Gathering Financial Storm: This Is ‘Last Call’ for Glass-Steagall

March 9, 2020 (EIRNS)—The trans-Atlantic financial system, under the Federal Reserve and British, European and Japanese central banks, is in a crisis. U.S. Treasury interest rates have fallen so fast that on Monday, March 9, JPMorgan Bank found no orders anywhere for 30-year Treasury bonds, a rare and shocking event. Corporate bond interest rates are meanwhile rising, “high-yield” or junk-debt markets freezing up. An NBC News report Monday was entitled, “A Dozen Years after the 2008 Recession, a Different [meaning corporate] Kind of Debt Threatens the World Economy.” The Federal Reserve’s overnight lending operation to dealer banks and shadow banks required $113 billion Monday morning; the New York Fed, seeing this coming, had raised the daily limit on the overnight loans from $100 billion to $150 billion.

European and Wall Street stock markets fell another 7-8% as oil prices collapsed by more than 30% from Friday’s prices on March 6.

In this crisis moment the New York Times recirculated Boston Federal Reserve President Eric Rosengren’s proposal that the Fed start to buy common stock and various securities from the big Wall Street banks to attempt to hold up the stock and bond markets. The article was headlined, “Bonds Hit Historic Lows, Prompting Fed to Ponder: What More Can We Do?”

This has to be stopped. These Wall Street-created securities are toxic in this market-crash environment. The fact that the Fed has done this at least once before (in 2007, to force through the buyout of the failing Bear Stearns by JPMorgan Chase) does not alter the fact, or the reason, that it violates the Federal Reserve Act. That Act allows the Fed to buy from the big banks only government or government-guaranteed securities, or—only under Herbert Hoover’s 1932 “unusual and exigent circumstances” amendment)—AAA-rated corporate bonds only. No common stocks. No corporate junk and just-above-junk bonds of the type that would be offered now.

Aside from having to be “made legal,” such purchases Rosengren proposes would ruin the Fed itself. No central bank can be allowed to print U.S. legal tender currency while loading toxic common stock and low-grade corporate bonds into its capital reserve, which supports that currency. The dollar itself would sink well below any level justified by relative strengths of the U.S. and other economies. And Wall Street banks would be encouraged to ruin their clients by buying stocks to “support the market.”

The next step was already advertised at the Jackson Hole conference in August: Federal Reserve printing of “fiscal money” for government spending or even to give to other institutions to spend. This scheme is called helicopter money. This would then add runaway inflation to the ruination of household wages, wealth and savings.

Rosengren’s desperate proposal actually signals: This is the last chance to restore the Glass-Steagall Act and save the vital commercial banking part of the financial system from an accelerating crash. Glass-Steagall now, will give pension and retirement funds a short grace period to get out of highly speculative hedge fund or investment banking operations and into safer investments.

Failing to restore Glass-Steagall now means the next steps may be bank holidays and FDIC forensic audits of banks as in March-April 1933, with large-scale forced writedowns.