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Donald Trump confirmed the worst fears of Too-Big-To-Fail banks last week, telling Bloomberg in a 2 May interview that he is examining how to break up the big banks. “I’m looking into that right now”, he said. “There’s some people that want to go back to the old system, right? So we’re going to look at that.”
In his election campaign Trump had promised a “21st Century Glass-Steagall”, to revive the “old system”, the 1933 Glass-Steagall Act’s strict separation of commercial banks with deposits from investment banks that speculate. His White House spokesman has twice reiterated his commitment to the policy, and his chief economic adviser Gary Cohn has also endorsed Glass-Steagall, but this is the first time Trump has personally reaffirmed his election pledge.
The TBTF banks are suddenly taking very seriously the possibility that Glass-Steagall may soon be restored. US bank shares fell on the news of Trump’s comments, and financial media in London and New York are nervously reporting every mention coming from the White House. They know the president’s support is a game-changer. Barack Obama, on behalf of his mega-donors on Wall Street, personally blocked Glass-Steagall for eight years. With Trump’s support, the champions of Glass-Steagall in the US Congress will be able to push it to the top of the legislative agenda.
Glass-Steagall is the TBTF banks’ worst fear, because it means they are no longer Too Big To Fail. The megabanks will be forced to split into separate commercial and investment banks that have nothing to do with each other—no cross ownership, no cross directorships, no joint ventures. While the commercial banks will have the protection of government-backed deposit insurance, the investment banks will be forced to wear the consequences of their financial gambling. The era of “privatised profits and socialised losses” will be over.
There is a new urgency to this Glass-Steagall discussion. The International Monetary Fund has just warned that the USA could soon experience a 20 per cent default rate on its non-bank corporate debt. This has become a US$14 trillion bubble, dwarfing even the US$11 trillion mortgage bubble of 2007-08; a 20 per cent default rate would be greater than the mortgage default rate that crashed the global financial system eight years go. Without Glass-Steagall in place, another, far bigger financial crash is inevitable, which will be more devastating than 2008.
Will UK, Australia also break up big banks?
The momentum towards Glass-Steagall in the USA has huge implications for other countries. China already has a separation of commercial and investment banking, and Glass-Steagall legislation has been introduced and/or debated in the EU, UK, Iceland, Belgium, Sweden, Switzerland, Italy, and Greece.
In the UK, a bipartisan push in 2013 to enact Glass-Steagall was only narrowly defeated, but that was when Obama was blocking Glass-Steagall in the USA. A break up of the big Wall Street banks will put the spotlight on the continuing threat that HSBC, RBS, Barclays, Deutsche Bank and the other TBTF megabanks in London and Europe, with their hundreds of trillions in exposure to dangerous derivatives gambling, pose to the global financial system. The supporters of banking separation in the UK parliament, including Labour Party leader Jeremy Corbyn who in 2015 pledged a “full-blown Glass-Steagall”, must seize this opportunity to force through the only measure that will protect the British people and economy from another crash.
(UK supporters of Glass-Steagall should sign and share the petition that has just been launched on 38 Degrees entitled: “Break up the City’s megabanks: pass Glass-Steagall!”.)
Likewise Australia. The Citizens Electoral Council has campaigned tirelessly for a Glass-Steagall separation of Australia’s TBTF banks, which, combined with the shift in the USA, has forced Australia’s politicians to address the issue. The Labor Party recently announced it would support breaking up the banks if it was recommended by a banking royal commission. The Galaxy polling company is presently gauging the public’s opinion of the policy. And today’s Australian Financial Review reports that Treasurer Scott Morrison intends to establish a Productivity Commission inquiry into whether retail banks should be separated from the financial advice businesses that have ruined thousands of bank customers in the past decade. However, with the housing bubble set to burst and wipe out the banking system, Australia needs action, not words, and inquiries are not necessary to know that only Glass-Steagall will protect everyday Australians and the real economy from a banking crash.
(Sign and share the Australian Glass-Steagall petition on change.org: Break up the big banks now—pass Glass-Steagall!) https://www.change.org/p/break-up-the-big-banks-now-pass-glass-steagall
The momentum for Glass-Steagall in Australia and worldwide demonstrates the power that everyday people have when they fight for a principle they know to be right. The CEC is winning the Glass-Steagall fight in Australia—now is the time for you to join in!
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