Citizens Electoral Council of Australia

Media Release Thursday, 12 March 2014

Craig Isherwood‚ National Secretary
PO Box 376‚ COBURG‚ VIC 3058
Phone: 1800 636 432
Email: cec@cecaust.com.au
Website: http://cec.cecaust.com.au

International banking expert warns Australian government: go with Glass-Steagall

One of the world’s very top banking experts visited Canberra on 5-6 March, as a guest of the Citizens Electoral Council to offer the Australian government his expert advice that Australia should immediately implement a Glass-Steagall separation of investment banking from retail banking, or risk a banking crash.

Daisuke Kotegawa worked for Japan’s Ministry of Finance for 35 years, rising to the position of deputy director. He was also Executive Director for Japan at the International Monetary Fund.

In his career, Kotegawa observed first hand the 1980s takeover of the financial system by predatory financial speculators, whose crimes under the cover of deregulation eventually brought the world financial system to its knees in 2008. He even participated in designing one of the world’s first over-the-counter (OTC) derivatives, a “put option” on a bond, while on secondment to the World Bank in the 1980s.

This was the beginning of the exponential growth in OTC derivatives speculation, which went from a trade of around $1 trillion in 1988, to $30 trillion by 1993, $70 trillion by 1997, $100 trillion by 2000, and then $1,400 trillion by 2008. Having seen the origins of derivatives speculation, Kotegawa was well qualified to lead the clean-up in Japan when a number of Japanese financial houses, banks and life insurance funds were bankrupted by derivatives speculation in 1997-1998.

Governments should clean out, not bail out

By 1997 Kotegawa was a deputy director of the MOF. He took a number of decisions that worked to solve the Japanese crisis, and which, if they had been repeated in 2008, would have averted the GFC.

First, over a number of long weekends, Kotegawa’s team made sure that Japan did not become the epicentre of a global financial crisis in 1997-98, by unwinding all of the affected Japanese banks’ cross-border transactions with other institutions around the world. This included cancelling out their derivatives bets. Thus, the crisis was contained to Japan.

When Lehman Brothers collapsed in September 2008, the authorities in the U.S. and U.K. did not follow Japan’s example from a decade earlier. Instead, they organised massive government bailouts in order to honour the derivatives bets that were the cause of the crisis, and the crisis spread around the world.

Second, Kotegawa’s team punished offending financial institutions. This included confiscating the banking licences of the foreign investment banks such as Credit Suisse which had arranged derivatives bets with Japanese life insurance companies that had sent those companies bankrupt. One particular foreign institution did not have a banking licence, so all Kotegawa’s team could do was warn it that its activities were being watched, which prompted the company to relocate to London. Its name was AIG Financial Services, the company whose derivatives bets with Lehman Brothers and Goldman Sachs blew up the global financial system ten years later, in 2008, and was the reason for the massive government bailouts.

Third, quite a few Japanese bankers, including some of Kotegawa’s own friends, went to jail for their role in the 1997-98 crisis. There is strong evidence that this taught the entire Japanese financial system a lesson, because when the GFC erupted in 2008, Japan’s financial system was largely unaffected.

By contrast, no banker on Wall Street or in London has been held accountable for the far graver crisis in 2008; indeed, Barack Obama’s Attorney-General Eric Holder has virtually admitted that the Wall Street bankers are “too-big-to-jail”.

Sound advice

The U.S. Treasury officials who handled the 2008 crisis, Timothy Geithner and Larry Summers, both of whom Kotegawa knows well, did not take his advice. They instead decided to prop up the Wall Street and London banks’ toxic derivatives contracts. Consequently, the banks that caused the crisis were bailed out, and to pay for it the people of the U.S. and Europe have been hit with vicious austerity, and now the threat of “bail-in”—losing their deposits to prop up banks that fail in the future.

Kotegawa’s advice to the Australian government was that bail-in is an insane policy, because it destroys the foundation of banking, which is the depositors’ confidence in the bank.

From his examination of the features of the Australian financial system, Kotegawa identified that Australia’s banks were at grave risk, from their derivatives speculation, and from the precariously-balanced domestic property bubble. He therefore advised the government to implement a Glass-Steagall separation of Australia’s banking system, into deposit-taking retail banks strictly separated off from the risky investment banks embroiled in what he termed the “money game” of derivatives speculation.

Kotegawa explained this would protect Australian depositors from the risks they are presently exposed to through their banks. He further explained that by keeping deposits away from being used for speculation, they would be available for normal lending into the real economy, including to the farming and manufacturing industries that provide Australia’s economic strength. Australia, Kotegawa urged, should develop itself to become the food bowl of Asia, but the nation needs a credit system that can facilitate that, which it will only achieve through a Glass-Steagall banking separation.

Click here to support the CEC’s petition to the Australian Parliament, Australia Urgently Needs a Glass-Steagall Separation of Banks.

Click here for a free copy of the CEC’s new pamphlet, Glass-Steagall NOW!, which shows how stopping the global financial meltdown begins with Glass-Steagall.

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