Resolutions for CAP Convention
So-called subprime credit that has engulfed much of the international banking system threatens consequences more grim than those of the Great Depression of the 1930s and its sequel in WWII. So grim was the effect on the credit system of the Crash of October 1929 that by the time President F.D. Roosevelt was inaugurated for his first term at the beginning of 1933. 9,000 US banks had shut their doors, and one of Roosevelts first acts was to declare a bank moratorium during which no banks were open. Roosevelt, conscientious and open-minded listened to all economists and finally arrived at a solution that restored the banking system and restricted it rigorously to banking. Banks were forbidden to acquire interests in the other “financial pillars”: stock brokerages, insurance and mortgage companies.
There was a good enough reason for this. Each of these “other pillars” retained a cash reserve for the needs of their own business. Allow the banks access to these, and they will use them as the cash basis for applying the bank multiplier, the very essence of the art of banking - creating say as much as 10 times the cash in the banks vaults by lending it out for interest. So long as the banks could honour all claims to the deposits they had taken in, they were in the clear, but when they expanded their cash base with the cash reserves of the other pillars the country was in trouble.
Note well. The 1933 bail-out of the banks is the only instance in the history of bank bail-outs in which the banks on being bailed out were seriously regulated rather than being deregulated further and allowed to acquire greater political power. Bail-outs have averaged about once every seven years since the banks were deregulated again by the 1970s.
Notable is the appointment of the new Governor of the Bank of Canada a former high executive of a bank, rather than someone from the Bank of Canada staff or an international institution like the IMF.
We draw the attention of the Conference that without the removal of the Rooseveltian restrictions on what non-banking interests banks could acquire there could have been no subprime mortgage crisis that threatens to flatten out the world banking system.
As the banks were bailed out from their speculative forays into non-banking financial territory, subservient governments granted further non-banking powers to them. And the economic curricula of our universities were cleansed even of the memory of the great writings of economists such as John Maynard Keynes and John Kenneth Galbraith. Early retirement and zero hiring of those who did not respect this censorship, completed the sweep. Particularly since the bailout following the massive losses of banks in acquiring Savings and Loans, Enron where at least one Canadian bank was allowed billion dollar settlements out of court with class actions against Enron scams actually designed by a Canadian bank. Characteristically, this shameful use of the banks capital was partly recouped by the bank in question as a tax credit in Canada.
It is necessary to make this invaluable suppressed economic literature available once again in economic courses, and in public and university libraries. The goal is not to adopt blindly any of the principles of the great economists stricken from the officially recognized literature but to invite critics of their writings to enter the discussion. This project might well be titled the McGeer Project, because the works of this self-taught economist antedated the writings of Keynes, went further than Keynes ever did in developing the functions and theory of nationalized central banks. It was largely his tireless and prophetic writings that led Prime Minister Mackenzie King to nationalize the bank of Canada in 1938.
COMER has the commitment of one million dollars from a private individual to establish a fund to set up a course at initially a single one of our universities. This will have to be closely reviewed and monitored to ensure that its purpose is followed. CAP and other organizations are invited to support this project, by seeking out likely universities and joining in the routine checks to make sure that the purpose of the project is fulfilled takes shape with safeguards that the desired goal will be respected.
COMER, on the initiative of Connie Fogal, who is both leader of CAP and a member of COMER in good standing, has retained Rocco Galati, a lawyer experienced and devoted to such suits, to take to the Supreme Court the breach of the Bank of Canada Act which is still on the law books of the country. It would be helpful if CAP joined in publicizing the importance of the initiative.
The notion of what is inflation - meaning an excess of demand over available supply - must be re-examined. It is correct that when there is a shortfall of supply to demand prices will rise. But that proposition, just as any other proposition, cannot be turned around. To assume it can, would get you flunked in an elementary course of logic.
Example: If a man holds a loaded revolver to his temple and pulls the trigger, he will fall dead. But that does not mean that the proposition turned around is necessarily correct. If a man falls dead it cannot be taken to prove that he shot himself. There are thousands of other possibilities that may have caused his death.
