Executive Intelligence Review
This article appears in the September 16, 2011 issue of Executive Intelligence Review.

Step Two: Use Glass-Steagall Standard
To Restore Credit

by Dennis Small

[PDF version of this article]

On Aug. 24, 2011, Lyndon LaRouche outlined a seven-point program as the only possible solution for the present threat of a global breakdown crisis. Having presented the overview of the program in our Sept. 2 issue, and in-depth attention last issue to Step One—the removal of President Barack Obama from the U.S. Presidency, and the re-enactment of Roosevelt's original Glass-Steagall Act of 1933—we turn now to Step Two: the separation of fictitious from real liabilities, according to the Glass-Steagall standard.

In that Aug. 24 urgent message, delivered on LaRouche PAC-TV, LaRouche stated:

"The next thing we must do, after having established Glass-Steagall, is that the powers ascribed to the original version of Glass-Steagall—that is, by Franklin Roosevelt's Administration—must be applied, and there must be a division of the assets in question, between two categories: On the one hand, you will have the category which belongs to the merchant banking sector and similar kinds of finances. The entirety of the claims against the United States, due to that sector, will be assigned to that sector, and removed as liabilities from the list of liabilities of the government section and the regular banking section. That division of assets and liabilities will define the situation which confronts us at that point.

"Now, the key part of this thing, is that the amount of credit which will survive the purge of this system of debts, is unfortunately rather small. Therefore, it is not possible to simply use Glass-Steagall in the simple way, by continuing the present national currency system. You have to go to a credit system, as implicitly defined by Alexander Hamilton when he was Treasury Secretary, and in forming that aspect of the Federal Constitution. So therefore, that division will define a section of the debts that will go to the merchant banking sector and similar sectors—the gambling sector—they are on their own; they get not a penny of bailout! All the debt is entirely assigned to them, that part of the debt.

"The debt, however, of the part that will be rescued from this embrace, will be a very small part, because we've waited much too long on this thing, and therefore, the ratio of bad money to good money has gone that way as such. So that has to be done; so we have the division of liabilities."

The Glass-Steagall Standard

The second point of LaRouche's seven-point program is perhaps the most polemical and contentious point of all. What at first blush seems fairly obvious—the need to separate the speculative financial instruments of the merchant banks or investment houses, from the productive credit issued for normal commercial banking purposes—quickly leads to a string of nervous objections:

"How do you decide what gets paid and what doesn't?"

"Who is going to make those decisions?"

"But they are all debts, and my mother told me that you always have to honor your debts, right?"

"And if we don't pay Wall Street and London's demands, won't the whole system crash?"

The reason that LaRouche's Step Two is so contentious, is that it raises the most fundamental question of economics: If money is accepted as the basic measure of value in an economy, then there is in fact no way to rigorously distinguish between a million dollars owed on a steel plant, or a million dollars owed for buying and selling derivatives, or a million dollars owed on prostitution and drugs. Money simply becomes the unit of account of an underlying philosophical worldview known as hedonism, or the pleasure-pain principle of British Liberalism.

The contrary view in economics, that of the American System of political economy enshrined in the Constitution of the United States, is that value is measured not by money, but by the advance of the General Welfare, by the advance of the public interest in physical-economic terms. Under this worldview, financial instruments and liabilities have merit and standing under our Constitution only to the degree that they contribute to the general welfare.

This is also, emphatically, the worldview of Roosevelt's 1933 Glass-Steagall Act, as even a cursory reading of the law shows (see box, "Franklin Roosevelt's 1933 Glass-Steagall Act"). In fact, its opening statement of purpose is unambiguous: "To provide for the safer and more effective use of the assets of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations, and for other purposes." Throughout its 37 pages, the Act repeatedly attacks "speculation," and states that the banking sector must promote the "public interest." Its specific provisions, including the establishment of the FDIC, and the strict separation of commercial banking from merchant banking and brokerage activities, were guided by this outlook, and were intended to protect individual depositors from predatory speculative practices in order to keep the entire system functioning productively.

This is what LaRouche is referring to when he says that the Glass-Steagal standard must be applied today, to separate fictitious from legitimate obligations. That standard—as stated in what we might refer to as the "Preamble" of the Glass-Steagall Act cited above—is a direct echo of the Preamble of the Federal Constitution, which proclaims:

"We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America."

Therefore, to accept that financial liabilities can be sorted out at all, and that some are to be considered as legitimate while others are not, in fact, implies an axiomatic break with the very premises of British hedonism. And that is what many people recoil from in panic today, when they consider the implications of LaRouche's Step Two.

A Cultural Paradigm-Shift

Why is this such a generalized response among Americans today?

Because the United States has gone through an underlying cultural paradigm-shift since the 1963 assassination of President John F. Kennedy, as expressed in today's Baby-Boomer generation. What used to be obvious and second-nature—that we should promote the general welfare, that the public interest comes first, that speculation is to be abhorred, and that economics and morality are one—is now rejected in favor of my pleasure, my money, my investments. "And please don't talk to me about morality. What does that have to do with economics?"

