Mnuchin in confirmation testimony before the Senate.
My Response to Mnuchin Confirmation Testimony on Glass-Steagall
The testimony of the incoming Treasury Secretary Steven Mnuchin respecting Glass-Steagall has revealed a deadly shortcoming in his theoretical economic outlook, and, by consequence, in the economic competence of the Trump team as a whole.
Mnuchin’s only cited reason as to why he opposes a full restoration of Glass-Steagall (GS) is that it would “have very big implication to the liquidity and [in?] the capital markets, and banks being able to perform necessary lending”.(Fn.1) For now, I will say only that the first part of this cited reason, in fact, is a true statement- but, as should be obvious, it is the very reason that a full GS should be reinstated. I explain more later.
First, I will address the second part of his proffered “reason” as to why GS should not be reinstated, namely, that doing so would reduce the ability of banks to lend. This is true in only one sense: It is true only in the sense that most of the major banks in the US will be revealed as bankrupt upon the reimplementation of GS. After the massive amount of liquidity which has been channeled into financial markets through bank investments utilizing bank deposits is removed, those financial markets will crash. To the extent that a bank has invested in such markets, that bank will suffer losses in the direction of bankruptcy. However, the reorganization of the banking system can take place in such a way which avoids a chaotic collapse and allows the banks to function properly again. (Fn.2) Thus, it is true that reimplementing GS would limit the ability of banks to lend in this sense, but, obviously, the ability of banks to lend will be reduced in this way even if GS is not reinstated, because they will all go bankrupt as a result of the implosion of the bubble which they are all tied into. The real issue here is whether we want a chaotic or orderly bankruptcy of the system. Thus, even if this is what Mnuchin intended when he claimed that reimplementing GS would limit the ability of the banks to lend, his claim is completely idiotic.
Further -as I find it probable that Mnuchin does not really understand what was said immediately above- if we assume that Mnuchin intended to mean that reinstating GS would reduce the ability of banks to lend, not because it would cause the banks to go bankrupt, but for some other reason, we can prove that to be absurd as well. GS would not reduce the ability of Banks to lend, but rather, improve it drastically. This is true, firstly, because the banks would no longer have the option to do anything but lend as a way of making significant profit (being prohibited from other investment activities), and secondly because the elimination of economic waste attending reimplementation of GS is the only way that sustainable lending by the banks, which is based on real economic growth, can be maintained. Further, the impetus for more people to deposit money in banks, as opposed to investing in the stock market, will increase, since, after the elimination of the massive liquidity injection made possible by deposit based bank investment in the financial markets, the such markets will be much less inflated, and therefore, much less attractive. The more deposits a bank has, the more lending power it has. Etc.
We see that “any way you slice it” Mnuchin is utterly wrong, or, perhaps, consciously lying in a vicious way, when he says that reinstating GS would reduce the ability of the banks “to perform necessary lending” .
As to Mnuchin’s first point of objection, that “[reinstating a full GS would ] have very big implication to the liquidity and the capital markets”, as I mentioned above, this is the very reason that GS should be reinstated. When Mnuchin refers to the “Capital markets” he is referring to the markets in stocks and bonds of business firms. First of all, anyone who claims that businesses cannot obtain the credit they need in order to maximize their productive potential, need only look at the figures recently noted by Paul Gallagher which show that the great majority of all investment capital procuration by businesses came from direct loans by banks. Thus, reducing the ability for Banks to invest in these markets would have no significant effect on the ability of industry to obtain the investment capital they need. Besides, if a bank thought that a company was profitable enough in the long term to purchase their stock, would they not be equally willing to provide that bank with a loan for the same amount should they be prohibited from purchasing the stock by GS?
But, most importantly, the fact that GS would reduce the “liquidity in the capital markets” is a good thing. For excess liquidity in financial markets lead to destructive bubbles which cannot but collapse eventually, leaving economic ruin in their wake. Pouring more fuel onto a raging fire is not the way to deal with the negative effects of the fire.
The allowance of banks to engage in financial market activity reduces the credit which is available to productive industry, thereby creating the false impression of a shortage of money, which, in turn, leads authorities at the Fed to increase the money supply to compensate. Meanwhile a giant bubble is building in financial markets. As this process continues, and the economic waste generated through speculative profits made possible by continual influx liquidity from banks into financial markets increases, economic authorities at the Fed and elsewhere find themselves scratching their heads in wonder as to why economic expansion is so slow, even while their expansionist monetary policy is, supposedly, making credit is so abundantly available to industry.
Thus, Mnuchin’s first reason amounts to saying no more than “we cannot reinstate GS because that would pop the bubbles in the capital markets”. This is dangerously foolish (or intentionally evil), and it represents a continuation of the kinds of gobbledygook which we saw from the Obama administration. Hopefully Mnuchin is either convinced otherwise, sacked by Trump, or reveals that he only lied about his thoughts on GS so that he could be confirmed by the Wall-Street whores on the Senate Financial Services Committee.
