Citizens Electoral Council of Australia
Media Release Thursday, 4 February 2016
Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Economist John Kay echoes CEC—separate banking from gambling
Elements in the Australian media have finally picked up on the crucial issue of Glass-Steagall, thanks to visiting British economist John Kay, the author of Other People’s Money: The Real Business of Finance.
The Sydney Morning Herald’s economics editor Ross Gittins reported the essence of Kay’s 1 February speech to the CFA Society in Sydney (regular readers will recognise echoes of the CEC’s oft-repeated warnings):
“We need a financial sector to service the needs of the ‘real economy’ of households and businesses producing and consuming goods and services. But none of this justifies the huge growth in the financial sector we’ve seen. Most of that growth has come in the form of massively increased trading between the banks themselves in ‘financial claims’, such as shares and bonds and foreign currencies and ‘derivatives’ (claims on claims, and even—if you’ve seen The Big Short—claims on claims on claims). If you add together all the financial assets (‘claims’) owned by all the banks and other financial outfits, they exceed by many times the value of the physical assets—such as houses and business buildings and equipment—which are the ultimate basis for all those claims.”
(Since 1994, the CEC has publicised US physical economist Lyndon LaRouche’s famous Triple Curve function, which illustrated, even then, the disconnect between financial claims and monetary issues on the one hand, and physical economic output on the other; at the time LaRouche forecast this would necessarily lead to economic collapse, which it has, starting in 2008.)
Gittins continued, “Kay says that, in Britain, bank lending to firms and individuals in the real economy amounts to only about 3 per cent of their total lending. All the rest is lending to other banks and institutions busy buying and selling bits of paper to each other—making bets with each other that the prices of those bits of paper will rise or fall in coming days. Kay makes what, for an economist, is the very strong condemnation that almost all this speculative activity is ‘socially unproductive’. It might or might not benefit the people doing the trading, but it’s of no benefit to the rest of the economy.”
For those who wonder how Australia’s Big Four banks can be so profitable when Australia’s physical economy is collapsing, Gittins reports Kay’s general insight into how gambling banks can essentially fake profits using derivatives—which the Big Four use heavily:
“If all they’re doing is making bets with each other, why aren’t the gains of the winners exactly cancelled out by the losses of the losers? [Kay’s] answer is that the claims-trading parts of banks have found ways to exaggerate the profits they make by counting expected future profits they haven’t actually captured—‘paper profits’—but delaying recognition of expected ‘paper losses’ until they’re realised. This game can continue for as long as everything’s on the up and the bubble’s getting bigger. Once it bursts, of course, former supposed profits become present, unavoidable losses. Many banks teeter on bankruptcy, but the government bails them out and they live to gamble another day.”
(This latter point is true, except the bank bail-outs during the 2008 financial crisis bankrupted the governments, so now they can no longer bail out gambling banks, but instead of forcing banks to stop gambling, government and banking authorities have schemed up “bail-in” whereby they will force the banks’ creditors, including unsuspecting depositors, to pay the banks’ gambling debts by stealing their savings.)
With his general insights, Kay has reached the same conclusion as the CEC and LaRouche, and countless experts around the world—the solution is to separate banking that serves the real economy, from gambling; i.e., do as US President Franklin Roosevelt did in 1933 with the Glass-Steagall Act, which averted any systemic banking crises until it was repealed in 1999. As Gittins reported:
“Kay says the answer is to rigidly separate the old-fashioned parts of banking—the facilitation of payments, and lending to households and businesses; the bits that must be kept going through recessions—from all the speculative trading in claims.”
Although, as Gittins and Kay demonstrate, the need for Glass-Steagall is indisputable, and it is a beautifully straightforward, uncomplicated financial regulation, it will not be achieved without a fight. The banks that are gambling our lives away exert a completely corrupt control over the political system, especially the two major parties, whether your average bumbling politician knows it or not. Presently, a former partner of one of the most criminal of the gambling banks, Goldman Sachs, is Australia’s Prime Minister!
Glass-Steagall is something the Australian people must demand, and be prepared to fight for. The CEC has long led that fight and continues to do so—if you want Glass-Steagall, join us!
For the only comprehensive treatment of Glass-Steagall, its growing support internationally, and why Australia’s economy cannot survive without it, click here for a free copy of the CEC magazine, Glass-Steagall Now!
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