In the domain of economic policy, 1971 was a milestone in the dismantling of the Glass-Steagall standard—if not yet the Act itself. In that year, the link of the dollar to any physical-economic idea of value was severed internationally, as the British Empire induced President Nixon to take the dollar off gold, and usher in the era of floating exchange rates among currencies. That destroyed Roosevelt's design of the post-war Bretton Woods system, and allowed for endless quantities of dollars to be printed outside the sovereign control of the United States government, and to begin the creation of an uncontrolled speculative bubble of financial instruments.

Throughout the 1980s and 1990s, the reins on speculation were progressively loosened, both financially and—more importantly—philosophically, culturally, and morally. For example, the British Empire was allowed to foist illegitimate foreign debt on Third World nations, such as in Africa, and use it to impose their policy of genocide and depopulation.

The year 1999 was a watershed. On Nov. 12, Roosevelt's Glass-Steagall Act was formally overthrown and replaced by Gramm-Leach-Bliley. Earlier that same year, in mid-June, the IMF had forced the government of Colombia to officially count drugs as part of their gross national product. In late June, the head of the New York Stock exchange, Richard Grasso, met in the jungles of Colombia with Raúl Reyes, the head of finances of the FARC cocaine cartel, to discuss a "mutual exchange of capitals," as Grasso put it (see box, "Gross Narco Product").

As the drug case so clearly shows, Roosevelt's Glass-Steagall standard had been dethroned, and British Liberalism and hedonism reigned supreme.

Applying the Standard: Manure vs. Credit

Step Two of LaRouche's seven-step action program calls for reviving the Glass-Steagall standard to separate the wheat from the chaff—productive from speculative liabilities—in the U.S. (and international) financial system. LaRouche has promoted this policy for decades. Just a few examples.

In his first major response to Nixon's Aug. 15, 1971 decision to bury FDR's Bretton Woods, LaRouche wrote that the physical economy was being "crushed under a mass of stocks, bonds, mortgages, and other capitalist paper. Destroy that paper, and prosperity could emerge." The guts of the problem was clinging to fictitious "money" values, rather than the physical wealth associated with increasing the productive power of labor.

In 1982, at the height of the "debt bomb" crisis, LaRouche stressed, in his book-length Operation Juárez, that the world financial system had to be reorganized by freezing the hundreds of billions of dollars of illegitimate Third World debt with a debt moratorium, and issuing new productive credit for great infrastructure projects.

At both these points, such a procedure could still have salvaged a reformed international monetary system. But the situation today is too far gone, and more drastic measures are now required.

As the global breakdown crisis was playing out in 2008 and 2009, LaRouche presented his policy to solve the crisis with total clarity, such as in these remarks to a private meeting of diplomats and others in Washington, D.C., on Nov. 11, 2008:

"There's no way to save this monetary system in its present form. It's so full of junk, with the financial derivatives far in excess of a quadrillion dollars in claims, against the nominal size of the actual production of nations, it is impossible to reform this monetary system in its present form. You have to put the monetary system itself through bankruptcy. You will have to wipe out the greatest portion of nominal monetary assets in the world today! Cancel them! Because the system as a whole is hopelessly bankrupt.

"Now, what do you do in that case? Well, what you do for a monetary reform to a credit system, is, you use the U.S. Constitution. Because of our Constitution, we can create, as Roosevelt did that formally, we can create a credit system. To replace a monetary system.

"Now, what you do under this case, and with agreement with the United States and its Constitution, with Russia, China, and India, it can be done. What you do, is you say, we put all the claims which are equivalent of monetary or credit claims in two piles. One pile we call 'monetary.' That's the manure pile. The other we call the 'credit' pile.

"Now under the U.S. Constitution, money, when the Constitution is followed, is created only by the will of the government. It is done by the Executive branch of government, with the consent of the House of Representatives, and things flow from that. This credit being issued, is also authorized for monetization: So, the credit can be issued as loans for projects, or international loans, and part of it can actually be monetized, under the condition under which it was uttered.

"Particularly, if we had a national banking system, which we don't have presently, we could convert the Federal Reserve system, which is bankrupt, into a national banking system, as Hamilton proposed. Then it would do that automatically. We do need a national banking system in each country. That doesn't mean they're the only banks, but it does mean you use a national banking system to control the relationship between government and the banking system as a whole, in general....

"What do you do? You have to protect those things which are productive, and are necessary for the government and necessary for the population. Therefore, you create a pile called the 'credit pile.' What you do, is you take every obligation, and every asset, which is valuable to society, currently, or necessary and meritorious—you take the monetary value of that, and you assign that to the creation of credit, government credit, a credit system. And you leave the remainder to rot."

