Extending the Glass-Steagall Principle
We understand that Glass-Steagall is not just a law, but that it is, in fact, a principle. It is the principle of the distinguishment, by a culture/society, between economic activity which is valuable, or of potential value, and economic activity which is wasteful and injurious- and this combined with the commitment to always support the former at the expense of the latter. This principle is clearly exemplified by the formal strictures of the original Glass-Steagall act which prohibited commercial banks from engaging in the business of financial securities in any way- a measure which was explicitly stated to fulfill the intention “to prevent the undue diversion of funds into speculative operations”. (Fn. 1) Yet, the mere formality having such a law in place does not necessarily indicate that the society/nation which does so is actually operating on the basis of the Glass-Steagall Principle with respect to financial policy or economic practice.
For example, in the United States, prior to 1980, there was an interest rate cap which limited the amount of interest commercial banks (then under strict Glass-Steagall regulation) could pay their depositors. At this time, there were various Wall-Street centered financial institutions which were finding new ways to offer higher rates of interest to the general public for non-commercial bank deposit accounts. Such accounts were created in order to provide these institutions with greater cash-pools for speculative activity. This has been called “shadow banking”. Because the interest rates on these accounts were higher than those offered by the capped interest rate capable of being offered by commercial banks, a growing portion of the population began to invest in them, despite the fact that such accounts were not FDIC insured. Commercial banks, even with their FDIC guarantee, were thus losing access to deposit pools required for useful lending, and a fuss was raised about it with lawmakers. In response to this, the congress foolishly removed the interest rate cap on the commercial banks’ deposit accounts.
Thus, the congress did not act according to the Glass-Steagall Principle. Why? Because, if they had, they would have, in response to the situation just described, simply imposed interest rate caps on the shadow banking accounts as opposed to lifting the interest rate cap on the commercial bank accounts, and thus protected the useful economic activity at the expense of the wasteful, as opposed to visa versa. We see here, then, a failure to operate on the basis of the recognition of the difference between valuable economic activity and wasteful economic activity, or at least the lack of intention to defend the valuable at the expense of the wasteful- a clear violation of the Principle -or spirit- of Glass-Steagall.
The effects of such a blunder can easily be imagined. The commercial banks largely relied upon relatively fixed and low interest rate investments such as 30 year mortgages and long-term business loans, yet, the interest rate they were obliged to pay depositors became increasingly greater in order to compete with Wall-Street. Thus, a squeeze on the profits of the commercial banks was created. This in turn created more pressures for deregulation of the commercial banks which the congress, failing the Glass-Steagall Principle again, responded to by allowing the banks to engage in more risky activity, as with the Garn-St. Germain Act of 1982. This risky activity eventually led to the S&L crisis in which hundreds of banks across the US collapsed. (Fn. 2)(Fn. 3)
Based on how the “Glass-Steagall Principle” has been defined here, it is clear that it is a principle which must inform every aspect of political economic practice. That is, this principle is not specific to financial regulation. However, because of the fact that the national (and international) economic waste associated with Wall-Street centered financial operations has been so extreme over the last decades, it is important to consider questions of structural and regulatory changes in the financial system in accordance with the GS Principle as very significant and pressing, especially at this moment when the entire system is facing the need for a total overhaul because of its imminent collapse. This is evidenced by the fact that Lyndon LaRouche has placed the reinstatement of the essential regulatory provisions of the Glass-Steagall act at the top of his list of “Four Laws” to save the United States from economic collapse. Below I have included a short list of some of the measures which would extend the GS Principle to other aspects of financial operations which are not directly addressed by the isolated act of separating commercial and investment banks. I understand that passing Glass-Steagall at this critical moment of history will result in effects which may seem to obviate some of the measures outlined below in the short term. However, I believe that it is useful to consider the long term potentials for regrowth of wasteful activity in the economy through the financial system, and the measures which might be taken in the short term to mitigate against such potential future problems. (Fn. 4)
-Personal Financial Instrument Law (PFIL)
This law, the PFIL, would mandate that all purchases and ownership of financial securities can only be performed by individual people, and solely on behalf of the individual who performs the purchase.(Fn. 5) This law has many implications for current financial operations in the US, some of which are elaborated below. But all of the changes in financial practice which would be brought about by this law would correspond to the Glass-Steagall principle, as far as I can tell.
--The PFIL would prohibit the pooling of the money of multiple individuals, by any individual, group, or company, in any form, for the purpose of making purchases and sales of financial securities.(Fn. 6) This, of course, would eliminate most “investment firms” in operation today.(Fn. 7) All purchases and sale of corporate stock will need to be made through stock brokers on behalf of their individual client’s expressed intention.(Fn.8)
Of course, there are some who might complain about this law based on something like: “Companies need capital and people should have the right to buy stock!” But, obviously, this law allows for both of those things to occur, but only as decisions (hopefully rational) made by individuals who choose their own holdings, and not by small groups of people who control large pools of other people's money.
