Chapter 23 - Glass-Steagall

Glass-Steagall

The Glass-Steagall Act of 1933 was a law that Franklin D. Roosevelt used to get the Unites States out of the Great Depression. The act forced banks to choose between being a Commercial Bank or being an Investment Bank. Many banks separated into two separate banks, an Investment Bank and a Commercial Bank. Commercial Banks are the high street banks in which families and businesses place their deposits and run their cheque and savings accounts. Commercial Banks operate the national and worldwide 'payments system', on which our livelihood relies. Investment Banks are City of London, Wall Street and other large international banks that trade with the purpose of making money from money. The Glass-Steagall Act stopped local high street type banks (Commercial Banks) from engaging in risk-taking speculation with customers' deposits. It stopped Commercial Banks from gambling away people's life savings. It meant that Commercial Banks could not trade (gamble, risk) with their customers deposits for their own profit. A rarely talked about side point is that it encouraged high street Commercial Banks to invest in local business. Although rarely mentioned, this is an essential element of a Glass-Steagall type reform. When High Street banks invest local money in local businesses, the locality thrives. Wall Street Banks successfully lobbied the regulators to chip away at the Glass-Steagall rules in the nineteen eighties. Congress finally repealed the Glass-Steagall Act in 1999 during the Clinton years. Once the Glass-Steagall laws were repealed, six big banks went from controlling effectively the equivalent of 15 percent of US GDP to around 65 percent of US GDP. Many people believe the repeal of the Glass-Steagall Act led to massive investment speculation that caused the financial crash of 2008.

Richard Parsons of Citigroup said in 2012: "To some extent what we saw in the 2007, 2008 crash was the result of the throwing off of Glass-Steagall." [230] Citigroup, which took the most government aid of any U.S. bank during the financial crisis, has lost 86 percent of its value in the past four years. [230] John Reed, the former Citicorp CEO said in 2009 that he regretted working to overturn Glass-Steagall. [231]

Glass-Steagall and the Banking Act of 1933

Investment banking expanded dramatically in the early 20th century particularly as a result of the prosperous years after the World War One. The huge rise in stock prices created a bubble which collapsed in 1929, leading to the Great Depression. At least, eleven thousand banks failed and a quarter of the population became unemployed. The excesses of the Investment Banks, of that period, caused new regulations to be created to protect citizens from fraudulent investment situations, reduce the incidence of bubbles and stabilize the banking system.

The Glass-Steagall Act is a set of rules that are part of the Banking Act of 1933. This act required banks to separate themselves from their investment department. Banks were required to declare themselves as Commercial Banks or Investment Banks. The Banking Act created the FDIC (Federal Deposit Insurance Commission) to insure consumers' deposits with Commercial Banks and included the Glass-Steagall provisions to reduce the risk of providing such insurance. Glass-Steagall made it illegal for a bank that held FDIC-insured deposits to invest in anything other low-risk situations. Many large banks split into two entities. JP Morgan split into JP Morgan as a commercial bank and the investment section became Morgan Stanley and the British section became Morgan Grenfell. The Glass-Steagall Act remained in place until it was weakened and finally repealed in 1999. [233]

 Websearch: 'Glass-Steagall'

 'Like' a 'Glass-Steagall' Facebook page.

The Glass-Steagall Act is the only tested and proven economic stabilizer.

The American Financial Crisis Inquiry Commission has published the results of its study on the causes of the 2008 financial crash. The report gives the main reason for the crisis as the gradual removal of the measures aimed at protecting citizens set up by Franklin Roosevelt in the nineteen thirties, including the Glass-Steagall Act. The person named as the main initiator behind the destruction of the regulatory mechanism is Alan Greenspan, the former Federal Reserve Chairman. [237]

Glass-Steagall

I now believe that the Glass-Steagall Act did more than stop speculation with customers money. Glass-Steagall also redirected money into the local community and local companies that produced things and created jobs. As a side-effect, Glass-Steagall promoted useful local economic activity. It re-diverted money to where it would be more useful. The logic is this: If money from customers savings is kept from speculative banks then it is likely to be invested into the local community. It is invested in local companies and communities. A new Glass-Steagall Act is an essential component of our financial solution. Glass-Steagall needs your full support. Sign every petition that you can and get on the email list of local Glass-Steagall support organizations. Like a Glass-Steagall Facebook page.

