Testimony of Paul Gallagher, Executive Intelligence Review Economics Co-Editor

March 3, 2017

Committee Chair and Delegates,

Thank you very much for holding today’s hearing on the resolution to the U.S. Congress to restore the Glass-Steagall Act separating commercial bank units from all other types of financial institutions, and limiting FDIC insurance to those units.

Glass-Steagall restoration legislation in the U.S. House of Representatives, H.R.790, the Return to Prudent Banking Act of 2017, was introduced Feb. 1 by Republican Walter Jones of North Carolina and Democrats Marcy Kaptur and Tim Ryan of Ohio and Tulsi Gabbard of Hawaii. It has grown to 32 cosponsors, and needs support. Twelve state legislatures are now considering resolutions supporting this legislation.

If Glass-Steagall is not restored now, the next large bank — or non-bank — financial failure will again topple the banking system and trigger both new bailouts and confiscation of bondholders and depositors in the form of bail-in. U.S.-based large bank holding companies have $2 trillion in exposure to European megabanks, which are full of non-performing loans and have not had a single profitable year since the 2008 crash despite hundreds of billions in bailouts and trillions in bond purchases by the European Central Bank.

And if Glass-Steagall separation is not restored now, the largest U.S. bank holding companies — which dominate the banking system to the extent of 60-70% of deposits and assets — will continue to limit lending, in practice, to the large corporate bond issuers and borrowers, shutting out technologically progressive SMEs from credit.

JP MorganChase had $837 billion in loans/leases outstanding at Dec. 31, 2015, just 65.1% of its deposits of $1.279 trillion. Citigroup had $604,991 billion in loans/leases at the same date, just 66.8% of its deposits. But the entire U.S. commercial banking system has loans/leases outstanding equal to 79.2% of deposits according to the Federal Reserve’s flow-of-funds report. Since the six largest banks hold more than half of all deposits, the comparative ratio for the nation’s 6,000 community banks and regionals clearly must be in the range of 90%-plus loans/leases to deposits. The biggest banks’ loan ratios are very low indeed; they both hurt the economy, and demonstrate the great degree to which households and businesses deposits are being used for securities and derivatives speculation.

But since the 2008 crash, the biggest 12 banks have largely absorbed the deposits and assets of some 2,000 small banks which have disappeared — one quarter of all the commercial banks which existed in the United States a decade ago.

The largest bank holding companies changed dramatically from 1995 the point at which Glass-Steagall enforcement had effectively ceased — through the 2007-08 crash. This was studied and effectively described already in a 2011 study by the New York Federal Reserve, entitled “Peeling the Onion: The Structure of Large Bank Holding Companies.” These giants became impossibly complex, morphing from 1-200 subsidiaries typically in 1995 to 3,000 or more units per megabank in 2011. They became giants dominating the assets and deposits of the entire U.S. banking system for the first time in U.S. history. They shifted their huge and growing deposit bases from lending toward supporting securities trading units, derivatives trades, etc. Derivatives markets exploded ten times in size in ten years 1997-2007.

Already in 1998-99 the failure of a single hedge fund called Long Term Capital Management was admitted to have nearly caused a global bank panic, because 55 U.S. and European banks, through leveraged loans, were into LTCM’s immensely risky derivatives trading. By 2008 Lehman Brothers and other investment banks, insurance companies and hedge funds were in the same blowout event condition.

Today, a media report March 2 identified $321 billion in fines which the world’s biggest banks have had to pay since the 2008 crash, for illegal and/or immoral activities which they continue to commit up to the present. The dominant character of these violations of banking law and practice is the use of the very large deposit bases of these banks, to support speculative units, securitization of investments, and derivatives bets. The currently very public Wells Fargo mis-selling scandal is emblematic of this.

If the Glass-Steagall Act is restored by Congress now, financial failures will take down only individual financial institutions, as when important investment banks like Drexel Burnham Lambert and Solomon Brothers failed under Glass-Steagall enforcement without affecting the rest of the banking system. U.S. branches of the biggest European universal banks, which absorbed great volumes of taxpayer bailout loans and recapitalizations, will have to recharter themselves completely independently if they are to operate in the United States at all. But in fact, Glass-Steagall restoration in the United States is likely to be followed more or less immediately in Europe, where many nations have already had Glass-Steagall bank separation legislation introduced.

