Why Does Canada Need a Glass-Steagall Bank Separation?
27 October 2014
As of this writing, over 120 Canadian union representatives from 9 provinces have joined the City of Burnaby, British Columbia in calling for the Glass-Steagall Bank reform to be applied to both the “Big 6” Canadian banks as well as the world financial system more generally. From the ex-Prime Minister of Australia Malcolm Fraser, to leading U.S. Senator Elizabeth Warren, a growing chorus is emerging in support of bringing back the separation between investment banks and commercial banks.
While many onlookers have understood why this type of reform is necessary in the USA or Europe, where speculative activity has been more rampant than the Canadian experience, it has been less understood why it is so necessary for Canada to do the same.
This lack of understanding can prove fatal to the future security of Canada, and it is the purpose of this brief report to clarify why Burnaby, BC and the Labour union representatives are not only correct, but why this reform must occur if we are to navigate Canada out of the oncoming financial disaster sparked by the meltdown of the $2 Quadrillion global derivatives bubble.[Figure 1]
It is important to understand that Glass-Steagall is not merely a “regulation”, but a powerful principle of change which transforms the global financial system at its deepest level. The primary obstacle to Glass-Steagall’s restoration in Canada remains four key myths which have spread like intellectual poison and must be addressed briefly in the following paper:
1) The Canadian Big 6 are not implicated in the global derivatives bubble
2) The Canadian housing bubble is not real and is not an integral part of the global speculative system now imploding.
3) The physical economy of Canada, which is the source of the only true value in our society is in fine health and is not collapsing.
4) The bail-in regime now being installed into the Canadian banking system will never be used to seize pensions, RRSPs, mutual funds and other assets more in this impending collapse
Debunking the Myths
Myth 1: The Big 6 Canadian Banks Are Not Affected by the Global Derivatives Bubble
False: Our banks are not safer than any other “too big to fail” banks internationally. In fact, recent OSFI statistics have demonstrated the Big 6 banks to be exposed to over $20 trillion of derivatives, nearly all of which represent purely “fictitious capital” . This puts the Canadian banks on the same playing field as their US counterparts. [Figure 2]
While derivatives had no existence before 1987, within the mere 25 years since their creation, these “creative financial instruments” as they were dubbed by Sir Alan Greenspan, had grown to $70 Trillion in 1999. In the 15 years since Glass-Steagall’s 1999 takedown, these instruments have metastasized to an enormous $2 Quadrillion! To put this number in perspective, the world GDP is only $74.9 Trillion.
Figure 2. As of 2012, the “big 6” Canadian banks have become exposed to over $20 trillion of derivatives (column on right). Equity and Assets (left and middle) represent a mere fraction of this hyperinflationary sum.
This is why the economy has stopped growing; the perceived growth had been based on merely diverting investment from the real economy into speculative international capital, which has no concern for human development
Myth 2: There Is No Canadian Housing Bubble
False: While the Canadian housing bubble is of a different form than that of the USA version, it is no less a bubble. It has been created by 1) the nearly 0% interest rates maintained by the Bank of Canada, 2) the $600 billion CMHC insurance on houses increased by over 2 fold under Harper since 2007, and 3) international speculative capital flooding into the Canadian housing sector looking for “safe” ground for investment in an age of global market instability.
In 2011, the average value of houses in Canada had surpassed the average housing price during the peak of American bubble of 2007 [Figure 3], and the underlying consumer debt sustaining its existence has also exceeded the average consumer debt index of the USA, with little to no re-pay ability in large measure.
Figure 3. As of 2011, average Canadian housing prices have lapped American prices during the peak of the American bubble
Myth 3: Canada’s Physical Economy is Healthy and Growing Stronger
False. Since the Global Economy became disconnected from the 1971 fixed-exchange rate system established in Bretton Woods, New Hampshire in 1944, the world entered a speculative, post-industrial rationale more recently dubbed “globalization” which encouraged economic thinking and behaviour that would have formally been considered insane.