Unfortunately, it gets worse. Mnuchin also cited a report by the Federal Reserve which claimed that there is currently a “lack of liquidity in many of the important markets”. Why would Mnuchin even bring this up unless he believed that it was correct, and that he was intent on rectifying this problem? What would a rectification of this problem mean? What would be required to increase the liquidity of those “important markets”? In a context of a discussion of GS, that would mean the exact opposite of GS- it would mean enabling the banks to engage in more “investing” in those markets. It would mean more bubbles, more economic waste, more destruction, and more stupidity holding back the US economy while the rest of the world joins the New Paradigm.
The amount of “liquidity” (money) which is “in a market” of a particular type, should be dependent solely upon the demand for the products specific to that “market” as that demand arises out of the physical-economic requirements of the productive processes in a society. Or, stated in another way, the amount of money utilized for purchases of a particular class of goods should be only that amount which is required by the business firms, governmental institutions and individuals in the society to procure those goods for the purpose of producing other goods needed for society, or for establishing material conditions of individual life which are beneficial to the members of that society.(Fn.3) Every dollar of money added to any market which is in excess of this amount will be inflationary and will lead, by definition, to the formation of bubbles whose sizes will vary from imperceptibly small to catastrophically destructive.
One might ask: “How could any ‘excess money’, as that term is defined in this way, ever make it’s way into any market in a free-market economy? Should not the total demand, measured in money expenditures, for a particular product naturally arise out of the consumption patterns of individuals and business firms which choose to purchase in the way they do?” In response, excess money may be provisionally defined as the money flowing into a market as a result of speculation. What is speculation? Speculation is the act of purchasing anything without any intention to put the thing to any physical use,(Fn.4) and only with the intention of selling it later at a higher price.(Fn.5)
Every dollar added to a particular “market” and utilized in claiming its product which is in excess of the money supply required by the individuals and institutions of a society to procure that product, will represent a reduction in the ability of those individuals and institutions to procure the same amount of product from that market. That is to say, the market in question will suffer inflation to the extent that this excess money is introduced.(Fn.6)
The argument that certain markets need liquidity injections from banks to “remain stable” is basically an admission that the market cannot be sustained by the real free market of businesses, individuals, and governments purchasing the things they judge to be needed for their prosperity and well being. The very argument is, implicitly, an argument asserting the illegitimacy of the very market in question.
The extent to which individuals can speculate in a market should be restricted by sound regulation. The extent to which institutions, of any kind, which control pools of money collected from many individuals, can speculate, should be severely restricted or simply banned. GS is a measure which will accomplish this. To allow banks to engage in speculation is extremely dangerous, because it creates an extremely large inflationary potential in the economy.
We ask the question: What business does a bank have in purchasing commodities? None! Banks do not produce any goods out of commodities, and, thus, if ever a bank is found which is attempting to purchase commodities, then it is immediately known that the management of that bank intends to speculate. Thus, banks should be completely banned from commodity purchases. Another question: What business do banks have in purchasing foreign currencies? None! Unless the bank makes international loans (which no Bank in the United States should be authorized to do under a fixed exchange rate system of national currencies and no international currency) the bank must intend to speculate with the foreign currency. Thus, banks should be banned from purchasing foreign currency. What business to banks have in buying anything? They should only buy things which are of use to the purpose of functioning as an institution to make loans and provide basic deposit account services. Any purchase beyond those necessary to the fulfillment of such functions are immediately known to be intended for speculation.(Fn.7) Thus, when Mnuchin does clarify what market he thinks requires liquidity injections via bank purchases of that markets product -say “X”- all we need to do is ask: What business does a bank have in purchasing X? If the answer does not reveal that X is needed for the bank to properly function as a bank, then the purchases of X by the bank are speculation and should be banned.
1.) The second part of this statement, about lending, is true only in the sense that lending will be reduced because every major bank will be exposed as bankrupt once GS is reinstated. However, after a reorganization of the financial system (which is necessary) after such a bankruptcy, GS would increase the lending power of the banks firstly, for the reason that they would no longer have the option to do anything but lend, and secondly because the elimination of economic waste attending reimplementation of GS is the only way that sustainable lending by the banks, which is based on real economic growth, can be maintained.
