Can a New Glass-Steagall Act Fix the Banking System?

Aug. 22—Pam and Russ Martens, of Wall Street On Parade, have regularly made the case for a restoration of Glass-Steagall, the 1934 act that separated commercial from investment banking. Now, in a new article Aug. 20, they stress again its urgency, in an article titled “All the Devils from 2008 Are Back at the Megabanks: Leverage, Off-Balance-Sheet Debt; Over $192 Trillion in Derivatives, Shaky Capital Levels. The extreme leverage exposed in the report of the Congressional Inquiry Committee in 2010, as the cause of the 2007–2008 financial crisis, has not decreased but has increased since then. Today, not only banks are super leveraged, but the four largest U.S. megabanks hold a whopping 87% of the total derivative exposure of the U.S. banking sector. Furthermore, they hold as much in derivative bets hidden off their books, as they have on their balance sheets.

Take JPMorgan Chase for example. In JPMorgan Chase’s 10-K public filing with the Securities and Exchange Commission for the period ending December 31, 2023, it reported total assets on its balance sheet of $3.875 trillion. According to financial data provided by the Federal Financial Institutions Examination Council, as of December 31, 2023, JPMorgan Chase held $3.227 trillion in off balance sheet assets. Altogether then, $7.3 trillion in assets

Regulators are insisting that megabanks increase their capital ratio, i.e., increase the ratio of their Tier 1(core) equity capital (common stock, retained earnings, accumulated other comprehensive income, non-cumulative perpetual preferred stock, and any regulatory adjustments to those accounts) against their risk-weighted assets, but the megabanks have so far successfully resisted, including with blackmail. (Indeed, as CNBC reported yesterday, the Federal Reserve has circulated comments on a proposed (international) rule to have the large banks raise their capital ratio to 16%, wherein the Federal Reserve presents optional requirements as low as 5% of tangible assets as capital. CNBC quotes muted complaints from officials of other regulatory agencies that the Fed may be circulating the demands of the banks.)

“Because Wall Street megabanks have honed to perfection a century-old bag of tricks that enable them to get their way by intimidating their regulators, game accounting rules with impunity, and put personal greed above the good of the country—the only means of restoring sanity and stability to the U.S. financial system is for Congress to restore the Glass-Steagall Act, which would permanently separate federally-insured banks from the trading casinos on Wall Street,” the Martenses conclude.

While such separation of banking as enforced by Glass Steagall is absolutely necessary for prudent backing practice, the financial system has since Aug. 15, 1971, become completely untethered from the real economy, creating speculative casino that creates monetary and financial value literally out of thin air. Those non-supported values, which are called assets, but are really negative claims against the real economy, the which can never be paid, number somewhere north of $2 quadrillion (that's with a q)! When an incompetently advised President Bill Clinton signed that law in 1999 that formally did away with Glass Steagall, the Act had already been largely ignored by regulators who found excuses to get around its efforts to separate banking practice.

Now, as many even among the monetarists who run the central banks now realize, the entire financial system is overripe for a blowout, the which might be delayed a bit more by the usual monetary tricks, but ultimately cannot be averted. The real question, which even the Martenses do not want to address, is that the entire world system needs to be put through an orderly bankruptcy reorganization, with Glass Steagall separation of commercial and investment banking put in place on the other side of this reorganization. 

Additional regulation will be needed to shut down the casino, which will include the replacement of the decayed institutions of the old Bretton Woods system: the International Monetary Fund, which has become a debt collection and enforcement arm for predator lenders, which include the mega-banks whose fate concerns the Martenses; and the World Bank, which by charter, is incapable of issuing credit for large development projects which the world will need to recover from the current collapse of its physical economy. In their place, there must be a new Bretton Woods type gold reserve system, the exchange rates for which must be fixed within a rather narrow band of adjustment, instead of floated in a wild speculative market, as is now the case. Those currencies will be pegged to a newly-created non-dollar trading currency, administered by an International Development Bank, which will issue vast, low-interest credits for development projects worldwide. By removing a single sovereign currency as  the currency of global trade—in the current case, the U.S. dollar and before that the British pound sterling—the new system brings to an end the ability of banks and other financial institutions to rig and manipulate the system by using the dollar as weapon against the policy and currency of sovereign nations, to the detriment of borrowing nations and their people, and to the benefit of those who rig and manipulate the system.

Such a new paradigm system is actually consistent with the one designed by U.S. President Franklin D. Roosevelt for the Bretton Woods system which got botched up by his team at the original 1944 Bretton Woods conference, which came out with the dollar-pegged trading system. FDR intended to fix this, but died before he could, leaving the system flawed, and leading to its collapse in 1967–71.

After President Richard Nixon on Aug. 15, 1071, on the advice of British agent and U.S. Treasury Secretary George Schultz, pulled the plug on the Bretton Woods dollar gold peg,, the banks and the IMF created the global speculative casino, which, unregulated by sovereign nations, is headed toward its inevitable doom. In the 1970s, the American physical economist and statesman Lyndon LaRouche, Jr. first proposed to revive the Bretton Woods system in a plan paralleling FDR’s intended design, pivoting around an International Development Bank (IDB). Although LaRouche’s design gained considerable traction, especially among the nations in the Non-Aligned Movement, and including in Mexico, Ibero America, and in India, the central banks, until now, have been able to put down this rebellion for monetary and economic sanity.

The LaRouche plan has also found advocates in China and Russia, where President Vladimir Putin’s most important economic advisor, Sergei Glazyev is a self-proclaimed student of LaRouche. This now is taking shape in the economic and trading system being developed by the BRICS (Brazil, Russia, India, China, and South Africa) alliance which is expanding in membership, and which already represents over 40% of the world’s people. In the coming months, the BRICS plan to announce a new non-dollar based trading and monetary system, centered around their IDB, the New Development Bank.

“The difference between now and every other systemic financial crisis is that someone is putting up an alternative to the City of London/Wall Street dominated casino on the table,” said a financial insider. “So, whatever happens in this onrushing financial crack-up, the current global powers will be challenged. This is no ordinary crisis that can be managed through some controlled disintegration of unsupportable financial values. The whole damn system is completely unsupportable. The whole shebang is coming down in a heap. The BRICS nations and their new system will get through the crisis with their real physical economic power and their technological prowess pretty much intact. This is going to be fun—assuming the central bankers and their Global NATO war and debt collection machine doesn’t blow up the world first.”