Wall Street’s Top Line of Attack on Glass-Steagall Is a Fraud
Aug. 15, 2016 (EIRNS)—Since recent advances in the mobilization for Glass-Steagall legislation in the U.S. Congress, including endorsement by both political parties’ presidential platforms, numerous repetitive and foolish attacks have been published against Glass-Steagall in the financial media. Their authors have usually been bankers, bailers-out of banks, or financial analysts with motives both fearful and self-serving.
Wall Street’s leading anti-Glass-Steagall champion for the past five years, however, has been Peter Wallison, "Arthur Burns Fellow for Financial Policy Studies" at the Heritage Foundation. Trying to deal with the new situation, Wallison has invented a slick new argument which appears to be addressing an important subject—credit in the U.S. economy, or the lack of it for anything productive, along with the lack of growth and productivity. Wallison’s new line was published by the American Bankers Association’s American Banker on Aug. 9, in the form of a "How can he support this?" attack on the Trump campaign.
American companies, says Wallison, raise money primarily by issuing long-term bonds, not by borrowing from banks. Bond underwriting is handled by the investment banking divisions of banks. Therefore, if Glass-Steagall breaks up the banks, the separated investment banks will get all the business, and the commercial deposit banks will atrophy:
"Banking organizations will again be frozen out of the securities markets. They will become less profitable and less able to support their subsidiary banks, making bank failures and taxpayer bailouts more likely."
Don’t attack investment bank speculations, goes the underlying message, because they are what American companies need.
Expect to hear this Wall Street line in the intensifying Glass-Steagall debate.
That Wallison’s argument is a Wall Street fraud, is shown by currently available data from the Federal Reserve about "bank credit" in the U.S. economy. Many U.S. banks, by now, own some form of investment-banking vehicle, so "bank credit" includes most of the bond market.
Loans and leases in outstanding bank credit as of Aug. 3 totalled $8.967 trillion. Securities (bonds) in bank credit totalled $3.252 trillion; and most of that ($2.343 trillion) was bonds of the U.S. Treasury and U.S. "agencies" like Fannie and Freddie, which Glass-Steagall specifically allowed commercial banks to buy. Just $909 billion are bonds which investment banks alone can underwrite.
Some 90% of U.S. corporations have never issued a bond. Only the largest corporations do it regularly. The critical issue of credit to small and medium-sized enterprises, where most technological advance takes place, is one of bank lending—as it was, when Franklin Roosevelt wisely put Glass-Steagall into effect. This produced, as the FDIC’s Thomas Hoenig has observed, the "deepest and most stable capital market in the world."