Citizens Electoral Council of Australia
Media Release Friday, 4 March 2016
Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
As bail-in scheme backfires, Glass-Steagall or bust
Recognition is spreading that none of the post-2008 financial regulations (Basel III, Dodd-Frank et al.) will prevent another GFC—and in particular, that “bail-in”, the practice of stealing bank deposits, bonds etc. and converting them into equity to stave off bankruptcy, is a non-starter. As a result, more high-profile figures in the business and financial world are coming to realise that the system itself is the problem, and this in turn has led to discussion of the thing the financier oligarchy most fears: Glass-Steagall. Glass-Steagall would make it illegal for banks that gamble in high-risk bets to hold deposits, and for deposit-taking banks to gamble.
Mervyn King, Governor of the Bank of England in 2003-13, has written a new book, The End of Alchemy, that is getting a lot of publicity—indeed, it is being serialised in The Telegraph. King notes that “The Dodd-Frank Act … contained 2,300 pages, with many thousands of pages more expected to cover the detailed rules that will follow”, and that “In Britain, the Prudential Regulation Authority and the Financial Conduct Authority have combined rulebooks exceeding 10,000 pages.” Despite all this “frenetic activity”, he argues, “nothing fundamental has changed. The alchemy of our banking system remains.” In stark contrast, “the Glass-Steagall Act of 1933, which separated commercial and investment banking, covered a mere 37 pages.” King has advocated an international Glass-Steagall system since 2010. “Only a fundamental rethink of how we, as a society, organise our system of money and banking will prevent a repetition of the crisis that we experienced in 2008”, he says; otherwise, “another crisis is certain … sooner rather than later.”
Philip Aldrick, economics editor of the London Times, expressed identical sentiments on 23 February. The promised post-2008 regulatory “storm”, he writes, came to nothing: “for all the noise, regulation has not remade the banks in the way that Glass-Steagall did after the Great Depression of the 1930s. … Mark Carney, the Bank of England governor who doubles as the world’s chief banking regulator, [has] told lenders that they can relax.”
Aldrick does not say so, but that is because Carney is an architect of the EU Bank Recovery and Resolution Directive (BRRD) bail-in regime, designed to impose losses on everyone but the banks. But, as Aldrick notes: “Bail-in rules that came into force this year to … [dump] losses on banks’ bondholders did not start well. Creditors of a bust Portuguese bank were bailed in, sparking a local bond market sell-off that infected Italy’s weak lenders. Deutsche Bank posted a huge loss that caused another bail-in instrument, called CoCos [contingent convertibles], to collapse in value. The CoCo market, which banks tapped for US$275 billion in the past two years, shut to new issuance. As bonds came under pressure, confidence evaporated and share prices fell. Far from protecting banks, safety mechanisms have become a source of instability.”
Citigroup has just expressed concern that the primary market for investment-grade bonds has been freezing up. On 75 days in the past 12 months, no new corporate bonds were sold by anybody—Bloomberg noted that this is “a higher rolling 12-month figure than was seen during the depths of the financial crisis in 2008 to 2009.” Bloomberg points out that this will affect the secondary bond market, “with the potential to create contagion if companies find they are unable to refinance existing debt.” Sales in the junk bond market have fallen off the cliff altogether, with the value of new bonds issued since the beginning of 2016 being 75 per cent lower than in the same period in 2015.
On 16 February Minnesota Federal Reserve chairman Neel Kashkari also pointed to Glass-Steagall as the only way to prevent another massive bail-out of failing banks. At a Brookings Institution event in Washington DC he called for “breaking up large banks into smaller, less connected, less important entities”, and “turning large banks into public utilities by forcing them to hold so much capital that they virtually can’t fail”. Two former regional Fed bosses, Richard Fisher of the Dallas Fed and Thomas Hoenig of Kansas City, now vice-chair of the Federal Deposit Insurance Corporation (FDIC), have also promoted Glass-Steagall.
Australia desperately needs Glass-Steagall too, preferably before a collapse of the property bubble wipes out the Big Four too-big-to-fail (TBTF) banks. The hysterical market reaction to the 21 February 60 Minutes story on the Australian property bubble demonstrates that many people here and around the world are starting to think that a property crash is overdue. Only Glass-Steagall will protect the people and the functioning of the real economy.
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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