--The PFIL would eliminate the possibility of corporate (non-individual person) ownership of securities like corporate stocks. This would eliminate the capability for corporations to participate in financial bubbles. Any financial bubbles in the system which might arise would be made less severe on account of the reduced monetary inputs from the vast corporate sector. This law would encourage corporations, instead, to increase investment in themselves through research and development, higher wages for employees, increased capital investments etc. This would also reduce the financial interconnectedness of the corporate sector, as the profitability of corporations would no longer be connected to the capital gains or dividend revenues derived from the holding of stock in other corporations (for example). Thus the stability of the system would be increased, for the collapse of one corporation (and its stock value) would have a much reduced effect on the other corporations in the system, if any at all.(Fn. 9) Thus, as for the implications of this law on corporate financial practice, we see that it corresponds to the Glass-Steagall Principle. Some might complain that this reduces the “versatility of corporate competitiveness” or something like that. In response, I would simply ask: Why can the firm in question not increase its competitiveness by being more creative, and producing better goods for less cost- why does it need to involve itself in financial speculation to be more competitive?- doesn’t the firm have other more important things to invest in- like its own productivity? Etc.
Another implication of this law is that pension funds for corporations will no longer be able to invest in financial securities. The pension fund accounts will need to be tied to other investments, such as by being deposited in a bank for a certain rate of interest and lent out to production, or by the corporation making loans on its own liability to other companies which are judged to be a good investment opportunity. This could encourage the management of businesses in society to be more attuned to the real physical economic conditions and requirements of the society in order to most wisely engage in such firm to firm investments. This, in turn, would most probably be reflected in a clearer and more fruitful research and development policy within the individual business as well.
Upon implementation of the PFIL, and in cases where corporations hold financial instruments, the corporation will be given two (or more if good ones can be found) choices: 1.) Immediately liquidate all financial securities. 2.) Immediately transfer ownership of all held securities to the individual stockholders in the company in proportion to their stake in the company.
Clearly, there are many corporations which operate solely on the basis of trading in financial securities as a corporate entity, and derive profits for the executive management thereby. Under the PFIL, essentially all such businesses in the system will vanish. But that is ok, since we don't really need them anyway.
--The PFIL would also eliminate the insane practice of automated securities trading. Today, more than 75 percent(Fn. 10) of all stocks traded occur through computer automated trading. The PFIL would make this impossible, and thus increase the rationality of the financial securities markets- quite literally, since, of course, computers can not think. This would further reduce the artificial market inflation potential (and corresponding waste), as well as the risk of the kinds of computer “errors” which sometimes cause the markets to collapse and the whole society into a state of infantile panic.(Fn.11)
-One Day Transaction Law (ODTL)
The ODTL would place a limit on the frequency with with financial securities could be purchased and sold. The minimum time interval after which a financial security can be sold once it has been purchased will be 24 hours. For example, if an individual purchases a share in a corporation, then that individual could only sell that share after 24 hours had passed. This law will thus eliminate the insane class of speculators known as “Day Traders”.
All investments in financial securities will thus be made on the basis of a judgement (hopefully rational) by the individual which takes into consideration the viability of the investment into the future of at least 24 hours. Based on the fact that most economic planning requires the foresight into the future of at least 25, 50 or 100 years, I don’t think that it is too much to ask people (especially those who consider themselves “investors”) to have enough brains to think into the future at least one day!
The practice of day trading is another factor of encouragement for the development of irrational financial bubbles and panicked collapses. Eliminating this practice will thus attenuate the potential for both such deleterious economic effects. A significant amount of economic waste associated with the accumulation of profit by high frequency trading practices will be eliminated in the economy.
In addition, the rationality of financial markets will be increased, and the culture of financial investment, and business practice generally, will be improved. The business culture typified by the wild-eyed speculation of cocaine addicted, cold blooded parasites at Goldman Sachs is a major factor in the corruption of the entire society generally, resulting in seemingly unrelated cultural effects which all degrade the human condition, even beyond the establishment of widespread neuroses corresponding, in principle, to gambling addiction.(Fn. 12) A dissociation of reason from the procurement of wealth is an extremely dangerous cultural tendency, and any individual or society which suffers from such a dissociation could rightfully be called insane. This is yet another expression of the violation of the Glass-Steagall principle, and a reformulation of this principle could be stated as follows: The commitment to improve the association of reason and the accumulation of wealth (or the allocation of resources).