Do not be deceived into thinking it is the full solution to our financial problems. It is the starting point. Glass-Steagall is needed to help prevent a collapse of our money system whilst significantly helping the local economy.

Commercial Banks

A Commercial Bank is a financial institution that provides services for businesses, organizations and individuals. These services include offering current, deposit and saving accounts as well as providing loans of freshly-created bank credit to businesses. It is a bank for mums, dads, families, small business and more. It is your local bank. It also operates the 'payments system' where bank credit is transferred from account to account to effect payments. Vast quantities of transactions take place daily, dwarfing the somewhat insignificant volume of cash transactions

Investment Banks

An Investment Bank, also called merchant bank, is a bank with a wide range of specialized services for companies and large investors, including underwriting and advising on securities issues and other forms of capital raising, mergers and acquisitions, trading on capital markets, research and private equity investments etc. Also, an investment bank trades and invests on its own account. [Financial Times] Thus, an Investment Bank operates to make money for its clients but also for itself. The aim is to make money from money. Making 'money from money' does not assist the real economy that feeds, houses and clothes us, but makes those with 'more money than they can spend' even richer which automatically makes the less sophisticated poor people poorer in comparison.

Thus, a Commercial Bank tends to look after the interests of small and medium businesses and individuals in the local area and operate the fabulous payments system. Commercial Banks are an indispensable component of of our privatised and commercialised civilisation. It is not without fault and it needs to be improved. An Investment Bank, on the other hand, operates to make 'money from money' for people that have 'more money than they can spend', which includes itself. These big banks have their own trading rooms where they use their financial muscle to dominate and influence markets to make money for the bank. The sophistication of the systems used, the competitive nature of its employees and the influence wielded by the army of lobbyists over the law making process combines to drain the less sophisticated real economy of wealth. The very essence of 'making money from money' is a sophistication of the usury denounced by influential people throughout the written history of mankind. Any act that attempts to make 'money from money' without adding any real wealth to the world is an activity that needs to be terminated. The various money reforming prophets of old did not go far enough on this issue as the practice had not reached the current level of sophistication. Banks should be banned from betting their own money in any form. Any unearned money obtained from any activity that makes 'money from money' should be heavily taxed whilst earned money from physical effort should have reduced tax.

Glass-Steagall was weakened over the years and was repealed in 1999 during the Clinton years. Very many people believe that the repeal of the Glass-Steagall Act led to the financial crisis of 1998. I believe they are correct, but for more reasons than they mention. Usually cited are the risky investments and practices. I include the following:

Money tends to get 'invested' in money making schemes that cause selective inflation of the class of asset that has been attacked which bloats the value of this class of assets and creates a bubble which promptly collapses. The selective inflation can be created by natural human tendency for greed or can be created purposely and deliberately collapsed.

The volume of investment increased as money was invested in Wall Street rather than Main Street. Thus, money moved from the Real Economy to the Financial Economy.

Profits increased due to the extra investment. If more money is pumped into a system with limited assets, the assets will rise in value in proportion to the money 'invested'. A game of chicken ensues until a peak occurs whence the profiteers rapidly sell causing a predictable crash. Those with sufficient acumen and backing can influence the boom and bust cycle. Our perverted outlook holds these economy wreckers in esteem. They are from the dark side.

Profits and bonuses increase, causing further incentives to push more money into the system. This includes borrowed money. You can borrow money from A and put it in B and make more money. This is a nonsense if you consider the definition of money. It is a clear manipulation of the original purpose of money.

Main street suffered due to the misdirection of money toward Wall street. This leads to insufficient money for the purposes of trade and business expansion in areas away from the banking areas.

The rapid expansion of the banking and finance industries creates instability that causes crashes and difficult to reverse trends.

Money tends to be spent into selected areas which creates a selective inflation of the asset values. The inflationary gain evaporates as soon as the selective spending ceases.

The USA has become a land of mythical money and fake affluence, but decaying neighbourhoods and industries. The real wealth is disappearing whilst paper or virtual wealth is increasing.

I can think of a few problems that occur without a Glass-Steagall type law:

The banks can take risky gambles with depositors' money.

The depositors money is not invested back into the local or national economy.

Risky investments can inflate the value of assets in so-called 'bubbles', creating instability, leading to crashes as the bubbles burst.

