WITH A NEW CRASH LOOMING, IT IS TIME TO LEARN THE LESSON OF 2008

09/22/2018

BY HARLEY SCHLANGER

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A decade after the meltdown of the Trans-Atlantic financial/monetary system in September 2008, there are calls circulating for an urgent return to Glass Steagall banking regulation.  The original Glass Steagall bill was passed in 1933 to deal with the banking collapse of the Great Depression, as an essential part of Franklin D. Roosevelt's New Deal.  Its leading features were the establishment of a wall of separation between commercial and investment banks, and an insurance program to protect depositors.  Its repeal in 1999, by the Gramm-Leach-Bliley Act, with support from leaders of both U.S. political parties, opened the door for an orgy of speculative swindles,  allowing commercial banks to buy and sell "instruments of financial innovation", such as "derivatives" and "swaps", which are in reality worthless pieces of paper with no underlying value.  The blowout of the Mortgage-Backed Security bubble, which had been pumped up by speculative lending from deregulated financial institutions after Glass Steagall was repealed, was the trigger for the Crash in 2008.  


Restoring Glass Steagall today is an urgently needed remedy, which would accomplish two necessary  goals: 1.) It would protect the real economy for the coming blow-out of the speculative bubble, which has grown bigger since the 2008 Crash, precisely because Glass Steagall was NOT restored; 2. It would put the largest banks and financial firms into bankruptcy, taking away the ability of the criminals who are the financial "elite" to loot the real economy, to prop up their worthless assets, and eliminate their ability to dictate economic and strategic policies to their puppets in the Congress and executive institutions of government.

Among the most prominent of these calls was a white paper issued by the National Association of Federally Insured Credit Unions (NAFCU), "Modernizing Financial Services: The Glass Steagall Act Revisited," which was followed by an op ed in {The Hill} on September 11 by the organization's executive vice president and general counsel, Carrie Hunt.  While understating the danger of a financial crash today, the sub-text of Hunt's piece is clear: by not restoring Glass Steagall after the Crash of 2008, the practices of the "Too Big to Fail" (TBTF) banks earlier in the decade, which precipitated the Crash when housing prices collapsed -- which she characterizes as "excessive, unbridled risk taking" -- continue today.   

By not acting to ensure that "bank's past misdeeds are not normalized or accepted as status quo," U.S. lawmakers' protection of the TBTF banks means that nothing was done to prevent the growth of these banks, and the size of their debt holdings has swelled to unsustainable levels, which Hunt says "will have a catastrophic impact on the American economy and wreak havoc on consumer's financial well-being."  Hunt writes that a "modern approach" to Glass Steagall "would restrict the banks' ability to make risky bets with consumers' savings and reduce their overall size, thereby limiting the likelihood of future bailouts and economic turmoil."

The white paper comes more than a year after the association's "Credit Union Times" ran an article by the presidents of two credit unions, warning that ignoring the debate over Glass Steagall "could leave our industry, our members and our entire country open to a repeat of the crisis of 2008."  Though there was no immediate mobilization of NAFCU members spurred by the June 2017 article, the dramatic contraction of credit unions, with more than 2,500 disappearing since 2008, and the threats of a new crisis, have provoked a new effort by NAFCU, with the release of the white paper.

A similar call was issued across the Atlantic by the former chairman of the Sparda Bank, a Munich based savings bank, who identified "deregulation" of banking as the cause of financial crisis.  He proposed a "Trennbanken system" (i.e., banking separation, as in Glass Steagall), so that "the crisis not be repeated."  His appeal was covered on an Austrian website, kontrast.at.  The same theme was sounded in a column in the German {Finanzmarktwelt}, whose author, Claudio Kummerfeld, calls for a bank separation law modeled on Glass Steagall.  Reporting on the systemic threat posed by the unraveling of Deutsche Bank, he says that under a separation law, the bank could be broken up, which would allow a separate investment bank based in London to go under, without affecting "the deposits in a separated primary bank in Germany."