To mention just one of the alternative explanations for rising prices. When I move from a town of, say, 20,000, to New York City, I am not fool enough to expect my living costs to remain the same. How then can economists assume that, when humanity over recent decades has been making just such a move. Average life spans have moved upward, and this involves more public services whether provided by the state or the private sector.
COMER has done original work published in France 35 years ago, recognizing that an independent factor in the systematic rise of prices having nothing to do with the supply-demand relationship, results from the increase of infrastructural services paid for by the government. This - which COMER calls “the social lien” - represents the deepening layer of taxation essential for running a contemporary society.
Our statistics department on the trail of this element of price rise that was clearly not related to an excess of demand over supply, when the Mulroney budget slashed its budget with the warning that it drop the researches in question. PAC must demand that they be resumed.
The Rooseveltian banking reform, which became the model throughout much of the Western world, provided an alternative to raising the benchmark central bank interest rate in the statutory reserves that banks had to redeposit with the central bank from the deposits made with them by the public.
However, particularly since the 1970s, the banks having cleaned up their balance sheets during the years when they were restricted to banking, were lobbying for further deregulation and globalization. By the 1980s in particular, they lost much of their capital in their involvement with mortgages, and to bail them out from their plight, the Bank for International Settlements - which conducted the comeback plans of the worlds banks - brought in its Risk-Based Capital Requirements for banks of developed countries. This declared government debt of such governments to be “risk-free” hence requiring no down payment for the banks to acquire. As a result the Canadian banks increased their holdings from around $20 billion to $100 billion.
The elimination of the statutory reserves between 1991-3 left the benchmark interest rate the only device for the central bank to dampen or stimulate the economy. And that awarded unique control position of the economy to the speculative financial sector, whose primary revenue is interest.
The BIS, and all the central bankers, around it overlooked a detail. To fight inflation that could be expected from such a great infusion of capital into the banking systems, the BIS raised interest rates to the heavens, proclaiming “zero inflation” - i.e., an absolutely flat price level as alone acceptable. But with the banks loaded up with completely leveraged government bonds issued earlier with drastically lower coupons, the banks suffered a massive loss on such bond hoards. This caused a major monetary crisis in Mexico that threatened to bring down the world financial system. Mexicos banks closed their doors and, though only recently privatized again, once again were taken over by the government. Eventually 85% of the banks of that proudly nationalist country ended up under foreign control.
The Mexican banking crisis was prevented from bringing down the world banking system, an emergency fund of $51 billion was put up by the USA, the IMF, and Canada. It was not used, but the United States government had learned an important lesson. It became clear that the age of sky-high interest rates was over. For the deregulated banks were in no position to forgo the mountains of government debt they were now authorized to acquire with no down-payment.
A way out was devised by Clintons Secretary of the Treasury, Robert Rubin, a Wall Street alumnus. With very few exceptions, governments of the day did not keep their books according to the double-entry system supposed to have been brought back from the Near East by the Crusaders about a thousand years ago. That requires that each transaction enter the firms ledger twice: once as the value of a given acquired asset depreciated over its likely period of usefulness, and then the amount of money paid for it amortized over a reasonable period. That is known as accrual accountancy or capital accountancy; the system by far most governments employed as “cash accountancy.” By this the debt incurred for the acquisition was carefully amortized over the term of its financing, but the value of the asset was written off in the year when the transaction was concluded. Obviously that left a deficit that was not really there. Private firms employing such bogus accountancy would find themselves in deep trouble when the tax sleuths caught up with them. But the fictitious bookkeeping of the governments themselves had considerable strategic advantages. It bolstered the argument, that we cannot afford social programs, and above all it made for some handsome privatization deals when highly expensive real estate or other infrastructure booked at a minute portion of its real value.