The interests of banks collide with the interests of clients. The banks are tempted to bet against their clients. Banks can make a profit from the loss of a client. the bank can be tempted to look after its interests to the detriment of its clients.

The original concept of an Investment Bank was to invest their clients money in items that might create a good return. However, the Investment Banks started to invest their own money in items for the benefit of the bank. This creates a conflict of interest and with modern derivatives, they can profit from the misfortune of their clients. It also makes the banks prone to collapse. These banks should be prevented from investing for their own profit. This practice is a destabilising influence on the world economy.

After the repeal of Glass-Steagall, the volume of investment money increased, pushing up asset values. This led to greater profits for some and great losses for others when the asset values crashed. The losers tend to be pension funds, local and state governments and other less wary institutional investors. The magnitude of the bailout of the 'too big to fail' banks in 2008, using taxpayers future tax, was so great that I believe it is unpayable. It is not possible to collect this volume of tax from the people. It is not possible to pay this debt. The massive government debt in the US has become un-payable and uncollectable. The only solution is to lend more money to pay interest on previous loans.

Total Tax Revenue 2014=$3 021 billion[Whitehouse USA-Whitehouse-Tax collection by source hist02z1]
Government Debt=$18 141 billion
Federal Reserve issued Currency=$1 252 billion[Fred]
Bank issued bank credit. (M3-Currency)=$16 379 billion [NowAndFutures, Fred]

Common-sense dictates that the essential circulating medium cannot be used to pay off debt as that would leave the nation with no circulating medium.

USA graph of debt and money

For a locality to prosper, investment must me made in the business and companies in that district. For a nation to prosper, investment must be made in the physical infrastructure of the nation that aids production. You can see this around you. If banks will not lend to small business in a district, small business stops employing. If banks invest in corporations, the corporations grow. You see more fast food restaurants and fewer local cafés. If banks increase the volume of housing loans to individuals, that sector grows, as it did with Australia's previous state and public banks. If banks prefer to lend to those with some equity, then the rental market grows and the young rent from people with more than one house. Small-time speculators take the place of owner-occupiers. We then finish up with social problems and lack of security for the renters in old age. Total lunacy in lending practices.

Thus, we need to reinstall Glass-Steagall for a few reasons:

To stop risky investments that helped create the 2008 crash.

To protect the all-important payments system. When investment banks collapse, we do not want them to bring down the commercial banks.

To redirect the investment into the real economy where it benefits society most.

To limit the volume of speculation with its bubble and crash creating tendencies.

To return money to where it does the task for which it was invented: enable transactions and trade. Money was not invented for the purpose of giving more money to people with more-money-then-they-can-spend.

Never forget that: The Glass-Steagall Act is the only tested and proven economic stabilizer.

A new Glass-Steagall would separate high-risk Investment Banks from more traditional banking. It would allow Wall Street to take risks, but not by dipping into the life savings and retirement accounts of regular people.

New Internationalist Magazine

"Governments should certainly act urgently to separate Investment Banks, which can act as risk junkies, from Commercial Banks where ordinary people used to save their money and where they now funnel it towards their debts." [23a]

A New Glass-Steagall in the USA

A new Glass-Steagall for the USA will be good for the whole world, including Australia.

Efforts to reinstate Glass-Steagall have been unsuccessful. In 2011, HR1489 was introduced to repeal the Gramm-Leach-Bliley Act and effectively reinstate Glass-Steagall. In 2013, US Senator Elizabeth Warren and a bipartisan group of Senators are proposing a bill they call a "21st Century Glass-Steagall Act" in an effort to curb the power of big banks.

There are Facebook pages, web petitions and web pages pushing to reinstate Glass-Steagall. Please support them.

The Volcker Rule

The Volcker Rule is a federal regulation that prohibits banks from conducting certain types of investment activities with their own accounts, and limits their ownership of and relationship with hedge funds and private equity funds. The Volcker Rule is based on the Glass-Steagall Act of 1933. The purpose of the rule is to prevent banks from making many types of speculative investments that many believe caused the 2008 financial crisis. [238] [239] The Volcker Rule refers to part of the 'Dodd-Frank Wall Street Reform and Consumer Protection Act', originally proposed by former U.S. Federal Reserve Chairman Paul Volcker.

