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‘Fear of Glass-Steagall’ Rising Along with Corporate Debt Blowout Threat

April 24, 2017 (EIRNS)—It would be difficult to name a financial publication or media source which has not attacked or "debunked" the Glass-Steagall banking separation act in the two weeks since a Senate bill, S. 881, joined the House bill, H.R. 790, and Congress then adjourned. A three-part diatribe by the Heritage Foundation, another trilogy from the Competitive Enterprise Institute, all major London dailies and American media from the Wall Street Journal to the New Yorker. The fear is palpable, despite all denials, that Glass-Steagall, Wall Street’s wolf’s bane, could progress in Congress.

Today the Washington Examiner joins in, with a particularly resentful and lengthy opposition, "Trump team muddies deregulation message with Glass-Steagall chatter." Among its many complaints: Trump has abandoned some other campaign promises, why hasn’t he given up on this one?; Glass-Steagall muddies the waters of Republican attempts to deregulate and "repeal and replace" Dodd-Frank; bank regulators could do the same thing without legislation; it’s a bad distraction for Wall Street bankers trying to comply with the Volcker Rule!; it isn’t likely to pass, but it might; and, Federal Deposit Insurance Corp. vice-chairman Thomas Hoenig has a "bold proposal for ring-fencing" which is so much easier and more available; and so on and forth.

The right-wing American Enterprise Institute added a column in American Banker April 24, claiming against 60 years’ historical evidence, that Glass-Steagall restoration would worsen the crisis threat of too-big-to-fail banks.

Lurking behind this fight, is a debt bubble in commercial mortgage-backed securities (CMBS), real estate investment trusts (REITs) and leveraged U.S. corporate debt in general, which could blow out this year.

Some 8,650 retail stores will close in 2017, estimates Credit Suisse research, three times the 2,700 which closed in 2016, and higher than the previous 2008 peak in retail busts. The Wall Street Journal reports that 10 retailers with more than $50 million in liabilities filed for bankruptcy in the first quarter of 2017, whereas there were nine such in all of 2016. The United States has double the retail space and retail sales per capita of any other major country (4-6 times most), and the world’s highest commercial rents. More to the point, it now has $14 trillion in debt of non-financial corporations, compared to $8 trillion in 2007.

An April 18 International Monetary Fund report was greeted with disbelief: 20% or more of U.S. non-financial corporations will default if interest rates rise quickly to 4-5%, the IMF researchers estimated. Morgan Stanley research published a much more detailed report April 20 which confirms the IMF in spades. It finds that non-financial corporate debt to cash-from-operations is at an all-time-high ratio of 3.2:1 (2.7:1 is the highest it’s ever been before). The debt-to-EBITDA (earnings before interest, taxes and depreciation) leverage of these corporations is equal to its all-time high.

These companies’ total profits, as already reported, did not grow from 2011-2013, and now have fallen from 2013-2016.

These situation was featured by former investment banker and economist Nomi Prins in her interview with LPAC-TV in early March, based on her January forecast for 2017, which foresaw a serious economic collapse in United States by the end of the year, with mass corporate defaults.