The Clinton government got around that difficulty when it switched to accrual accountancy and replacing $1 dollar token value with a properly amortized value of the asset, and working the conversion back to 1959, came up with some $1.3 trillion dollars of greater asset value. That first appeared in the Secretary of Commerces statistics in January 1996, but under the headings of “Savings,” which economists apply only to cash or assets readily convertible into cash. However, a nudge and a wink to the appraisers, whom we know from the current subprime investigations to be highly obliging folk, did the job. The lower interest rates that ensued from the revelation of so much net value in the governments estate brought in low interest rates that gave Clinton a second term, rewarded the nation with the prolonged technological boom that burst only as the new millennium had its foot in the door.
How dear the bogus low pricing has been to the private financiers appears from the persistent refusal to bring in accrual accountancy in Canada, even though the Auditor General refused to sign off on two annual reports on government financing. Finally a sordid compromise was reached when the government switched to accrual accountancy - but only when it had elicited a degrading statement from the AG to the effect that since no new money had entered the Treasury as a result of the agreement, it should not be taken as a reason for expenditures on new programs.
However, when the successive bailouts of our banks had left holes in the federal treasury the federal government had downloaded crucial social programs onto the provincial governments without the revenue to pay for them, a compliment that the provinces lost no time in passing on to the municipalities.
That is the origin of the potholes in our roads, and the violence in our schools.
We must ask that serious double-entry accountancy be brought into the finances of the nation. The Bank of Canada must be used for the purposes for which it was nationalized in 1938, at a good profit for the 12,000 private shareholders who had held their shares only for four years. Both the federal and provincial governments are eligible for financing both their funded and unfunded debt in generous amounts. Municipalities, as corporations, can with guarantee either of the federal or of a provincial government.
The interest paid on such loans, of course, would come back as dividends only to the federal government which is the Bank of Canadas single shareholder. But the federal government could reach a fair arrangement with the province or municipality that may have used Bank of Canada financing. It would straighten out the tangled financial relations of the different government and help usher in a happier period in the relations for our various levels of government.
After World War II, Washington sent hundreds of young economists to Japan and Germany to assess how long it would take for the two major Axis powers to rebuild their economies enough to become once again formidable competitors on world markets. Twenty years later, one of these, Theodore Schultz of the University of Chicago, wrote that it is astounding how wide of the mark these economists had been in their predictions. This he attributed to the fact that they had concentrated on the physical destruction in the conflict, and had overlooked the fact that the work force and technical personnel had come through virtually intact. And from this he concluded that the most productive investment a nation can make is in its human capital - in the skills, and hence the health and social welfare of its work force. For this Schultz was awarded the so-called Nobel Peace Prize - awarded by the Bank of Sweden, and enjoyed a brief celebrity. Today COMER seems just about the only organization to remember either his name or the idea that holds to keys to running our society. We underline that not only must societys investment in human capital be properly depreciated, but the period of such depreciation stretches over generations, since the children of well-educated well cared-for parents tend to be more readily educated and healthier in every sense of that word.
COMER therefore moves that human capital be recognized as an investment and handled in the nations accountancy as such, This will stop the use of key social investments as political scarecrows to deceive the electorate.
It is impossible to find your way through the overgrown subprime debt jungle that the world has become, unless you realize that there are two types of debt. The debt of our federal government that is spent into existence and hence bears no interest, and there is the debt lent into existence by banks which does bear interest.
The governments borrowings from the Bank of Canada, of which it has been the sole shareholder since 1938, is the only legal tender in our land - that must be accepted in payment of any debt. The interest charged the government by the Bank of Canada comes back to the federal government almost entirely in the form of dividends. The credit of the government when extended to domestic purchases or investments. is backed by its taxing powers over the nation, the skills, talents and education of its inhabitants, and the wealth of our environment. That is why all these capital assets - whether they are traded on the market or not - must be preserved and properly valued when privatized.
That is basic to understanding our economy. The word “debt” calls to mind a negative sign before a number of dollars, but government debt would be more realistically conceived would be better understood if we trained ourselves to think of it with a large positive sign before it.
Of course, the government must handle its own spending - and hence the countrys money creation responsibly. That is why PAC has emphasized the need for double-entry bookkeeping, that would keep track not only of the amortized debts of government investment but also of the depreciated value of its investments - both in physical investments and in human capital. (See Resolution 6.)