Nothing Works without Glass-Steagall
March 10, 2020 (EIRNS)—The extraordinary Tuesday morning demand upon the Federal Reserve for $216 billion in emergency liquidity loans, coming from primary dealer banks and more so from hedge funds and other shadow banks, showed that masses of bets in the bond markets and in interest rate derivatives have gone wrong and reverse leverage is now taking charge in the financial system.
A Washington Post column this morning by the experienced economic journalist Steven Pearlstein demonstrates that the “no alternative but to bail out Wall Street again” line has already resurfaced. Pearlstein starts out angrily blaming the central banks themselves for the huge masses of debt which are now turning up unpayable and choking the system. That is correct. He says they should not be feeding still more toxic debt into the system—don’t buy stocks or similar securities from the banks. In fact, the Federal Reserve should, he says, be selling from its vast mass of Treasuries to withdraw liquidity.
Only one catch in Pearlstein’s detailed prescription. First, just this once again, he says, the Fed will have to bail out Wall Street:
“And you can bet that in the coming days, the Fed will follow up by making even more credit available to financial market participants—lowering short-term interest rates, widening the circle of institutions that are able to borrow from its ‘discount’ window, and accepting as collateral those loans stocks and bonds and other securities that nobody is willing to buy.”
Then, he says, it must completely reverse policy over the long term.
This is the exact justification offered, along with threats of street riots and martial law, by the Treasury and Fed to Congress in the October 2008 crash to demand the bailout of Wall Street—which they were already carrying out in other ways. It leaves out the only action which would, at this point, prevent a disorderly meltdown: That is restoring the Glass-Steagall Act and making its rules effective within a very short period. The Wall Street banks are, even now, lending from their deposit base and using their capital reserves to save their speculative investment units, their captive or client hedge funds, etc. which are demanding the masses of additional liquidity from the New York Federal Reserve. The holding companies are thereby spreading the contagion into their commercial bank divisions, and exposing them to the corporate debt and derivatives collapse.
There is no action which prevents this, except Glass-Steagall.