The LaRouche movement, created by U.S. statesman and economist Lyndon LaRouche, has been leading the fight for restoring Glass Steagall since before the 2008 Crash.  A return to Glass Steagall is the first of Four Basic laws specified by Mr. LaRouche, as the basis for rebuilding the real, physical economy of the Trans-Atlantic region, which continues to shrink, while the new, bigger bubble created by the printing presses of central banks has ballooned, and may pop at any time, with catastrophic consequences.

THE REAL LESSON OF 2008

On July 25, 2007, as the first signs of the “credit  crunch” were becoming visible, LaRouche opened a  webcast with a warning that the system had reached a point of no return.   He said, “[T]he world monetary financial system  is actually now currently in the process of disintegrating. There’s nothing mysterious about this; I’ve talked  about it for some time, it’s been in progress, it’s not  abating. What’s listed as stock values and market values  in the financial markets internationally is bunk! These  are purely fictitious beliefs. There’s no truth to it; the  fakery is enormous. There is no possibility of a non-collapse of the present financial system—none. It’s finished, now! The present financial system can not continue  to  exist  under  any  circumstances,  under  any  Presidency, under any leadership. . . . Only a fundamental and sudden change in the world monetary financial  system will prevent a general, immediate chain-reaction type of collapse.” (1.) 

Days after this webcast, LaRouche drafted an emergency bill, the Homeowner and Bank Protection Act (HBPA), which specified what he meant by adopting "a fundamental and sudden change."  Incorporating the basic principles of Glass Steagall, LaRouche's proposal would have put the banking system as a whole through a Franklin Roosevelt-style bankruptcy reorganization.  Taking such action would have frozen trillions of dollars of worthless assets, to be written down, or written off entirely, later, and there would have been no such category created as a bank "Too Big to Fail," and no multi-trillion dollar bailout package to save them.  His draft bill would have protected the legitimate functions of banks, to allow them to disperse an utterance of hundreds of billions of dollars of productive credit, issued by the U.S. Congress, which would have been channeled first into job creation in productive infrastructure, with an emphasis on the most modern technologies in high-speed rail construction, nuclear power production, and water and power management.  This would have reversed the collapse of physical goods production and employment, which began with President Nixon's August 1971 decision to end Roosevelt's post-war recovery plan associated with the Bretton Woods system, and initiated instead a real economic recovery.   

Though a number of state and local governments passed resolutions in support of the HBPA, it was not introduced into the Congress, nor was it acted upon by relevant institutions.

LaRouche's approach is based on his advancement of a concept of "physical economy", which he developed through his study of the discoveries of scientists and physical economists of the past, such as Johannes Kepler, Gottfried Leibniz and Bernhard Riemann.  He advanced their work through his own unique discoveries about the American System of economics, which had been created by Benjamin Franklin and Alexander Hamilton.  For LaRouche and these scientists, an economy is not about making money, or monetary theory -- which is the basis of neo-liberal economic "theory", a thinly-disguised justification for looting, which originated with the enemies of the American Revolution in London's imperial circles -- but about applying the most advanced scientific discoveries to the production and distribution of goods, to allow for an improving standard of living for all people, while at the same time investing in the future, in areas which will allow for the scientific and technological progress needed to provide for the next generations. 

Over the months following LaRouche's prophetic webcast, as housing prices tumbled, the sub-prime mortgage bubble, which had been fueled by speculative lending by commercial banks, investment banks, hedge funds and assorted entities of the "shadow banking system", and backed by "insurance" instruments called "credit default swaps",  began to unravel.  Bankers and others in finance rejected the idea that this was a bubble, and continued to pump money into it, making profits while the marginal underlying value of the instruments they were selling collapsed.  One investment firm which had jumped with both feet into the mortgage bond underwriting business was Lehman Brothers, beginning in 1998.  By 2003, Lehman made $18.2 billion in loans, largely related to subprime mortgage lending.  This jumped to $40 billion in 2004, then accelerated to a rate of $50 billion per month, in 2006!  By 2008, Lehman had assets (i.e., outstanding loans) of $680 billion, backed by only $22.5 billion of capital.