In an international webcast on Jan. 22, 2009, two days after the inauguration of Barack Obama, LaRouche returned to the issue:

"Put the present system, economic system of the United States, in particular, into a general reform, general reorganization, reorganization in bankruptcy. This means putting the Federal Reserve system into bankruptcy, under bankruptcy protection; taking the assets, or claimed assets, of the banking system and sorting them into two piles. One pile fits the chartered bank standard, conventional ordinary banks, as under Glass-Steagall, that kind of contingent. Those banks must be restored to full functioning now, and they must be used as receptacles of Federal credit to get some things moving that have to be gotten moving.

"On the other side, the garbage side, the bailout side: Not a penny! You put them into bankruptcy receivership, freeze them. That's the garbage department: You freeze the garbage so it doesn't stink too much. Don't put more garbage in there, don't generate more garbage."

How Much Garbage Is There?

An awful lot.

First, let's consider some of the categories of the interlocking global financial garbage that will simply be written off, or returned to the City of London and Wall Street for them to handle on their own. It will not be bailed out by governments—i.e., by you, the taxpayer. This is by no means a comprehensive list, but it includes:

  • Derivatives instruments, such as MBS (mortgage-backed securities), CDO (collaterized debt obligations), CDS (credit default swaps), foreign exchange swaps, and commodity futures markets. Derivatives in general are the lion's share of the total speculative bubble; nobody really knows the amount involved, but it clearly surpasses $1 quadrillion, and infects the entire Trans-Atlantic financial system.

    It is pointless for our purposes here to either try to define, or quantify, each of these forms of financial cancer. Instead, we refer the reader to the succinct definition of derivatives provided by EIR's John Hoefle (see box, "What in the World Are Derivatives, Anyway?").

  • Third World debt, which officially totals a mere $2.5 trillion, is almost entirely illegitimate debt which has been paid many times over by these countries.

  • Stock markets worldwide.

  • The trillion-dollar international drug trade.

On the other side of the ledger, we have obligations that will be defended and guaranteed under the Glass-Steagall standard, including:

  • Social Security, Medicare, Medicaid, and similar government programs serving the general welfare.

  • Pensions, from both the public and the private sectors.

  • Business loans for productive activities.

  • Family home mortgages—as distinct from the fraudulent Ponzi scheme built up on mortgages by the leading banks.

  • Infrastructure investment projects.

  • Commitments by states and municipalities for productive economic activity.

Globally, speculative financial assets have grown from about $200 trillion in 1997 (before Glass-Steagall was revoked), to well over $1,000 trillion ($1 quadrillion) today—a fivefold increase. During this same period, the physical economy, and its valid obligations, have been savagely shrinking, such that the ratios are now unmanageable.

Look at the situation of America's leading banks. They have been thoroughly taken over by the cancer of derivatives. In 2000, the country's top ten banks had some $2.5 trillion in assets, which tripled to about $7.7 trillion in 2009. But those banks' exposure to derivatives went from $45 trillion in 2000 to $294 trillion in 2009—a 6.5-fold increase! And when you compare the derivatives cancer to the banks' equity captial (see Derivatives box, for the case of JPMorgan Chase), the true magnitude of the insanity is even clearer.

The cancer is also highly concentrated. The top five derivatives banks in the U.S.—JPMorgan Chase, Bank of America, Goldman Sachs, Morgan Stanley, and Citigroup—hold about 90% of total derivatives.

So guess who got bailed out when the derivatives bubble blew in 2008? Of the nearly $17 trillion in bailouts provided, as documented by Sen. Bernie Sanders (I-Vt.), amounts disbursed included:

  • $1.5 trillion to Morgan Stanley;
  • $1.2 trillion to Merrill Lynch (now part of Bank of America);
  • $1 trillion to Citigroup;
  • $700 billion to Bank of America;
  • $600 billion to Goldman Sachs.

Another large, and continuing, flow of bailout funds is going to British and other European banks, through unlimited dollars provided through the Federal Reserve's swap window with the European Central Bank and the Bank of England.

And now that the Bush and Obama administrations, consecutively, have handed over $17 trillion in taxpayer funds to help feed the cancer, we are being told that some $4 trillion in cuts have to be made out of the flesh and blood of the productive economy: Social Security, Medicare, state and local budgets, and people's living standards in general.

This is the exact inverse of the Glass-Steagall standard. Instead, we should reinstate Glass-Steagall and, for starters, "charge back" the $17 trillion that was added to the government's illegitimate obligations—which is more than four times the amount of cuts in legitimate, vital programs that Obama is proposing to make.

Lunacy has taken over our national policy-making on economics. It's as if a man with cancer went to his oncologist to report a big cancer tumor growing in his belly, only to be told to stop complaining, that he was showing clear signs of "growth," and that all cells have equal rights in any event.

If that were your doctor, you would fire him for being a quack, wouldn't you? Time to do the same with Obama, and get on with the treatment.

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