You are right to be angry. Although, I question how many of you truly understand the system you criticize. You’re right that Bay Street is a land of excess at the expense of you and most Canadians. You’re right that we are merely serfs of the financial class. But why is it this way? Is this the edge of free markets?
Canada is, at least, superficially different from our neighbors to the south in how our financial system works and operates. In the effort to deconstruct it, one should not operate under any pretense that Canada has free market banking.
Free markets have never driven the structure of banking in this country through the course of any living Canadian’s lifetime.
We have a banking oligarchy and it is codified in law. In fact, Schedule I of Section 14 of the Bank Act (S.C. 1991. c. 46) lays out quite plainly which institutions have been blessed by our supreme leaders to accept demand deposits for chequing and savings . They are as follows:
|Name of Bank||Head Office|
|Bank of Montreal||Québec|
|Bank of Nova Scotia (The)||Nova Scotia|
|Canadian Imperial Bank of Commerce||Ontario|
|Canadian Tire Bank||Ontario|
|Canadian Western Bank||Alberta|
|Citizens Bank of Canada||British Columbia|
|CS Alterna Bank||Ontario|
|Dundee Bank of Canada||Ontario|
|First Nations Bank of Canada||Saskatchewan|
|General Bank of Canada||Alberta|
|Laurentian Bank of Canada||Québec|
|Manulife Bank of Canada||Ontario|
|National Bank of Canada||Québec|
|Pacific & Western Bank of Canada||Ontario|
|President’s Choice Bank||Ontario|
|Royal Bank of Canada||Québec|
|Toronto-Dominion Bank (The)||Ontario|
You or I, with or without investors, cannot open a bank in Canada without an amendment to this act. No definition of free market that I’m aware of involves a legislative vote in the state plenary to obtain license to start a new business. Considering that Schedule I of the Bank Act has been unamended since 1991, I think it’s fair to say that the conditions for new entrants in the Canadian banking system are, well, not good.
They’re even worse if you happen to be a foreign bank. While Canada generally permits (limited) commercial banking activities of foreign banks in Canada, consumer banking is limited to the aforementioned Schedule I banks which are subject to strict ownership and directorship requirements guaranteeing that foreign interest stakes in any of those institutions is severely limited.
Canadians have often complained about having among the highest banking fees in the world. Well, this is the reason. Not that Canadian banks are particularly greedy. But that, well… competition, either foreign or domestic, is illegal.
Here’s the other clincher, you smashers of capitalism: the lions share of bank revenue is obtained through leveraged financing of government-created credit.
Leverage is the process of borrowing money to multiply the size of a deal. Put it laymen’s terms: if you receive an order for 10,000 widgets, but as a business you only have enough capital to carry the construction of say, 1,000 widgets — you may need a bridge-loan to finance the manufacturing of 9,000 widgets before the buyer pays you. When the buyer pays you, you make a profit and the banks makes some interest. Everybody’s happy. There’s nothing wrong with this. This is an important function of banking.
But in the modern world, a great deal of leverage is done with money which did not exist prior to the transaction. You see, since we left the gold standard and saw the emergence of central banking, credit has become something which governments — not private banks — have an effective monopoly on the creation of. The velocity of this credit creation is linked directly to the interest rate policy set by central banks just like the Bank of Canada.
When the government creates this money through its central bank, you pay for it. It creates inflation. Which, you experience as rising prices at the grocery store.
Keynesian economists consider this constant rising of prices and the flow of unlimited credit into the financial system a good thing. On one hand, they believe that inflation has the positive effect of discouraging saving and encouraging higher risk, job-creating investment. And more importantly, spending of money and consumer leveraging which they see as a zero-sum game.
It is this philosophy which is directly linked to the consumer credit crisis we see in the western world. And the real estate bubbles that have come crashing down around us. It is this philosophy that makes us pay higher prices, to fund the credit expansion which we in turn use to borrow our way to higher consumption. It is a perfect storm for middlemen to get very rich and for the financial services industry to grow out of proportion with the productivity of the overall economy.
It is unsurprising giving these factors that we see the wealth gap widening. The über-rich bankers in the financial services industry are completely isolated from the effects of inflation, and perversely, benefit from its causes greatly. They are able to loan out essentially unlimited funds, that are detached from any semblance of capital backing, make money on the interest, and pay back the loan at sub-inflationary cost. It is for this reason, that we see the counter-intuitive windfall profits in banks, even as the economy comes burning down around them; because the government is shoveling free money in the back door, socializing the risk, and leaving them with the difference. And it’s a mighty difference.
Bay Street may not be part of the government in name. But it certainly is in practice. Canada’s policy-making bank, the Bank of Canada, has deep control over the credit markets which these banks facilitate and use to drive our economy. The financial elite who run these banks are well-connected back to the highest-echelons of power in this country. There is no real separation between Bay Street and Parliament Hill.
For that separation to occur, there would need to be a free market of money and credit. Where in, I could open up my own bank and accept demand deposits, lend out money and even issue my own promissory notes. But such an environment would fundamentally undermine the profitability of our oligarchical financial sector. And the useful idiots of the paternalistic “consumer protection” movement would be right there beside the financial sector’s lobbyists to stop me.
There’s no free market on Bay Street. There never was. And the corporatist, social democratic and socialist interests (the overlap between these groups my vary), while at loggerheads with each other, are all aligned to ensure that no free market will ever be there.
Accuracy Note: there are other banks (also covered in schedules of the act) who have been blessed within narrower rules — like HSBC Canada. The scope of the financial services they can offer is more restricted than Schedule I banks.