The Glass-Steagall of the North: Re-instate the Four Pillars of Banking Now

By Matthew Ehret-Kump

Canada now sits atop two debts, yet only one can be repaid. The first is the debt we owe to the nation builders past who sacrificed and aspired for a better life for their posterity. The second debt is to be found in that payment which shall be demanded of Canadian citizens to cover the highly leveraged financial bubble which has been concentrated in our housing and personal securitized debts.

The systemic collapse sweeping the world has expressed itself in various ways, but in no way should it be believed that Canada is in any way exempt from suffering from the effects of this general meltdown. In fact, as the evidence indicates, should a Glass-Steagall standard of banking not be forcefully re-applied to the dying financial system soon, then a fate similar to that which will strike the European and American communities, shall await the Canadian population.

For this reason, it must be emphasized that any citizen who is unfamiliar with the fact that there was once a Glass-Steagall standard in Canada, or that such a Glass-Steagall option is now active as a legislative potential both in the Italian Senate or in the US House of Representatives is not truly fit to judge what must now be done to ensure a future for our country. The largely unknown name of this vital law in Canada was the “Four Pillars”. It is thus the purpose of the following report to illustrate more clearly a brief history leading into the annihilation of this important law, and the means by which it may be reinstated, not merely for the survival of Canada, but of civilization itself.

Some necessary background

“The money changers have fled from their high seats in the temple of our civilization. We may now restore that temple to the ancient truths. The measure of the restoration lies in the extent to which we apply social values more noble than mere monetary profit.”

-Franklin Delano Roosevelt, first Inaugural Address 1933

Knowing that the “money changers” had only been able to create the great bubbles of the 1920s via their access to the deposits of the commercial banks, Franklin Roosevelt made the core of his battle against the abuses of Wall Street centre around a 1933 legislation entitled “Glass-Steagall”, named after the two federally elected officials who led the reform with FDR. This would be a bill which forced the absolute separation of productive from risky banking, guaranteeing via the Federal Deposit Insurance Corporation (FDIC) only those commercial banking assets associated with the productive economy, but forcing any speculative losses arising from investment banking to be suffered by the gambler. The striking success of this law which was always achieved against the screams of Wall Street, inspired other countries around the world to establish similar bank separation. Alongside principles of capital budgeting, public credit, parity pricing and a commitment to scientific and technological development, a dynamic had been created that would express the greatest hope for the world, and the greatest fear for the financial empire occupying the City of London and Wall Street

The death of John F. Kennedy ushered in a new age of pessimism and cultural irrationalism from which our society has never recovered. The destruction of a long term vision as exemplified by the space program, the St. Lawrence Seaway and the New Deal projects had resulted in a tendency within the population to increasingly look upon present pleasures as the only reality, and future goods as the mystical expression of the sum of present pleasures. In this new philosophical setting, so alien in previous epochs of long term planning, money was permitted to act as a power unto itself for short term gains instead of serving the investments into the real productive wealth of society. With this new paradigm shift into the “now”, a new economic model had to be adopted replacing the industrial economic model which had proven itself in the years preceding and following World War II.

The name for this system would be “post-industrial monetarism”. This would be a system ushered in by Richard Nixon’s announcement of the destruction of the fixed-exchange rate Bretton Woods system and its replacement by the “floating rate” system of post 1971 fame. During that same fateful year of 1971, another ominous event took place: the formation of the Rothschild Inter-Alpha Group of banks under the umbrella of the Royal Bank of Scotland, which today controls upwards of 70% of the global financial system1. The stated intention of this Group would be found in the 1983 speech by Lord Jacob Rothschild: “two broad types of giant institutions, the worldwide financial service company and the international commercial bank with a global trading competence, may converge to form the ultimate, all-powerful, many-headed financial conglomerate.”

This policy would involve the destruction of the sovereign nation-state system and the imposition of a new feudal structure of world governance through the age-old scheme of controlling the money system on the one side, and playing on the vices of credulous fools who, by allowing their nations to be ruled by the belief that hedonistic market forces govern the world, would seal their own children’s doom.

The Big Bang

The great “liberalization” of world commerce began with a series of waves through the 1970s, and moved into high gear with the interest rate hikes of Federal Reserve Chairman Paul Volcker in 1980-82, the effects of which both annihilated much of the small and medium sized entrepreneurs, opened the speculative gates into the “Savings and Loan” debacle and also helped cartelize mineral, food, and financial institutions into ever greater behemoths.

In 1986, the City of London announced the beginning of a new era of economic irrationalism with Margaret Thatcher’s “Big Bang” deregulation. This wave of liberalization took the world by storm as it swept aside the separation of commercial, deposit and investment banking which had been the post-world war cornerstone in ensuring that the will of private finance would never again hold more sway than the power of sovereign nation-states.

