuance of large volumes of national credit for productive employment and productivity, in particular, for building new and advanced economic infrastructure projects like high-speed rail grids across the nation.
4. Why do we need large investments in new infrastructure projects?
In one word, productivity. The U.S. economy has been mired in near-zero productivity growth for almost a decade. And that’s using the crudest measure—total Gross Domestic Product divided by total hours worked by the labor force—which hardly measures productivity advance at all. Measuring rather by technological productivity, the increases in productive power of labor which come from real technological advances, this zero-growth condition goes back decades. It goes back, in fact, to the end of the “golden age of U.S. productivity” which began with Franklin Roosevelt’s New Deal great projects, and ended when JFK’s Apollo Project space program was drastically cut back in the late 1960s.
That kind of productivity advance comes from renewing a nation’s economic infrastructure at a higher level: for example, by building a national and actually Continental high-speed rail grid for freight and passengers; by building scores of nuclear desalination stations to produce water across the drought-stricken West; by reviving deep-space exploration and developing the new propulsion and exploitation systems for it based on fusion power.
The truest definition of productivity—an economy which gives the greatest scope to the human mind’s powers of invention—arose from the Report on Manufactures of the great U.S. military leader, Constitutionalist and Treasury Secretary Alexander Hamilton, at constitution.org/ah/rpt_manufactures.pdf
5. Doesn’t new infrastructure mean smart grids, and solar and wind power?
No. Solar and wind power are giant steps backwards in the history of mankind’s power capacities. Their power densities are an order of magnitude lower than that of coal, still further below nuclear fission, and incomparably far below nuclear fusion. That means that productive processes powered by wind and/or solar have lower labor productivity (less production per capita) AND lower energy efficiency (less production per unit of energy used).
Electricity grids powered by a lot of wind and solar power installations—as already proven in several European countries, Germany in particular—are not smart grids; they are unstable grids. They take power from facilities which operate only intermittently—over a year’s time typically at 20-30% of capacity, compared to 90-98% of capacity for nuclear fission plants. And they supply electricity at extraordinarily high costs.
Forget desalinating water on any large scale with wind or solar power. And nothing is more important to the productivity of the U.S. economy than to conquer the western drought, which is shutting down our most productive agricultural base.
Worse, a “new” power infrastructure largely based on solar and wind power would block, effectively forever, our ability to make the breakthrough to fusion power. Such a “new” electricity infrastructure would not be able to generate the power pulses necessary to ignite a fusion reaction!
6. If we need a new economic infrastructure, and interest rates are so low that borrowing is “almost free” for the Federal government, why doesn’t Congress have the Treasury borrow as much as is needed into a new infrastructure fund, to build the new infrastructure we need?
That is, essentially, what Franklin Roosevelt’s Administration did through the Reconstruction Finance Corporation (RFC). But the needs for investment to restore productivity in the current U.S. economy are far greater, even relatively, than Roosevelt faced in the Great Depression. Today, there has been half a century of complete neglect of even repair and replacement of existing infrastructure; of stagnant technology and technological productivity; of declining household income; of deindustrialization which has produced hopelessness and even suicidal behavior in large portions of the population; of the loss of skills and education in our labor force.
FDR’s RFC eventually sold bonds to the public for about $50 billion over 20 years, from 1934-1955. Today’s need is to invest 100 times that much, roughly $4-5 trillion dollars over the next five-ten years in advanced infrastructure, reviving the NASA space program, reviving the fusion energy development effort to a crash program.
The increased productivity of the labor force and economy will return that investment, and much more, over 30-40 years. But should the Treasury borrow $4-5 trillion through long-term bonds into a dedicated fund or agency for infrastructure investment?
It could not do that “virtually free,” as those people think who are deluded by Federal Reserve zero-interest money printing, or who would like to see the United States issuing devalued debt so that Wall Street hedge funds could speculate in it. Rather, it would have to borrow over that long term at 3-4%, gradually rising, and pay tens of billions in new interest annually, starting immediately. A tax to pay that interest in the short term, will be required. If a Wall Streeter is selling a scheme for “50-year infrastructure bonds at 1%,” or “helicopter money for infrastructure,” he is blowing smoke, or wants devalued and “distressed” Treasury bonds for “vulture fund” speculation.
But Congress, by creating a national bank on Hamilton’s principles, can leverage the already existing Treasury debt; the bonds and investment funds of states and cities which build infrastructure; and the investments of commercial banks and the public, to create the very large amounts of credit required for a new economic infrastructure—national, multinational, and back into human exploration of the Solar System.
Just as critical: Once the United States has such a national credit bank for these purposes, that bank can cooperate directly with the infrastructure banks and funds which the economic powers of Asia have been creating—China’s national development banks, the Asian Infrastructure Investment Bank, the BRICS Bank, the Silk Road Fund, and others.