Lehman was hit by a perfect storm: a 34% drop in housing prices in 2008; a leverage ratio of over 30:1, meaning there was literally nothing to back up the bonds it was selling; a subsequent devaluation of its assets by rating agencies, followed by a steep drop in its stock value.  On September 12, 2008, a handful of leading banking and investment firm CEOs met at the New York Federal Reserve, under the direction of U.S. Treasury Secretary Hank Paulson, the former Goldman Sachs CEO, Timothy Geithner, head of the New York Fed, and Federal Reserve chairman Ben Bernanke.  Over the next two days, they reached the conclusion that there was no way to save Lehman.  On September 15, Lehman was put into bankruptcy, and its assets sold off at bargain basement prices.

Paulson, Geithner and Bernanke, as well as the others meeting, quickly realized that sacrificing Lehman would not stop the collapse of the financial system.  Instead of listening to LaRouche, and addressing the failure of their monetarist model, they chose the path taken by former Fed chair Alan Greenspan, who addressed the popping of previous bubbles, in 1987 (a stock bubble) and 1998 (the LTCM bubble), by unleashing a wall of money.  At the same time, Greenspan had doubled down in his long-time efforts to repeal Glass Steagall, pushing deregulation as a solution to problems created by the series of speculative bubbles.  This bought some time -- by perpetuating the ongoing swindle, thus creating new bubbles!  

The three convinced President Bush that the only alternative to the most massive bailout ever would be the collapse of the banking system.  On October 3, 2008, a frightened Bush signed the Troubled Asset Relief Plan (TARP), which gave the biggest banks a $700 billion rescue plan.  He was supported in this by the two candidates vying for the White House, Barack Obama and John McCain, and the majority of fear-driven lemmings in the U.S. Congress.  Over the next years, the Special Inspector General of TARP, Neil Barofsky, estimates that more than $23 trillion was ultimately provided to the biggest banks and investment funds, through a series of loans, grants, tax credits, etc.  As a result, they not only stayed in business, but never had to write down the bad debts they were carrying.  The funds from TARP, and later from the various Quantitative Easing scams adopted by the Fed, and followed by the Bank of England, the European Central Bank of the EU, etc., enabled them to continue to profit from buying and selling toxic assets, which had no inherent value, except that provided by the guarantee that unlimited funds would be available from the Central Banks to back them!  As a result, the stock market went on a nine year appreciation, generating new monetary "wealth" for those who could buy stocks, which neo-liberal apologists proclaimed to be a robust economic recovery.

THE CRISIS, AND SUPPORT FOR GLASS STEAGALL, RE-EMERGE

At the same time, little credit made its way to the smaller and regional banks, which historically have been the major lenders to small and medium businesses, with devastating effects.  More than 6 million manufacturing jobs were lost, factories closed, productivity fell, wages dropped and at least nine million Americans lost their homes.  During the so-called Obama recovery, the vast majority of new jobs created (as much as 90%) were temporary, part-time and low wage.  The gap between the 1% or so of wealthy people and the rest of the population widened to record levels, small towns died, and many Americans were plunged into poverty.  What made the conditions for the majority worse were the claims of recovery by Obama and his chosen successor Hillary Clinton, for whom the Wall Street profits were presented as proof that the bailouts worked.  The deadly effect of the hopelessness engendered by the lying and coverup about the real effect of post-Crash policy can be seen in the overall decline in life expectancy in the U.S., with the opioid epidemic taking over 70,000 lives of mostly young people in 2017.

It is in this context that the global insurgency against the "establishment" was unleashed.  Beginning with Brexit, the rejection of established norms spread throughout the Trans-Atlantic region.  In the U.S., Donald Trump emerged as the Republican Party front-runner, by attacking the strategic policies of the neocons, such as regime change, proxy wars and confrontation with Russia, and the economic policies of the neo-liberals, including bail outs and free trade agreements.  He defeated the Bush wing of the Republican Party, and the Obama-Clinton wing among Democrats, exposing both as controlled by Wall Street interests.  In particular, he labelled Hillary Clinton as the candidate of Wall Street, highlighting her promises in private talks to investment bankers, to bolster his point.