-Separation of Insurance Functions/Companies
Another measure for extending the Glass-Steagall Principle to good effect could be to implement a Glass-Steagall style separation of insurance firms. This could take the form of separating financial insurance from physical insurance. For example, we could mandate that all insurance coverage for physical liabilities; ie. car accident insurance, farmers crop wipe out insurance, home damage insurance, shipping damage insurance, loss of life insurance, business property damage insurance etc. can only be performed by one class of insurance companies, perhaps we could call them “Tangible Insurance Companies”. On the other hand, it could be mandated that all financial insurance; ie. insurance on financial contract defaults, insurance on fluctuating interest rates, insurance on devaluation of financial contracts etc. can only be performed by another class of insurance companies, perhaps called “Financial Insurance Companies”.
The measure just described might appeal to our economic instincts, but what is the economic rationality behind such a separation of the insurance functions? Insurance plays a major role in financial speculation. Speculation, by its nature, is risky business, and various forms of financial insurance are used to hedge speculative positions. Increasing speculation thus demands more insurance. The availability of insurance, in turn, provides a greater impetus for more speculation. Thus, if a financial bubble develops, there will inevitably be significant insurance liabilities which will develop in conjunction with it. A collapse of the bubble will thus trigger massive insurance payouts, which could lead to the bankruptcy of the insurance firms involved.(Fn. 13) If an insurance firm which collapses as a result of this also maintains operations in “Tangible Insurance”, like farmers insurance, or life insurance, then there is an inability of that insurance firm to pay the outstanding claims of their tangible insurance clients who have suffered physical economic loss. These people will be left with nothing. And, of course, all of the individuals and businesses which relied on such insurance for protection from that firm would be forced to find insurance coverage elsewhere, creating more expenses. The systemic risks of insurance operations to the economy is reduced.
This situation creates pressures for government bailouts in the event of an insurance firm collapse. In a similar fashion to the way in which banks have taken greater speculative risks as a result of the implicit government bailout guarantee in the case of failure, the insurance companies similarly have greater impetus to involve themselves in higher risk positions in speculative financial bubbles, knowing that a bailout will save them if they go too far. This implicit guarantee, of course, fuels speculative inflation, and the corresponding economic waste and instability. A separation of insurance functions would undermine the rationality behind any state bailouts to remedy financial insurance caused bankruptcies.
As with the Glass-Steagall separation of the banks, a separation of the insurance companies will have a positive impact on the culture of business practice across the whole society. For the legitimate “tangible” insurance functions which the economy needs will be not only legally separated, but also culturally separated thereby, from the financial insurance world which is more conducive and accommodating to the kinds of fraudulent practice and culture of brutal Wall-Street economic thievery.(Fn.14)
-Addressing Commodity Speculation
Today, the majority of trade in commodities does not take place at the hands of businesses and individuals who intend to do anything useful with those commodities, but rather, by speculators who find ways to gouge profits out of these manipulatable markets. (Fn. 15) Every dollar of such profit is economic waste. Passage of Glass-Steagall will prevent speculation in commodities by the commercial banks, and reduce this waste thereby. However, it is still of great importance to identify other ways in which speculation in commodities, and the economic waste associated with it, can be reduced as much as possible. Methods by which speculation can be curbed must be crafted so as to interfere with the legitimate needs of businesses which require quick access to the commodity markets. As a result, some of the measures taken may be quite involved. There may be some simple and elegant measures which can be taken however.
A simple, but potentially very effective law could be the prohibition of purchases of commodities by businesses or individuals which do not have the intention of utilizing the commodities for the production of useful goods to be sold, or, in the case of food, for the production of consumer food product. That is to say, we simply ban commodity speculation. Because speculative activity has the potential to be disguised as legitimate business, a speculation ban would require that agencies like the CFTC be beefed up in their capacities for aggressive investigation and pursuit of such activity once it were made illegal. This would reconnect the commodities market to the real physical-economic conditions/requirements of the society.
A trading frequency limitation law for commodity contracts, similar to the ODTL described above, may be in order, even with a speculation ban, for the purposes of further decreasing speculation and increasing market stability.
Alteration in corporate/business tax policy could be made for the purpose of reducing economic waste. As LaRouche said in “So You Wish to Learn All About Economics”, economic waste should be taxed out of existence.
But this cannot be done if all corporations and businesses are taxed equally. Thus, we need to find ways to classify different business sectors such that they can be taxed differently. If Glass-Steagall is reinstated, this will be accomplished for financial institutions, and thus higher taxes can be imposed on non FDIC insured institutions. (Although there probably won't be many around if the measures I have outlined above are implemented). Solutions to ambiguities can be addressed in cases of businesses which have different kinds of operations which fall into different categories. These options require more discussion.(Fn.16)
Tax breaks, in things like R&D for example, can similarly be modified along such lines. (I have always found it insane that companies like Goldman Sachs can get tax breaks for R&D!)
