Federal Reserve Forced by Financial Collapse to Shift Monetary Policy

Keynoting the annual central bank symposium in Jackson Hole, Wyoming, on Aug. 23, U.S. Federal Reserve Chairman Jerome Powell announced that “the time has come” for the Fed to cut interest rates. While some commented that his announcement “came in time” to favor the Democratic Party candidate, in reality it came almost too late.

As Lyndon LaRouche often insisted, central banks have no choice within their unsustainable system but to print money. That is why he expected that of the two possible deaths of the system – of bankruptcy or of hyperinflation — the latter was more likely.

Consider what happened when the Bank of Japan raised the interest rate from 0% (zero!) to 0.25% a few weeks ago. The collapse of the global stock market showed that the bankrupt system cannot even sustain an interest rate increase of one-quarter of 1%! Only after the Bank of Japan rushed to announce on Aug. 7 that the central bank would not raise rates further in conditions of market volatility, did the markets calm down.

True, Jerome Powell might have speculated that, by waiting until the proverbial last minute to lower rates, the consequences in terms of inflation would come after the Presidential elections on Nov. 5. The shift in monetary policy will not help the real economy, but it will feed the Wall Street bubble. For the physical economy to recover, the Wall Street gambling casino would have to be shut down. This could be done by reviving the Glass-Steagall Act, that separated commercial banks from investment banks, and denied the latter access to central bank money.

Economists Pam and Russ Martens, who run the Wall Street On Parade website, have regularly made the case for restoration of that law, including in an Aug. 20 article titled “All The Devils Of 2008 Are Back At The Megabanks”. The extreme leverage exposed in the report of the Congressional Inquiry Committee in 2010, as the cause of the 2007-2008 financial crisis, has not decreased, but has increased since then.

In addition, four US megabanks hold 87% of the derivatives exposure of the entire U.S. banking sector. And they have as many derivatives bets off their books as on their balance sheet. Take the example of JP Morgan. According to financial data at the Federal Financial Institutions Examination Council (FFIEC), as of Dec. 31, 2023, JPMorgan Chase held $3.227 trillion in its off-balance sheet, while it reported to the SEC total assets on its balance sheet of $3.875 trillion.

Regulators insist that megabanks should increase their capital ratio, but the megabanks have so far successfully resisted, including with blackmail. Therefore, the Martens call on Congress to “restore the Glass-Steagall Act, which would permanently separate federally-insured banks from the trading casinos on Wall Street”.