Into the Boiler Room: Deregulation of Canada's Financial Industry Part 1
This series addresses the context and the root causes for the economic crisis, that have affected Canada Corporation.
This series also analyzes just how “Prudent” Canada’s banking sector has been, and what its implications mean for Canada’s future.
We begin by looking into an academic paper produced by Manfred Bienefeld, written in 1992 titled – Financial Deregulation: Disarming the Nation State
Bienefeld was quite ahead of his time, accurately predicting numerous pitfalls and challenges that the Canadian economy would eventually face, in the absence of effective regulations on the financial industry.
He wrote,
Despite it’s critical importance and its pervasive impact, the financial system has been relatively neglected in recent political economy debates, probably because it is the least well understood and least well documented part of the economy. This is a grave mistake both tactically and analytically since financial liberalization has been a central driving force behind the severe social and economic problems currently emerging in Canada.
He stated this back in 1992, at a time when the Mulroney unlawful government had embraced financial liberalization in a high risk strategy, built on the assumption that deregulation and exposure to competition would suffice to ensure the future welfare of Canadians.
On the topic of deregulation, Bienefeld wrote, “…this strategy is more likely to produce an increasingly polarized society in which the majority will suffer sustained losses and in which the goal of a more humane, caring and leisure-oriented society will soon be dismissed…the truth is that financial liberalization significantly disenfranchises Canadians by reducing their ability to make social and political choices. The dream of a caring society can only be kept alive, if it is possible to restore a degree of effective national control over the finance sector.”
But if we look in the many decades past, Canada’s financial system has been very stable. Bienefeld rightfully mentioned, that during the great depression of the ‘30s, over 5000 banks went out of business in the US, however no Sovereign bank had failed.
This difference also held strong in the 1980s as well, when the rate of US bank failures multiplied due to the costs associated with fixing the deregulated Savings and Loans system.
1964: Canada’s Royal Commission on Banking and Finance (otherwise known as the Porter Commission) had clearly emphasized the financial sector’s stability as a valuable asset, but was still concerned about the level of competition.
1967: Revision of the Bank Act sought to increase competition without jeopardizing stability or undermining the effectiveness of national regulation. It did this by reducing the “compartmentalization” of domestic financial markets and terminating the ‘open entry policy’ which had allowed the virtually unrestricted entry of foreign banks (Bienefeld, 04).
Bienefeld importantly acknowledged, that this attempt at legislation to strengthen Canada’s financial institutions did nothing to alter the economy’s systematic reliance on the US for its long-term capital needs.
The problem in the 1980s, was that the crisis that was created by financial deregulation paved the way for the demand of more deregulation. As prudential standards were lowered, more and more credit was extended to speculative or distressed borrowers, willing to pay higher rates for credit. Eventually, the process became self-perpetuating because policy choices ended up being determined by a stranglehold that deregulated financial markets had on government monetary policy.
Because of this, financial deregulation came to be seen as something governments had to accept, because their refusal would lead to capital flight and exclusion from international capital markets. Embracing deregulation would lead to efficiency and welfare gains, though not without risk and at the expense of some amount of national sovereignty. As Bienefeld noted,
The Mulroney government’s enthusiastic acceptance of deregulation undoubtedly raised [GDP] growth rates a little in the mid-eighties, but the result was such an explosive growth of external debt that, by the end of the decade, a financial sector economist wrote that Canada had ‘’suffered a massive loss of economic sovereignty over the past two decades – especially since early 1986 and it is no comfort that the wound was largely self-inflicted.
Several significant regulatory changes were made in the financial industry
1973 – QUEBEC OPENED UP ITS PROVINCIALLY REGULATED SECURITIES INDUSTRY TO FOREIGN COMPETITION
1980 – REVISION OF THE BANK ACT ALLOWED FOREIGN BANKS TO INCORPORATE SUBSIDIARIES IN CANADA, WITH THE RESULT THAT SUCH BANKS HAD INCREASED THEIR SHARE OF ALL BANK ASSETS FROM 3 TO 12% BY 1988 DESPITE SOME CONTINUING LIMITS ON THEIR OPERATIONS
And the biggest step forward for Canada, was the internationalization of Canada’s financial services with the Free Trade Agreement (FTA).
A study by the Economic Council of Canada at the time summarized the implications of this for Canada’s financial sector:
[The FTA] introduced a new set of legal parameters into the domestic banking situation. The agreement gives US banking almost automatic entry into Canada and removes the limits on their asset growth. Their Canadian subsidiaries are no longer required to obtain the approval of the Canadian authorities before opening branches here…so they enjoy the same opportunities as Canadian banks. With those barriers now removed, there Is every reason to anticipate that Canadian institutions will, in the future, face a much tougher challenge in their efforts to retain their share of the domestic market.
