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Why Did New York Fed Produce a Meaningless Report on Glass-Steagall?

Aug. 1, 2017 (EIRNS)—Financial press coverage was given today a report just issued by the New York Federal Reserve Bank’s research group, about the Glass-Steagall Act and the 2007-08 international financial crash.

The reason for publicizing the report is stated in CNBC’s first sentence:

"It’s an article of faith in some political circles that the end of Great Depression-era banking limits led to the 2008 financial crisis that devastated the U.S. economy."

These "political circles" in fact, now include many millions of thinking Americans, scores of unions and other constituency organizations, hundreds of state elected officials of both parties, at least 70 Members of Congress, and the drafters of the Presidential platforms of both major parties in 2016.

And, there is another debt-fueled banking system explosion coming on, in which forward-thinking Americans believe that if the Wall Street banks are not broken up first, by Glass-Steagall reinstatement, they will be bailed out again with the blood and tears of hundreds of millions.

The head researcher for the Fed report, Nicola Cetorelli, is quoted by CNBC (for example), as concluding,

"Banking firms had already been widening their business scope for a long time, so it is not clear that a particular regulatory reform can be considered the catalyst of the Great Recession some 10 years later. Nor is it immediately obvious how reinstating restrictions per se would reduce the likelihood of a future crisis."

Cetorelli’s typically vague, cocktail-party sort of attempt at a quick dismissal of Glass-Steagall’s importance, suggests how little thought or effort went into this "report."

Given in evidence of the New York Fed’s claim is a chart, said to show the main "finding": How many banks formed holding companies from 1970-2016, factoring in the new services they offered, it asks. The number of

"unique financial activities of these bank holding companies collectively, grew from 21-23 in the 1970s and early 1980s, to 27 in 2000, and to 29 at the point of the 2008 crash."

That’s it! And the chart’s left-hand legend is constructed to go from 20 at the bottom to 30 at the top, falsely magnifying the "expansion of activities" before Glass-Steagall was killed in 1999.

The "finding" is meaningless. What mattered, after the killing of Glass-Steagall, was what did the big Wall Street banks do with their customers’ deposits? Lend them, or speculate with them? On this, an earlier, 2011 report by the same New York Federal Reserve Bank was far more meaningful, and provided strong evidence that eliminating Glass-Steagall had very large negative results. That report was called "Peeling the Onion: The Structure of Large Bank Holding Companies."

What did Wall Street do with those trillions in deposits? A recent interview with Victor Haghani, a founder of the once world-famous hedge fund Long Term Capital Management (LTCM), gives one very powerful example. LTCM’s business was financial derivatives, exclusively. It collapsed in 1999, after being leveraged more than 100:1 with many billions of dollars in credit extended to it by 55 major banks in the United States and Europe. Glass-Steagall, when enforced, had prohibited such support by deposit banks to a purely speculative financial betting operation. Haghani recalls, "The world’s financial system ground to a halt, as the Fed had to cut rates for just this firm, and it was a hedge fund." September 2008 almost came in 1999.

The Fed then made the same banks bail LTCM out, with more billions. The global derivatives markets then grew in nine years from $70 trillion nominal value, to over $700 trillion, and crashed.