March 20, 2008

Bank of Canada lends $4B to ease credit crisis; OpEd

Bank of Canada lends $4B to ease credit crisis

The federal government refuses to borrow from
the Bank of Canada to finance education, health
care, housing and infrastructure, but has not
objected to the Bank lending $4-billion to our
commercial banks "to stave off a credit crisis".
(Kingston Whig, 12/3/08).

Our government is so steeped in the free-market
ideology that even though its efforts to
privatize and deregulate everything in sight has
led to crumbling roads, a weakened health care
system, students in debt up to their necks and
people sleeping on the streets in sub-zero
weather, it still balks at borrowing from our
central bank to finance needed public capital
expenditures. It prefers to borrow from the
private sector at a cost of about $33-billion a
year for interest. And that's only half the cost
because provinces and municipalities are paying an additional
$30- billion a year in interest on top of that!

It wasn't always like this. From 1939 to 1974
the federal government used the Bank of Canada to
finance a significant portion of its debt without
serious ill effects. Inflation went up and down,
but the rate was almost the same in 1971 (3.0) as
in 1951 (2.8). Beginning in the late seventies
it borrowed almost entirely from the private
sector, and since then public debt skyrocketed
from $19-billion in 1975 to $588-billion in 1997
along with huge interest costs.

During the years 1939 to 1974 banks were
constrained by regulations brought in during the
depression. They were shown to have issued too
much credit without adequate collateral, which
contributed to the depression. Governments of
the day, starting with the American government
under FDR, agreed to help the banks get back on
their feet providing they agreed to certain
conditions, e.g.: they would limit their
interest rates to a maximum of 6%; they would not
get involved with insurance, stock brokerage or
mortgages, and they could not own property other
than that necessary to carry out their banking business.

After the end of WWII banks began to lobby
governments for changes. At first it was just to
lift the 6% interest limit. Then they were
allowed to get back into mortgages and brokerages
and to own property. The move during the 1960's
to extreme free market ideology supported their
lobbying for removal of regulations. Then, in
1974, when central banks decided that governments
should borrow only from the private sector for
their long term debt, creation and control of
money was effectively privatized. Bankers and
financial traders became very wealthy, while the
income of most of the population remained the same or was reduced.

The crisis of confidence in our banks exposes
the weakness in a deregulated financial system
which depends on the system to supervise
itself. Re-regulation is needed as is also the
need for government to take back control of the
nation's money creation by borrowing from its own
Bank to finance public capital works. This is
not something the current government or
opposition are inclined to talk about – not the
Conservatives, not the Liberals, not the Bloc,
not even the NDP. The latter is surprising
since one of the fundamental principles of the
NDP's parent body, the CCF, was the "control of
finance" and the provision of capital for public
works "free from perpetual interest charges", as
can be done today through the Bank of Canada.

One way to change the situation is to vote in
the coming federal election for candidates who
support using the Bank of Canada to finance public capital works.

Richard Priestman,

Kingston Chapter
Committee on Monetary and Economic Reform

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