The Volcker Rule was effectively Glass-Steagall 'lite' as it did not curb inappropriate activity by banks. An essential loophole was incorporated which enabled business as usual. NerdWallet puts it this way: "The Volcker Rule is rendered essentially meaningless with one loophole: banks can't make speculative trades, but they can hedge existing bets using techniques virtually indistinguishable from speculative trades." ... "If the Volcker Rule worked the way it was intended, a bank's profit would only be derived from the difference between interest earned on loans and interest paid on deposits." [23b]

The Wind-back of Usury Laws

In 1980, a bill was enacted called the 'Depository Institutions Deregulation and Monetary Control Act.' Section V of the bill reads:

"Eliminates State mortgage usury ceilings and restrictions on discount points, finance charges and other charges with respect to residential mortgage loans on real property or mobile homes unless a State adopts a new usury ceiling prior to April 1, 1983, or adopts new limitations on discount points or other charges at any time"

This deregulation gutted the New Deal era financial regulation that prevented excessive usury for nearly half a century. By 1986, with this credit card-friendly ruling, all usury laws in America had been gutted. With this ruling and the Alternative Mortgage Transactions Parity Act (1982), the financial system not could have created the real estate bubbles of the late 1980's and the 2000's. States still have usury laws, but banks get round them by locating their credit card head office in a state that has no usury rate limit. [23e]

Making Money from Money

The practice of making money from money is essentially the practice of usury taken to a refined level. It has been made respectable. The main problem with this is that it goes against the original reason for civilisation to start using money tokens. Money tokens were invented to facilitate the trade of goods and services. It was one of the procedures that enabled us to move from our hunter-gatherer past to a civilised lifestyle a very short five thousand or so years ago. This trade in goods and services suffers as soon as:

Money is hoarded.

Money is removed from circulation.

The supply of tokens fails to increase slightly in sympathy with increasing population and increased production capacity.

Individuals create substitute or virtual money tokens.

Individuals monopolising the stock of existing tokens.

Individuals commandeering the supply of tokens.

Lending of tokens that do not exist.

The sophisticated systems practiced to Making Money from Money invoke a few of the above items. The whole practice of Making Money from Money is to the detriment of civilisation. It does nothing to increase the real wealth of the nation. In the limit, the perpetrators end up with vast quantities of virtual money in a nation that is bankrupt, inefficient and on the verge of collapse. Their money is as useless as a ton of gold on a life-raft. The whole practice of Making Money from Money needs to be reviewed, heavily taxed and eliminated as far as possible. So strong is the Money from Money sector of the economy that they live in an almost tax-free bubble and the tax burden is put on the circulating money essential to the production of real wealth. Business is hammered at every transaction whilst the financial sector operates with tax-free transactions. Something is horribly wrong when the financial parasites pay less tax than those operating in the real economy creating real value and goods and services of real value to the citizenry.

Citizens Electoral Council - CEC

The political party, CEC, Citizens Electoral Council, is strongly pushing for a Glass-Steagall type act in Australia. They are also pushing for homeowners protection. [23c]

Mainstream political groups lambaste them, so they are probably onto something. They tend to follow the teaching of US Senator Lyndon LaRouche. LaRouche is a controversial individual who is prepared to stand up against the establishment. So he gets plenty of flack. CEC gets similar flack in Australia. CEC has a very interesting weekly email although it is usually classed as spam. They tend to be prophets of doom, but well worth the educational content of the email. Even if they don't get everything right, their research and views are priceless. Robert Barwick may just have the formula to put Australia on a sound financial footing even if you think he is a nutjob.

Go to their website to get on their email list. Those politicians acting for the Money-Power, will, of course, denounce him in every way possible. They tend to denounce the CEC in every way except the sound logic of their monetary analysis.

ALP stalwart Kelvin Thomson said this about them as reported in Crikey:

"The CEC are a frightful organization which makes all manner of outrageous and unsubstantiated allegations. I therefore do my best to ignore them." [234]

This beauty appears in RationalWiki about Lyndon LaRouche, whom CEC appear to get most of their analysis:

"LaRouche is a perpetual office seeker with a messiah complex, who operates his own batshit loony (but thankfully ineffective) political machine in a manner freakishly reminiscent of a religious cult. Many of his political workers are young adults who think LaRouche, and only LaRouche, knows what needs to be done to Save The World. The best that can be said is his beliefs are a unique amalgamation of wingnuttery and moonbattery, where far-left and far-right meet on the far side of the moon." [235]