Of course, taxation can only go so far in eliminating economic waste, since, after all, a great portion of the economic waste in our society today comes in the form of cultural decadence, in which disposable consumer consumption is increasingly oriented around mentally and culturally deleterious practices. For example, the $650 Billion entertainment industry in the United States is nearly %100 culturally and mentally degrading. Thus, while this is not included as a component of economic waste in the sense of waste as we have been using it in this paper (as a first approximation), that does not mean that is is not real physical waste. But, as Schiller pointed out, most legislative measures, including tax policies, can only oppose deleterious practice(Fn. 17) but not create the impetus for the participation in culturally beneficial activity. This is why the government should place a major emphasis on the establishment of a national theater, along Schiller’s recommendations, in addition to many other cultural initiatives, such as mandating that all schools provide pupils from kindergarten through 12th grade 1 hour per day of choral work in Bach, Mozart, American patriotic songs, negro spirituals, etc. Such initiatives will reduce a significant portion of the economic waste of the society.(Fn.18)
Our discussion of extending the Glass-Steagall Principle will end here, at the doorstep of the higher implications of this principle in the domain of human cultural practice and engineering. That is a discussion which will also need to be taken up in earnest. We will probably never get to Mars otherwise.
1.)First sentence of the original Banking Act of 1933: https://archive.org/stream/FullTextTheGlass-steagallActA.k.a.TheBankingActOf1933/1933_01248_djvu.txt
2.) See FCIC report. Chapter 2. http://fcic-static.law.stanford.edu/cdn_media/fcic-reports/fcic_final_report_chapter2.pdf
3.) I realize that most instances of significant deregulation of the financial sector over the past 40 years would provide examples of the way in which the Glass-Steagall principle was violated. I chose this example, however, because I think it provides a clear illustration of the principle by juxtaposing what was done in violation of the Glass-Steagall Principle, with an alternative course of action which would have been in accordance with the GS Principle.
4.) While I have never personally encountered any proposals of the measures which I outline below, I do not make a claim to their originality. I also would mention that we may find a veritable gold-mine of good ideas as to how to regulate the financial system into the future by simply looking into the past at the measures taken towards deregulation and simply undoing them (or “re-doing” them, in a way in accordance with the GS Principle)! (This, of course, only to the extent that such measures would make any difference under the reimposition of GS banking separation).
5.)Besides registered stock brokers of course. This would also apply to the sale of corporate shares, excepting the initial public offering of such securities by corporations on the market.
6.) Additional laws can be passed limiting or prohibiting the amount of money individuals may accept as loans from other individuals or businesses if the loaned money is to be used in the trade of financial securities etc.
7.)The ironic thing about it is that this fact would make the so-called “free market” in financial securities much more connected to the actual investment judgements made by a larger portion of the individuals in society, as opposed to a tiny elite group of corrupt, insider-trading, drug money laundering Wall-Street locker room buddies. That is to say, this actually makes the “free market” more “free” in that sense!
8.)This will probably increase the amount of stock brokers around, but that's ok. Stock brokers, of course, will only be able to do as their clients say and provide investment advice- but that's it! We are going back to the good ol’ days! (When we were not insane)
9.)Of course, there would still be an effect, but one which would be of a physical nature- that is, the other businesses in the system would need to find another producer to obtain the product which the collapsed firm had been providing. Although, the very fact that the firm was collapsing in the first place would probably indicate that this was already taking place, and so the systemic effect may very well be unnoticeable.
10.)This is per Wikipedia, but it is probably much more.
11.)As with the “flash crash” of May 6 2010. See this video for an example of the kinds of unnecessary stress people will be able to avoid once the PFIL is passed: https://www.youtube.com/watch?v=E1xqSZy9_4I The savings to the economy from reduced healthcare expenditures necessitated by stress induced ailments alone will probably be enough to justify the PFIL!
12.)This begs the question of natural law, and the coherence of cultural condition with physical economic directionality.
13.) As with AIG in 2008.
14.)Fraud in insurance operations is rampant on Wall-Street. The FCIC report details some of the ways in which Goldman-Sachs, in particular, utilized insurance contracts -derivatives called credit default swaps- to profit of of the losses of their own clients whom they had knowingly given bad advice to.
15.) I could not find exact numbers. But most of the figures I found were that %60+ of all commodities trade is by speculators. This, while unacceptably high, still seems low to me however.
16.)I have also written a paper on how the national tax system could be overhauled to great benefit in another paper “Potential Alternative to the Current Tax System”. Implementation of the tax system there would make targeted tax increases on waste easier than under the current system.
17.)And even then, sometimes ineffectual, since the suppression of one practice may simply increase the creation of new and similar practices elsewhere. For example, heavily taxing sports tickets may only drive more people into the movie theaters where they will watch other human being being tortured on the big screen. Etc.
18.)While we are at it, we might as well have a full investigation into what kinds of intentional mental/cultural warfare might have been waged against the population by networks within both governmental and non-nongovernmental agencies. For example, we can put everyone who has been engaged in MkUltra style crimes against humanity in jail.