This is just an example, of how some deregulation led to a demand for more deregulation.
This is because banks had now complained that government had exposed them to international competition, yet they could not compete due to existing regulations imposed upon them. As a result of this, the government introduced additional reforms for the financial sector, which further reduced its domestic compartmentalization and increased its integration into the global financial system.
Bienefeld had scathing remarks for Mulroney’s planned deregulation, in part due to his decision to remain “oblivious to the associated risks and unmindful of the resulting constraints on Canada’s sovereignty.”
He added, “In fact, it appears to regard these constraints as desirable because they will tie future governments to its neoconservative agenda.”
In fact, Pat Carney, who was Minister for International Trade at the time, had publicly justified the Canada Corporation government’s pursuit of the Free Trade Agreement (FTA), and went so far as to say,
[we] wanted to ensure that in the future there is not the kind of anti-investment policies of other governments.
As Bienefeld had rightly assessed, that greater exposure to “the stranglehold of deregulated financial markets” achieved the same objective as the FTA.
Bienefeld also predicted what would happen when he wrote,
once enough Ponzi schemes run into trouble, as they eventually must, this source of upward pressure on interest rates will abate. However, for a short time it is likely to be partially replaced by pressure reflecting a general increase in risk and uncertainty and the proliferation of distressed debtors prepared to borrow at any cost to stave off collapse, and able to borrow from desperate lenders willing to lend so that borrowers can service their bad debts. These last expedients are soon exhausted, however, and at this point interest rates will fall. By then, even low interest rates may be unable to revive investment and spending be-cause accumulated debts, bankruptcies and uncertainty com-bine to stifle consumer and investor confidence, as in Keynes’s liquidity trap.
This sounds eerily similar to the situation that is being presented to us today, with abnormally low interest rates, dismal growth, and weak consumer and investor confidence.
One of the biggest problems that has affected the world in light of recent economic events, is that credit creation will provide some short-term relief, but actually, it will deepen the underlying crisis if it contributes to the accumulation of bad debt by encouraging: relatively speculative investment; excessive consumer spending on credit.
In fact, both of these problems continue to plague us today.
Bienefeld hit a home run when he wrote,
The issue for Canada, remains, that any attempt to regain any meaningful degree of sovereign control of Canada’s financial system faces looming opposition from an international financial system that has effectively, become “dangerously unstable” and that has grown enormously powerful as a result of deregulation, along with the Free Trade Agreement and Canada’s heavy past reliance on external long-term capital (Bienefeld, 53).
This is word-for-word, one of the biggest issues facing Canada today in 2012, almost 20 years since Bienefeld wrote his profound paper!
Bienefeld also added,
It is critical that people come to understand more clearly that the speculative excesses of interlocking, deregulated financial systems are at the heart of the current economic crisis in which debt, asset price inflation, and high interest rates are combining to destroy governments, businesses, jobs, and farms. If people…focus their anger only on symptoms like tax increases, spending cuts, or factory closures, they will not find a solution. Indeed they will be ground down and they will end up fighting each other, as one person’s tax cut becomes another’s job loss.
This is one of the biggest fundamental issues.
Since the general public is not aware, and remains oblivious to how the monetary system and economic policies of Canada operate, they are more attentive at each other’s pensions, benefits, and the like, rather than addressing the root causes of why such drastic austerity measures need to be enforced in the first place.
Deregulation of the financial industry has not been in the interests of any nation, and the recent sovereign debt crisis plaguing the Eurozone is a perfect example of this.
Solutions
Bienefeld advocated that success will occur when a political coalition will serve to look at the longer view and focus its political energies on 2 complex objectives:
1) RESTORING A DEGREE OF EFFECTIVE, SOVEREIGN CONTROL OVER [THE] FINANCIAL SYSTEM
2) FINDING A RELATIVELY SWIFT AND PAINLESS WAY OF LIQUIDATING OR DEVALUING SIGNIFICANT PROPORTION OF THOSE FINANCIAL CLAIMS THAT CURRENTLY PREY PARASITICALLY ON THE GLOBAL ECONOMY
The first has been targeted in a few ways, due to monetary policies enforced by the Chretien Liberals in the late ’90s and early 2000’s however it was the case of one step forward – two steps back; as the Harper coalition that came to power afterwards had sought to change several of the reforms that were originally made.
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