2.)I propose that a banking holiday be established, perhaps for 3 days, in which full audits, (including criminal audits to detect any drug money laundering or other criminal activity which will be the basis for immediate and severe prosecutions of all involved), and full reorganizations of the banks, along GS standards, take place. (I propose that bankruptcy reorganization be immediately frozen for any institution in which major criminal activity is reasonably suspected to have taken place by evidence procured through such audits, and that full rapid prosecutions and expropriations take place instead. Why reorganize a bank which is nothing but a criminal enterprise?) Each bank will surrender all investment units, along with the asset holdings of such units, to the control of the Federal Reserve. All non GS authorized assets, whether owned by the bank and counted as part of its capital stock, or held by the bank as an investment (liability) made with the deposits it has received, will be surrendered to the control of the Federal Reserve. Loan contracts, such as mortgages, which have been securitized and taken ownership of by banks, will be transformed into non-marketable, non-securitized loan contracts conforming to GS standards, and will not be required to be surrendered to the Federal Reserve. Any third party claims to the ownership of such mortgages, or other like contracts, such as fee contracts held by the banks originating such loans, shall be nullified. All financial instruments and contracts which are not convertible into GS conforming contracts, such as corporate stocks, interest rate derivatives, CDSs etc. shall be surrendered to the Federal Reserve. The Fed shall hold all such surrendered securities in an account designated to the institution which surrendered said securities. Over a period of time to be designated as appropriate, the Fed shall liquidate all surrendered securities on the open market. The revenues derived by this liquidation shall, first, be allocated to the repayment of any outstanding debt by the bank originating in bailouts from the Government or the Federal reserve, and afterward be delivered to each bank which originally surrendered their securities. If a bank is taken over by another bank, then the moneys shall be delivered to the absorbing bank etc. Even under a controlled sell off of all non-GS conforming assets by the Fed, the marketable value of such assets will plummet drastically. An option can be given to the management of the bank as to the time of the selling of the non-GS conforming assets which they surrendered to the Fed. If the bank is still solvent after surrendering all non-GS conforming assets to the Fed, then the following option will be given to them: If the withdrawal of deposits from the bank begin to occur such that the reserve requirement faces risk of falling below standard, the Bank can choose either to pay back the deposit loan with its money stock, or, by requesting that the Fed sell the amount of non-GS conforming securities held at the Fed under the account of the bank required to raise the money required to service the deposit withdraw from the bank. Simple mechanisms can be setup to facilitate this. Thus, the non-GS conforming assets held by the Fed in an account designated to the bank can still act as a cushion to cover deposit withdraw demands which could lead to the insolvency of the bank. The bank will not have any ability, in any other case, to choose the time at which the Fed sells their formerly held non-GS conforming assets however. The selling by the Fed will be done in such a way as to minimize market volatility, despite the general deflation in those markets to be expected. If a bank is found to be insolvent after a GS reorganization of this type, traditional methods of bankruptcy procedures can be used. After this is done, a severe shortage of credit will be at hand. However, this is easily remedied by an infusion of productively directed credit from the Fed, or other currency issuing institution, acting along the lines of the National Banking investment proposals put forward by LaRouche.
3.) In other words: business, government and individual expenditures. Obviously, there can be waste spending in these areas. But, such waste can be distinguished from forms of waste which do not arise from mismanagement of resources by consumers.
4.) Just because a purchase of something is not speculation, however, does not necessarily mean that the reason for purchase of that thing corresponds to something good- it can still be wasteful to society- economically decadent- or even doubly injurious, as in the case of articles purchased for drug consumption or criminal activity.
5.)Obviously, there can be purchases made, which result from the intermixed intention to speculate and engage in real use.
6.)This is assuming that the total output which constitutes the product of the market available for purchase is not increased. Indeed, such an increase can occur, but only in two ways. 1. Assuming there is no technological progress by which the productivity of the producing firms which produce the totality of product in that market, the increase of total product can be accomplished by increasing the total labor and consumption of those firms. Assuming the ability of this kind of increase to keep pace with inflationary injection of excess liquidity into the market in question, no inflation should occur- but only in that market temporarily; for there will be added expenses to the sectors of the economy which feed into the production of the product of that individual market. Inflation will occur in those sectors, and eventually reverberate back into the market originally in question. That is to say, increases of labor and capital intensity as a remediation of inflation of a particular market are only temporary, and distributive of inflationary pressures to other sectors of the economy. Unless, the entire economy as a whole can grow in absolute terms at a rate to meet with the introduction of excess money, inflation will occur. 2. Technological progress occurs which increases the total output of firms engaged in the production of the supply of that market. If this occurs at a rate which meets with the rate of inflationary effects of excess money injections into a particular market, then no inflation should occur.
The possibility of these responses to excess demand in a particular market should not be seen as safety buffers which justify speculation. For the process of accumulation of speculative profit is not contracted to any economic return to the society as a whole. Thus, even in the case in which inflation resulting from speculation was countered in these ways, the economy would still be operating under the weight of an “opportunity cost” which is proportional to the magnitude of speculative profit relative to the national income.
7.) Besides the wasteful spending resulting from the banks mismanagement.