After decades of chipping away at the structure of regulation that FDR’s bold intervention into history had built, the “Big Bang” set a precedent for similar financial de-regulation into the “Universal Banking” model in other parts of the western world.

Canada’s Four Pillars Destroyed

In Canada, the collapse of two large deposit banks in 1985 (Northland Bank of Canada and Canadian Commercial Bank) had fed the sophistical argument that Canadian banks could no longer compete with foreign financial institutions such as those in London which were able to deal in everything from insurance, trusts, securities dealers as well as deposit banking all under one roof. Up until this time, Canada’s highly centralized private banks had been prohibited from unabashed speculation not because of any “conservative banking culture” as is often heralded in the press today, but rather by a series of broad regulations that had set absolute walls between the types of financial institutions: Commercial Deposit, Securities, Trusts (which would issue mortgages) and Insurance companies. Each sector would be considered a “pillar” of support to the general Canadian economy.  Each would have a specific function within a greater whole, and each would not be permitted to intermingle with each other.

Banks would engage only in deposit taking and commercial loans, Trusts would provide fiduciary services and mortgage lending, Insurance companies would provide only financial protection, while the brokerage of corporate securities would be only in the domain of securities dealers

The London centered financial oligarchy ensured that its minions within the local oligarchy of Canada used every opportunity to scream that this system of “Four Pillar” regulation was an archaic infringement on the rights of free enterprise and competition, pushing instead for the “one stop shop” practice of Universal Banking whose precedent was set in London. This one stop shop practice would maximize both the size of the financial institutions via mergers and acquisitions, and also their profits, now almost wholly disassociated from reality. “How could it be possible in Canada”, as the story would go, “that innovation or competition could ever occur in a world where our banks would be forced to remain regulated and small relative to their London counterparts?” It was well and good that money was not bound to the laws of the physical productive process as it had been under the old industrial Bretton Woods system. But without being able to use clean deposits in high risk activities, how could profit margins increase at those hyperbolic rates necessary to compete with the City? The Four Pillars had to go.

By December 1986, two white papers had been written: “The Regulation of Canadian Financial Institutions” and “New Directions for the Financial Sector”, otherwise known as the “Green” and “Blue” papers. Both influential papers would argue for the Thatcher “Big Bang” program to be reproduced in Canada using the argument of allowing the banks to first mingle under the umbrella of a holding company, before full deregulation could occur. By the start of 1987, three of the four pillars had been removed via an amendment, given royal assent by the Queen’s Governor General during the Mulroney government, which allowed deposit banks, trusts and securities dealers to exist under one roof. Another aspect of the 1987 Bank Act allowed up to 50% foreign ownership of Canadian securities firms as of June 1987, increasing to 100% by June 1988. By 1992, another Bank Act was passed abolishing the last pillar separating insurance from “universal banking”, and ending the statutory reserve system2.

With the majority of the nations of Europe and the Commonwealth now conforming their laws to the Darwinian ideals of natural selection and its “big bang cosmological corollaries”, a collapse of the financial system was now becoming ripe. Irrationalism and a-causality had now become the assumed cause of all change, looking up at the visible world from which economic policy thinking would be shaped.

The Derivative Cancer Grows

In September 1987, the only short term stock market forecast made by American economist Lyndon LaRouche came to pass, with the annihilation of the Dow Jones by over 23% on October 19, 1987. Within hours of this crash, international emergency meetings had been convened with former JP Morgan tool Alan Greenspan introducing a “solution” which would have the future echoes of hyperinflation and fascism written all over it.

“Creative financial instruments” would be the Orwellian name given to the new financial asset popularized by Greenspan, but otherwise known as “derivatives”.  New supercomputing technologies would be used in this new venture, not as the support for higher nation building practices, and space exploration programs as their NASA origins intended, but would rather become perverted to accommodate the creation of new complex formulas which could associate values to price differentials on securities and insured debts that could then be “hedged” on those very spot and futures markets made possible via the destruction of the Bretton Woods system. So while an exponentially self-generating monster was created that could end nowhere but in a meltdown, “market confidence” rallied back in force with the new flux of easy money. The physical potential to sustain human life continued to plummet.

Enter NAFTA

It is no coincidence that within this period, another deadly treaty was passed under Thatcher admirer Brian Mulroney, known as the North American Free Trade Agreement (NAFTA). With this Agreement made law, protective programs that had kept Canadian industries and farming in Canada were struck down, allowing for the complete absorption of most Canadian enterprises by foreign institutions, and the export of the lifeblood of Canada’s highly skilled industrial workforce to Mexico where skills were low, technologies lower, and salaries lower still. The industrial potential to utilise the vast raw material production of Canada for any nation building purposes would thence be abandoned, leaving the nation to become increasingly reliant on exporting cheap resources for its means of existence. Again, the physically productive powers of society would collapse, yet monetary profits in the ephemeral “now” would skyrocket.

