Bank of Canada lends $4B to ease credit crisis

by Richard Priestman

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, March 12, 2008 edition).

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 Word War II, 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 predecessor organization, 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.

About the writer:

Richard Priestman, is affiliated with the Kingston Chapter of the Committee on Monetary and Economic Reform.

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