Prior to the Republican convention, in July 2016, Trump shocked the bankers when he stated that he favored a return to Glass Steagall bank separation.    CNBC television reported that "Wall Street is not pleased" by this.  Trump intervened directly in the Republican Platform hearings, insisting, along with campaign manager Paul Manafort, that Glass Steagall be included in the party's platform.  The plank said simply, "We support reinstating the Glass Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment."  Though Hillary Clinton personally refused to support Glass Steagall, the Democratic Party, under pressure from Bernie Sanders' delegates, included their own platform statement backing a return to the policy of bank separation.

Trump's commitment was reaffirmed by spokesman Sean Spicer, following a meeting by Trump with community bankers in March 2017.  The President answered a question from Bloomberg News on May 2, 2017, about whether he still supports Glass Steagall, by saying, "I'm looking into that right now...There's some people that want to go back to the old system [Glass Steagall], right?  So we're going to look at that."  Earlier in 2017, Democratic Representative Marcy Kaptur reintroduced a Glass Steagall bill in the U.S. House, which now has more than 70 cosigners, and Senator Elizabeth Warren, a Massachusetts Democrat, introduced a bill in the Senate, with both Republican and Independent cosigners.  Yet, no action has been taken to move this, as lobbyists from the TBTF-controlled American Bankers Association and other financial institutions have joined with pro-Wall Street neo-liberals of both parties, to prevent even a public discussion of the bill.  Many of the same Obama/Clinton Democrats and Bush Republicans who are colluding to remove Trump using the fraudulent Russiagate story, have joined in an effort to prevent Glass Steagall from getting a hearing.

But, as in the lead-up to the 2008 Crash, ignoring the signs of an impending disaster is not a sane policy, especially as many of the same warning signs are visible today.  The most obvious vulnerability is the weakness carried mover from 2008, of a growing volume of debt of dubious quality, which sucks up all available liquidity, which further shrinks physical production, which makes carrying the debt an unsustainable proposition.  The warnings of a new crash coming from the LaRouche movement, especially from Helga Zepp LaRouche, and independent Congressional candidate in Texas, Kesha Rogers, who is backed by LaRouchePAC, are now echoed by a small but significant number of analysts.  For example, former chief economist of the Bank for International Settlements William White, who along with LaRouche was one of the few prescient voices speaking out before the 2008 Crash, told {Der Spiegel} this week, that "the problems underlying the Lehman crisis have never been solved.  On the contrary, they have turned worse."  He added, "The debt is higher than ever before," criticizing the decision to print money to cover bad debt, arguing that the financial system is "crushing against a limit."

The most immediate threat comes from the debt buildup, created by unlimited flows of Central Bank money.  This is a problem with emerging market economies, with more than $8 trillion in emerging-market corporate and sovereign debt, of which more than $249 billion comes due in the next year.  With rising interest rates, and a stronger dollar, making debt payments more costly, defaults are inevitable.  An even larger exposure comes from U.S. corporate debt.  In 2007, there was $12.7 trillion in corporate debt.  Today, there is $15.9 trillion, a significant portion of which is low quality, including so-called junk debt.  In 2008, $700 billion in corporate bonds were issued.  This increased by 2.5 times in 2017, with a large percent of that increase in sub-prime debt.   The former chief economist of the IMF, Raghuram Rajan, who also forecast the 2008 crisis, warned of a domino effect which could be triggered by default, singling out the problem that the most risky sector of finance now resides in the "shadow banking system", in which there is no transparency.  "(A)re there accidents waiting to happen?  Yes, there are," he said in a recent interview.

It is therefore more urgent than ever that Glass Steagall become a rallying cry for those in the U.S. defending President Trump from the Russiagate coup, and for those in Europe mobilizing against the bankrupt policies of the European Union and its European Central Bank.  The calls for Glass Steagall referenced above must become a central feature of the global insurgency against the London/Wall Street-centered financial cartel, as an urgent first step toward re-establishing the American System of economics.    

 
1. Lyndon LaRouche webcast, July 25, 2007, published in {Executive Intelligence Review}, August 3, 2007.