CEC Media Release 2014

"Malcolm Fraser's advice on Glass-Steagall should be heeded, because he's one of the few Australian political leaders of recent decades with any credibility left after the global financial meltdown started in 2008. As PM Fraser resisted the first attempts to radically deregulate Australia's financial system, when, in the late 1970s, City of London-connected banks and resource corporations launched a secretive operation to infiltrate the Liberal Party with radical free market beliefs cooked up by the Mont Pelerin Society and its Australian front, the Centre for Independent Studies (detailed in Chapter 2 of The end of certainty, by Paul Kelly). One of the participants in this operation, John Hewson, then the economics adviser to Treasurer John Howard, set up the grandfather of this current FSI, known as the Campbell Committee, to map out the radical deregulation of Australia's financial system. Fraser wisely resisted much of the Campbell Report's demands, so it fell, ironically, to Labor to betray its working class constituency and implement the banking deregulation, privatization and free trade policies which annihilated Australia's industrial base and turned the economy into a quarry and financial casino; three decades on, the accelerating meltdown of the deregulated global financial casino, which threatens Australia's debt- and derivatives-laden banking system, vindicates Fraser's early resistance." [23d]

Malcolm Fraser 2014

"I am firmly of the view that Australia should not adopt the European policy of 'bail-in' of depositors in order to save failing banks. Instead, Australia should fully separate retail banking from the speculative activities of Investment Banks, which the Glass-Steagall law did in the United States so successfully from 1933 until its repeal in 1999.

It is appropriate for the government to back the retail banks that serve the community, but it should make it clear to Investment Banks that they are no longer too big to fail, and therefore responsible for their own losses." [236]

Italy

A draft bill for a banking separation Act similar to Glass-Steagall has been introduced in the Italian Senate by Sen. Giuseppe Vacciano (M5S). It has been signed by virtually the entire M5S faction (48 senators out of 50). [232]

To Summarize

A Glass-Steagall style type law will force banks to decide whether they are 'Commercial Banks' or 'Investment Banks'.

A Glass-Steagall style type law is needed to stop commercial banks from making risky investments in derivatives and the like.

A Glass-Steagall style type law will encourage investment in Australian local businesses and Australian communities.

We need a set of laws will prevent banks trading for their own profit. Investment Banks may invest their customers money for profit from which they may receive a fee, but they may not invest their own money for profit.

Glass-Steagall is not a complete answer to the financial issues of our time.

Glass-Steagall is required to prevent a collapse of the investment banks from collapsing the Commercial Banks with their vital payments system on which modern civilisation relies.


[230] www.bloomberg.com/news/2012-04-19/parsons-blames-glass-steagall-repeal-for-crisis.html

[231] www.bloomberg.com/news/2012-04-19/parsons-blames-glass-steagall-repeal-for-crisis.html

[232] Ref:http://www.larouchepub.com/eiw/public/2013/eirv40n27-20130712/33-34_4027.pdf

[233] http://investmentbanking.jobsearchdigest.com/121/a-snapshot-history-of-investment-banking retrieved 2015-06-10

[234] www.crikey.com.au/2013/04/26/did-the-citizens-electoral-council-buy-your-email-address

[235] http://rationalwiki.org/wiki/Lyndon_LaRouche

[236] Aug 2014 Submission to the Financial System Inquiry. Retrieved from http://fsi.gov.au/files/2014/09/Fraser_Malcolm.pdf on 2015-03-25

[237] www.strategic-culture.org/news/2013/06/20/the-return-of-the-glass-steagall-act.html

[238] https://en.wikipedia.org/wiki/Volcker_Rule retrieved 15/07/2015

[239]www.investopedia.com/terms/v/volcker-rule.asp retrieved 15/07/2015

[23a] http://newint.org/features/2013/07/01/debt-keynote

[23b] www.nerdwallet.com/blog/banking/volcker-rule-explained/ retrieved 2016-02-24

[23c] cecaust.com.au/main.asp?sub=Glass-Steagall&id=Why_Aus_needs_GS_separation.html

[23d] Citizens Electoral Council of Australia. Media Release. 2014-09-09

[23e] www.dailykos.com/story/2011/01/03/933143/-Why-the-rich-get-richer-and-poor-get-poorer# retrieved 2016-02-24