Since that 1971 global transformation, money no longer served as merely the means, but as the ends to itself. Speculation on debt, oil, food and currencies became the perceived drivers of wealth rather than production. Under this new logic, our infrastructure and manufacturing base was permitted to decay, credit for investment in long term infrastructure, businesses and scientific research was diverted into speculation and our society became increasingly “service-based”. [Figure 4]
Figure 4. The growth of the service-based “post-industrial society” demonstrates the underlying unsustainability of globalization. No society which cannot produce, and only consumes, can endure for long.
As a result, a debt-based economy arose in the place of our once proud industrial society, with nations and their citizens rich and poor alike, becoming ever more enslaved to usurious practices. Before this moment, the Canadian debt had never risen above $27 billion, while after the 1971 shift, we have grown an (unproductive) debt monster to the scale of $600 billion and similar rates of debt growth in our American and European neighbours. [Figure 5]
Figure 5. The growth of Canada’s debt from $28 billion in 1971 to the scale of $600+ billion today has everything to do with the destruction of the pre-1971 industrial model of national economy, as well as the 1974 ending of the Bank of Canada’s role as lender to the federal and provincial governments
Myth 4: The bail-in regime will never be used in Canada
False. By now, it should be clear that the Canadian situation is not as peachy keen as popularly believed, but certainly, what was done to Cyprus in May 2013, when citizens’ bank deposits were literally stolen to “bail in” the failing banks would never happen here! Sadly, this belief must also be thrown out, as Finance Minister Joe Oliver announced in July 2014, the creation of the Taxpayer Protection and Bank Recapitalization Regime which effectively allows banks to confiscate select assets in the event of a major bank failure. Oliver’s decision to bring the Canadian bail-in regime online alongside its global counterparts, resulted in Moody’s downgrade of our Big 6 banks within a day .
The appearance of the bail-in regime as well as the austerity budget in Quebec exemplified by Bill 3 are the consequences of our nations’ failure to address any of the above factors in a systemic way. Legal contracts, under the precedent set by Bill 3, have been made void, in order to maintain policies of austerity. This has accelerated the destruction of Canada’s real productive economy when the only solution was to engage in real nation-building strategies the likes of which had last been seen under former Quebec Premiers Jean Lesage, Daniel Johnson, and their ally Charles de Gaulle.
The Solution Begins with Glass-Steagall!
Glass-Steagall is the only practicable measure which addresses all four of the above variables in a systemic way, by forcing the deposit/commercial banks to serve the real economy, instead of the other way around. Canadians deserve to have a national credit policy that puts Canadians and their well-being first, and Glass-Steagall is the quickest, surest means to ensure that credit is directed towards building great projects for transportation, energy production, agriculture, science and healthcare.
Glass-Steagall at a Glance.
In its preamble, Glass-Steagall stated its intent: “To provide for the safer and more effective use of banks, to regulate interbank control, to prevent the undue diversion of funds into speculative operations...” The full Act, in just under forty pages, established that the banking system must be made to serve the “public interest”, to serve the general welfare of the American people as a whole, affirming the principles enshrined in the US Constitution— and outlawed anything to the contrary. In Canada, this principle was expressed under the “Four Pillars” which was destroyed under Brian Mulroney in 1987 in order to prepare for NAFTA.
1. Growing Support for Glass-Steagall by Canadian Municipalities and Labour Unions http://committeerepubliccanada.ca/article4647.html
2. “Fictitious capital” is generally defined as financial capital not sustained by any real value in the physical world. The example of a slum lord registering “profit” merely by the absence of investment in the maintenance of his or her slum.
3. Canadians Household Debt Burden Edges Higher in 2nd Quarter, David Parkinson, Sept. 12, 2014, Globe and Mail
4. Ottawa unveils proposals to relieve taxpayers from covering bank bailouts, Financial Post, Aug. 1, 2013