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Citizens Electoral Council of Australia

Media Release Thursday, 16 March 2017

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
 

Steve Keen missed the derivatives threat, which only Glass-Steagall can solve

Professor Steve Keen, whilst a rare competent economist, gave a talk at the House of Commons last week that needs correcting.

According to Money Week’s John Stepek on 13 March, Keen said there will be a repeat of the 2008 crisis, but not in the USA and UK. His reasoning is that the 2008 crisis was preceded by an explosion in debt, but as the USA and UK are already saturated in debt there is unlikely to be another sharp increase in debt levels in those economies. He compared the present state of the USA and UK to Japan after 1990. The countries that are likely to have 2008-style crashes, Keen said, include Australia, Norway, Sweden, Belgium, and possibly China.

Keen’s solution for the economic woes in the USA and UK, is writing off debt en masse, by issuing money that is used to repay debt—“QE for the people” (not to be confused with Jeremy Corbyn’s proposal for a national investment bank funded through what he called People’s Quantitative Easing).

Here’s the threat to the USA and UK that Keen didn’t mention: derivatives, a.k.a. “financial weapons of mass destruction”, as Warren Buffet memorably called them.

The deepening European banking crisis is a derivatives crisis, at the centre of which is the derivatives basket case Deutsche Bank, which has more than US$45 trillion in derivatives obligations. Don’t be fooled by its German name—the modern Deutsche Bank is actually a London and Wall Street bank, having picked up the derivatives disease from its acquisitions Morgan Grenfell and Bankers Trust.

Wall Street banks have a US$2 trillion exposure to European banks. The six biggest Wall Street banks also carry a combined US$240 trillion exposure to derivatives.

As bad as Wall Street is, the epicentre of the derivatives threat is London. The biggest UK banks, HSBC, Barclays and RBS, each have tens of trillions of pounds in derivatives obligations. The City of London plays host to the majority of the world’s derivatives trading. London Clearing House (LCH) is the world’s biggest clearing house for interest rate swaps, which last year experienced a 25 per cent increase in clearing volumes, up to US$666 trillion. Seventy-five per cent of euro-denominated interest rate swaps take place in London. London is the centre of foreign exchange (FX) trading, and FX derivatives, including US$574 billion in euro swaps per day.

This is a threat far greater than the levels of debt in the USA and UK—post-2008 the banks have been allowed to continue playing with fire, endangering the broader economy.

More urgent therefore than a debt jubilee is a firewall to protect the people of the UK from the inevitable fallout from this derivatives gambling when it implodes. The only reliable firewall is a Glass-Steagall separation of commercial banking from investment banking and other financial activities. Glass-Steagall, the banking separation law that operated in the USA from 1933 to 1999, is the most successful financial regulation in history, which put a stop to systemic banking crises for 66 years.

The following petition on the UK Parliament’s website calls for a Glass-Steagall banking separation:

Petition to UK Government and Parliament
Pass full-scale Glass-Steagall to break up The City’s Too-Big-To-Fail Banks!

The IMF, the BIS and many financial experts are warning of a new global financial crash far worse than 2008, which will be caused by the same forces: the unbridled speculation in derivatives, and outright criminal activity, of City of London and Wall Street megabanks.

The USA’s 1933 Glass-Steagall Act strictly separated deposit-taking commercial banks from speculative “investment banking”, which had caused the Great Depression. Its repeal in 1999, on top of London’s 1986 Big Bang deregulation, led to the formation of Too-Big-To-Fail banks. Glass-Steagall is non-partisan: 445 UK MPs and Lords from all parties voted for it in 2013. The “ring-fence” legislated instead allows TBTF banks to continue the risky mingling of investment and commercial banking.

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Go to https://petition.parliament.uk/petitions/186382 to sign this e-petition on the Parliament’s website. Please share this release with your associates, contacts, mailing lists, and on social media.

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