And if Glass-Steagall is restored by Congress now, even as large holding companies are divesting securities units, their commercial banking units will necessarily be in the business of lending to businesses and households, aside from holdings of Federal and municipal bonds. The common Wall Street argument against Glass-Steagall — that it will reduce bank lending or damage the capital market — is the opposite of the truth. As FDIC vice-chair Thomas Hoenig has frequently argued in recent years, the United States capital markets were the deepest and most reliable in the world in the decades when commercial banking and securities trading were separated and the Federal safety net protected only the former.

If a national bank for great infrastructure projects is established, it will need a system of private commercial banks lending on good terms to its contractors. Glass-Steagall will make lending those banks business again.

Executive Intelligence Review believes that restoring Glass-Steagall is the initiating action of four laws Congress should take. It should lead to a national Hamiltonian credit institutions for trillions in infrastructure investments; to an accelerated return to manned space exploration and to rapid development of fusion power and plasma technologies.

Thank you again for debating this crucial subject.

The Chinese government has launched a global organizing drive to ensure that the upcoming Belt and Road Forum for International Cooperation (BRF), to be held in Beijing on May 14-15, consolidates a “broad, international consensus on the Belt and Road Initiative,” in the words of State Councilor Yang Jiechi, the top-level Chinese official in charge of preparations for the Forum. Noting that “the global economy is yet to emerge from the profound impact of the international financial crisis,” Yang emphasized in a March 10 interview with China Daily that “we hope the BRF will help drive away the clouds of the economic doldrums,” and that already “in countries around the world, priority is given to the real economy, the manufacturing sector, industrialization and economic diversification.”

“The Belt and Road Initiative was proposed by China. Yet it’s not going to be China’s solo show,” Yang stated. “A better analogy would be that of a symphony performed by an orchestra composed of all participating countries.”

China has repeatedly made it clear that the Belt and Road Initiative is open to all nations in the world, emphatically including the United States. As Chinese Foreign Minister Wang Yi stated on March 7, China, Russia and the U.S. should work with each other to pursue “win-win, rather than zero-sum outcomes…. We believe the three countries can develop healthy and positive relations so that jointly we can fulfill our responsibilities for world peace and development.” It is also noteworthy that Yang Jiechi was the Chinese official who was sent to the U.S. for discussions with the incoming Trump administration earlier this year.

“The New Paradigm is becoming the dominant, defining dynamic on the planet,” Helga Zepp-LaRouche told associates today. “And given the fact that we are less than 100 days away from the May Belt and Road Forum, I think we should use that time to really make sure that we get the U.S. to join, but also European nations to join, because that is the establishment of a higher level of reason which could really solve all problems.”

We have to proceed quickly, she added, because the entire trans-Atlantic financial system is a powder keg, for which the only solution is the reinstatement of FDR’s Glass-Steagall law, as part of LaRouche’s Four Laws. The danger we face is of a chaotic collapse of the entire system before we can get Glass-Steagall and the Four Laws in place. However, if the U.S. joins the Belt and Road symphony, America, with its terrible infrastructure deficit and economic collapse, can be reconstructed at a higher technological platform, with the help of China, Japan and other nations.

We have to quickly get people to think on a strategic plane, Zepp-LaRouche said, and to realize “that there is a tremendous, tremendous change occurring in history. Which really means that if we succeed to get the U.S.—and European nations, for that matter—in collaboration with Russia and China on the New Silk Road, all the problems in the world can be solved. That doesn’t mean that they disappear overnight, but they can be solved. And that is why the British Empire is so freaked out; that’s why the whole campaign against Trump exists. Because the last 25-26 years, when the City of London and Wall Street thought they could build a unipolar world, that is now out the window. That paradigm has gone under already, with the Brexit, the ‘No’ in the Italian referendum, with the Trump victory. And therefore the point is now to consolidate that, and make sure that the people who are trying to use every means to stop that change, are not successful.”

Helga Zepp-LaRouche concluded that there is tremendous cause for optimism. “But $8 trillion in infrastructure investment cannot be mobilized with the present bankrupt financial system. But it can very well be implemented if you create a national bank, if the Chinese can put their U.S. treasuries into that infrastructure bank, and if you have coordinated productive investment after implementing Glass-Steagall, and LaRouche’s other three laws.

“The solution is really very close. So we should get people optimistic, and say to them: ‘Now is the time to move your behind; now is the time not to sit on the fence, because your fate can be turned into a much better situation in the short term. But we need you to act with us now.'”

Check out our latest report: ‘LaRouche’s Four Laws & America’s Future on the New Silk Road’, now available as a digital pamphlet