Universal Banking, NAFTA and the creation of the derivative economy in a space of two years would induce a cartelization of finance through newly legalized mergers and acquisitions at a rate never before seen. While the multitude of financial institutions that had existed in the early 1980s were absorbed into each other at great speed through the 1990s in true “survival of the fittest” fashion, the final and fourth pillar of banking regulation would be annihilated in 1992, allowing “insurance companies” to be absorbed under the umbrella of “Universal Banking”. No matter what level of regulation were attempted under this new structure, the degree of conflict of interest, and private political power would be uncontrollable, as evidenced in the United States, by the shutdown of any attempt by Securities and Exchange Commission head Brooksley Born to fight the derivative cancer at its early stages, or even President Bill Clinton’s appeals for a “new global financial architecture” weeks before his own witch hunt would begin in 1997.

By 1999 a politically besieged Bill Clinton would find himself reluctantly signing into law a treaty authored by then Treasury Secretary Larry Summers known as the Gramm-Leach-Bliley Act, which would be the final nail in the coffin for the Glass-Steagall separation of commercial and investment banking in the United States. One of the arguments that would have undoubtedly been used in the takedown of Glass-Steagall would be the Canadian precedent of the dismantling of the Four Pillars just 12 years earlier.

The playing field was now almost totally cleared of any obstructive relics of that archaic system known as “nationalism” such that “market forces” should now be able to mysteriously drive “innovation” completely unhindered by “the greedy self-interest of protectionist nation-states”. During this time, that tech bubble built up around Y2K fears would pop, allowing for one last final inflation of the world bubble to be effected by a desperate Alan Greenspan who would be knighted by the Queen the next year for his loyal service to the empire. Just like the bubble of the great depression 80 years before, the location for this new speculative frenzy would be the housing market.

With Glass-Steagall now removed, legitimate capital such as pension funds could be used to start a hedge to end all hedges. Billions would now be poured into mortgage-backed securities (MBS), a market which had been artificially plunged to record-breaking interest rate lows of 1-2% for over a year by the US Federal Reserve making borrowing easy, and the returns on the investments into the MBSs obscene. The obscenity swelled as the values of the houses skyrocketed far beyond the real values to the tune of one hundred thousand dollar homes selling for 5-6 times that price within the span of several years. As long as no one assumed this growth was ab-normal, and the unpayable nature of the capital underlying the leveraged assets locked up in the now infamous “sub-primes” and other illegitimate debt obligations was ignored, then profits were supposed to just continue infinitely. Anyone who questioned this logic was considered a heretic by the latter-day priesthood.

The stunning “success” of securitizing housing debts immediately induced a wave of sovereign wealth funds to come into prominence applying the same model that had been used in the case of mortgage-backed securities (MBS) and collateralized debt obligations (CDO) to the debts of entire nations. The securitizing of bundled packages of sovereign debts that could then be infinitely leveraged on the de-regulated world markets would no longer be considered an act of national treason, but the key to easy money. While Goldman Sachs organized Greece’s national portfolio as the terms and conditions of its entering into the Euro trap, easy money appeared so fast that the victims were too blinded by their own hedonism to see that the guillotine was coming down upon the back of their necks faster than Barack Obama could say “the fundamentals are sound”.

A Return to Canada

In this post Y2K decade, the Canadian housing sector has extended itself beyond the limits of the US housing bubble at its peak3. From Montreal and Toronto to Vancouver, average real estate prices have officially surpassed those of the USA at its 2007 peak. Over one trillion dollars of housing-associated debt sits leveraged and guaranteed by the Canadian Mortgage and Housing Corporation (CMHC), which now provides taxpayer insurance to over $600 billion of these mortgages. This bubble could not have been created were it not for the increasing of the CMHC cap from $350 billion in 2007 to the current $600 billion in 2012, nor could it have been prevented from exploding without the extraordinarily low interest rates being maintained by Goldman Sachs’ Mark Carney at the Bank of Canada. In fact, were those interest rates to rise even a little, it is estimated that a 10% default of mortgages could be expected immediately thereafter.

A recent report issued by the Canadian Centre for Policy Alternatives (CCPA)4 has demonstrated that even though transparency laws do not exist in Canada as they do in the Euro zone or in the American banking sector, it can be proven that since 2009, Canadian banks have received upwards of $114 billion dollars of bailout (not counting leveraging) via the CHMC which provided $69 billion for the purchase of toxic assets held by the “big five” Canadian banks, with much of the remainder coming from the Fed’s discount window. While defenders of the monetarist faith scream that we had a liquidity injection not a bailout, Shakespeare would only retort that “a rose by any other name would smell as sweet”… except that in this case, the rose is a rotting corpse.

