Citizens Electoral Council of Australia

Media Release Thursday, 10 December 2015

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

Without Glass-Steagall, looming defaults spell global financial disaster

The warning by Moody’s Investors Service on 3 December that the oil & gas and metals & mining sectors are facing a large spike in defaults early in 2016 underscores the urgent need for a full Glass-Steagall banking separation to protect the real economy.

Glass-Steagall is the 1933 US law that completely separated everyday commercial banking, which services the real economy, from risky, speculative investment banking. For the 66 years Glass-Steagall was in place there were no systemic banking crises in the US economy, but within a decade of its corrupt repeal in 1999 the global financial system melted down.

Instead of reinstating Glass-Steagall, the City of London and Wall Street’s too-big-to-fail banks conspired with governments and central banks to prop themselves up through taxpayer-funded bailouts, zero interest rates and injections of printed money (QE—quantitative easing) that only served to loot the real economy—including through the vicious austerity that European governments especially have imposed on their most vulnerable citizens to pay for the bailouts—and fuel an expansion of global debt by $57 trillion and of the toxic global derivatives bubble to more than $2 quadrillion.

Consequently, the financial system is teetering on the edge, vulnerable to any number of events that may tip it into another meltdown. One such event could occur this month, if US Federal Reserve chairwoman Janet Yellen gets her way and finally raises interest rates from zero.

In terms of the default threat, Moody’s reported that in the period since 2010, companies in the resources sector have issued approximately $2 trillion in high-yield debt—meaning junk bonds and high-yield loans—much of which is now being further downgraded and in which a default wave has started. Standard & Poor’s Financial Services had made an essentially identical warning one week earlier, on 25 November.

Moody’s managing director Daniel Gates was quoted in the 2 December statement, that “Many [commodities] companies were temporarily cushioned by hedging programs and fixed-price contracts in the early stages of the downturn. Others have been sustained by cash balances that are eroding. Diminishing liquidity and restricted access to capital markets are now pushing more firms closer to default.” The 7 December Wall Street Journal, in a front-page article “US Junk Bonds Flash Economic Warning Signs”, added that “The declines are worrying Wall Street because junk-market declines have a reputation for foreshadowing economic downturns.”

The Moody’s warning echoes that of financial consultant Jim Rickards of the Strategic Intelligence newsletter back on 22 October, who reported in the Daily Reckoning blog that there is in fact $5.4 trillion in debt associated with the recent fracking boom in the US, which cannot be serviced at current prices and is therefore in danger of default.

Whether $5.4 trillion or $2 trillion debt is at risk, this current threat dwarfs the $1 trillion US sub-prime loan market in 2007-08, of which a 20 per cent default rate was enough to trigger the bankruptcy of Lehman Brothers and the meltdown of the global financial system.

The issue is not stopping the crash, which is inevitable; it is protecting the real economy from the fallout when the crash happens, and the way to do that is clear—Glass-Steagall. Bankers oppose Glass-Steagall because it makes them pay for their own gambling losses, instead of letting them pass those losses on to ordinary people. The politicians who oppose Glass-Steagall are in the pockets of the bankers.

Although it has been obscured by the terrorism unleashed by Prince Charles’s close friends and weapons clients in the Wahhabite Saudi Royal family that has dominated the news lately, the US Democratic Party’s presidential pre-candidates are having a fierce debate about Glass-Steagall, with both Martin O’Malley and Bernie Sanders championing its restoration and showing up Hillary Clinton as the candidate who is beholden to Wall Street. UK Labour Party leader Jeremy Corbyn and his shadow Chancellor of the Exchequer John McDonnell are also staunch supporters of Glass-Steagall. Meanwhile former Citibank chairman John Reed, whose bank was largely responsible for the repeal of Glass-Steagall in 1999—for which it spent $300 million lobbying US Congressmen so that it could merge with insurance giant Travelers, wrote in the 11 November Financial Times that it was a mistake, and that merging commercial banking and investment banking is “unstable and unworkable”: “No amount of restructuring, management change or regulation is ever likely to change that,” Reed wrote.

The need for Glass-Steagall is more urgent than ever. If you agree that the government should act to protect the real economy from the next crash, you must fight for this solution. The CEC is leading the Glass-Steagall campaign in Australia—join us.

Click here for a free copy of the CEC’s special report Glass-Steagall Now!, which demonstrates the urgent need for a Glass-Steagall separation of Australia’s banks.

Click here to join the CEC as a member.

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