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The Money Meltdown
If Jack Layton is to deliver on
his promise "to protect Canadians with new banking regulations" (Sept.
17, Welland, ON), he’ll need to pay close attention to what has happened
and what is now happening at the Bank of Canada.
When I say the Bank of Canada, I
mean OUR bank – the people’s bank, the only publicly-owned central bank
in North America. Nationalized in 1938 by the government of the
newly-elected prime minister, William Lyon MacKenzie King, this bank has
served Canada well. It funded a war effort, a seaway, a trans-Canada
highway, old age pensions, and universal health care. All of that
without serious inflation and all interest-free, because any profits
were paid into our national treasury.
Until the early 1970s, all private
banks were regulated. Their restrictions involved reserve requirements,
limited loan periods, and maximum interest rates. Since then, each of
these restrictions has been removed. Since 1972, private banks have
created money by extending credit to governments at every level and
always collecting for themselves the going rate of interest. The total
annual interest charges for these municipal, provincial, and federal
debts are now over $60 billion annually.
With relaxed regulatory controls,
the privately-owned banks have taken full advantage of the opportunity
to inflate the money supply by creating credit instruments for investors
backed by assets of questionable value. Such "assets" include sub-prime
mortgages, auto loans, and credit card debt. Canadians have been
encouraged to imitate their American neighbours in this folly, borrowing
well beyond their ability to repay. Canadian businesses and investors
have suffered as a result. Some $33 billion of Asset-Backed Commercial
Paper (ABCP) has been frozen since August, 2007. The supposedly
risk-free ready cash is still not accessible.
Oh, wait! Maybe it will be. The
solution proposed by the Purdy Cameron Commission (composed mostly of
bankers) is for the Bank of Canada to loan these private for-profit
banks money to pay off their debts, using only their ABCP assets as
collateral. This proposal has already been approved by a Toronto court
(though is subject to appeal). In the past, it would have been illegal,
but the Bank of Canada Act has recently been modified so the transfer
can happen. Under the new law, the Bank of Canada now can provide
365-day loans based on questionable, high-risk collateral, whereas
previously only first-class collateral (e.g, Government of Canada
Treasury notes) has been acceptable, and only for overnight loans to
private banks. Is this collateral really worth a dollar? In August, the
National Australian Bank, which also owned this type of questionable
high-risk collateral, wrote down their holdings to 10 cents on the
dollar.
In other words, in order to rescue
the private banks from their self-created crisis, the Bank of Canada –
OUR public bank – is now primed to offer "good money for bad." This
essentially mimics what has been occurring in the U.S., where the "Fed"
(in that case, a privately-owned central bank) has accepted collateral
of similarly questionable value to extend 100's of billions of credit to
protect the banking system.
What are the implications of such
a move? Initially, the effect will be to reduce public panic, promise
some return of capital to investors, and keep the private bankers in
business. But ultimately, the financial consequences will be enormous
and at the expense of everyone in the country.
When you pump money into the
economic system without equivalent resources backing it, the result is
serious inflation. As the value of our money deteriorates, we can buy
less because we must pay more for everything we buy. The latest
statistics from recent issues of The Economist, more reliable
than those from Stats Canada and the Bureau of Labor Statistics,
document the double-digit price increases we are even now experiencing.
But most importantly to the
economy as a whole, this crisis will generate serious consequences for
the banking industry. It is imperative that government use this
opportunity to modify the practices of the private banks, and act
immediately to reinstate a forceful role for the Bank of Canada. We
should note that in a similar situation in Norway, the government chose
to nationalize the failing banks rather than bail them out. If we are to
protect the long-term interests of businesses and consumers, we must act
decisively to limit the power of private banks and control the creation
of money.
The need is clear: We must
challenge Jack Layton and ask him if his MPs will have the wisdom and
courage necessary to make the necessary changes in our monetary system.
We must ask if the Liberal and Conservative parties’ MPs are willing to
risk cutting off their private-banker support and finally act in the
public interest. We must ensure that this subject becomes a primary
topic in the leader debates and insist that the new government take
immediate action.
Jerry Ackerman,
Ph.D.
Financial
Analyst & Investment Counsellor
Finance Chair,
Canadian Action Party
Annapolis Royal,
Nova Scotia B0S 1A0
902-532-7509
jaem@ns.sympatico.ca
Quote:
The survival
of democracy is dependent on successful representative government; and
that is conditioned upon the practice of electing to public offices only
those individuals who are technically trained, intellectually competent,
socially loyal, and morally fit. Only by such provisions can government
of the people, by the people, and for the people be preserved.
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