Since the “Big Bang” 25 years ago, the entire mass of assets associated with derivative contracts is now in the order of $700 billion to $1.4 quadrillion, or 10-20 times the total GDP of the world, depending on which accountant you find. The City of London would control 47% of that hyperinflationary mass, while 16 American banks of the total 7500 in existence would manage 25%, and only six of those (JPMorgan Chase, Citigroup, Bank of America, Goldman Sachs, Morgan Stanley, and Wells Fargo) control 75% of that. Reports by the Levi Institute in December 20115 have demonstrated that the actual totality of US bailout has reached $29 trillion for the combined US, Canadian and European banks, and the Euro bailout pot is demonstrating that no bottom exists for this vessel to be filled. In Canada, reports by GreatPonzi.com have documented that total notional exposure to derivative contracts amounts to $18.9 Trillion6, which at a scale of 1:10 the Canadian economy, is well within the ballpark of the American banking folly

Conclusion

“If the rate of inflation is higher than the rate of your bailout, then what happens when you try to increase the bailout, is you increase the hysteria. You increase the rate of collapse. The rate of collapse exceeds the rate of bailout.” –Lyndon LaRouche 2012.

Lyndon LaRouche, the foremost economist who uniquely forecast this collapse publicly in 1971, has led the fight over the last 40 years to change what he explained was the inevitable effect of specific intentions and choices. Today, LaRouche has stated that the rate of collapse of the physical economy has outpaced our ability to bail out the system. With this very real physical constraint upon humanity, we must now face the fact that we can either move quickly to sever the fictitious debts from the real economy, and let the “too big to fail” banks take their losses, freeing ourselves of any obligation to honour those illegitimate claims, or we can face the consequences of hyperinflation, war, starvation, and pandemics on a scale that will make the 14th century dark age pale in comparison.

With over seven billion souls now on this planet, patriots of the world must act soon to defuse the war between NATO vs Russia and China being manipulated by the British Empire, and move to unleash future oriented great projects such as the North American Water and Power Alliance (NAWAPA), Arctic development, industrialization of Africa, asteroid defence and Mars colonization; all fuelled by a speedy transition to a fusion-based economy during the following 20-30 years and matter-anti matter energy sources soon thereafter.

Were we to choose this optimistic option for our future, humanity would not only find its survival assured in the short term, and in the long term highly improved, but we would also be forced to recognize that the belief in an a-causal “big bang universe” necessitates that either a monetarist “big crunch”, or an ecologist “heat death” be predetermined in the system. In both cases, the guiding principle underlying the system is a religious faith in the doctrine of the second law of thermodynamics. A higher and more reasonable hypothesis accounting for the qualitative changes in physical space-time would need to be undertaken. This must be a hypothesis that takes into account the causal role of mind as primary to the merely living and living as primary to the merely material. The proof for this higher hypothesis will be to apply Lyndon LaRouche’s discoveries in the science of physical economy, not merely forecasting the tragic consequences of the foolish monetarist decisions made worldwide up until now, but positively charting out a course into the deep recesses of the future time, where mankind has regained his mature identity as the galactic species that he and she had been all along.

Either we do what the former Mexican President Lopez Portillo recommended and “listen to the wise words of Lyndon LaRouche”, or default on the debt owed to our ancestors and join the dinosaurs.


1 “Inter-Alpha Group: Nation Killers for Imperial Genocide” by John Hoefle, Executive Intelligence Review, Sept 2010

http://www.larouchepub.com/eiw/public/2010/2010_30-39/2010-36/pdf/24-32_3736.pdf

2 The statutory reserves were instituted in 1938 and mandated that a percentage of the private banks’ deposits (usually around 8%) had to be deposited into the Bank of Canada. This had the effect of providing the National Bank with access to interest free capital which could be used for large scale development programs, as well as creating a precision instrument to stop bubbles from forming (known as the sector specific adjustment capability), giving the Bank of Canada the ability to demand that local banks contribute higher reserve deposits which would be connected to a specific sector that was experiencing inflationary effects of speculation as we are now experiencing with the Canadian housing market.

3 The Under-the-Radar Changes that may deflate (or pop) Canada’s Housing Bubble, Ben Rabidoux, Apr 2012

http://www2.macleans.ca/2012/04/23/the-under-the-radar-changes-that-may-soon-deflate-or-pop-the-housing-bubble/

4 “Big Banks Big Secret: Estimating Government Support for Canadian Banks During the Financial Crisis”, by David Macdonald, Apr 2012. www.policyalternatives.ca

5 “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson Dec 2011. www.levyinstitute.org/