Bay Street in Toronto (Source: Wikipedia)
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 |
| Bank West | Alberta |
| Bridgewater Bank | Alberta |
| Canadian Imperial Bank of Commerce | Ontario |
| Canadian Tire Bank | Ontario |
| Canadian Western Bank | Alberta |
| Citizens Bank of Canada | British Columbia |
| CS Alterna Bank | Ontario |
| DirectCash Bank | Alberta |
| Dundee Bank of Canada | Ontario |
| First Nations Bank of Canada | Saskatchewan |
| General Bank of Canada | Alberta |
| HomEquity Bank | Ontario |
| Jameson Bank | Ontario |
| 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.
Nice to see people gathering in peace to stop corrupt 5 banks “Banksters”. STOP BIG GOV’T w/links 2 BIG CORRUPT CORPORATIONS!
PEOPLE CONTROL: BANKS, CURRENCY and GOVERNMENT.
http://www.occupyvancouver.com/index.php?page=4
Thanks for a very good read Mike!
Respectfully, I believe you’re missing the point of the protests. They do not deal with specific financial policy at this stage (the policy issues are too broad in scope)… the goal is to send the “ruling class” the message that they’ve pushed it to the limit, and we (the people) are prepared to push back if the pillaging continues.
Fortunately, I’m close enough to attend, and plan to stand with those that have simply had enough… and it’s about time!
“I believe you’re missing the point of the protests.”
I don’t think I am. I merely suggest people should be aware of what exactly they’re protesting.
Oh Mike. “Awareness” is hardly the forte of ignorant scum like these people. They aren’t going to join your cause. Knowledge doesn’t matter to them.
How has Schedule 1 not been amended since 1991 when your list clearly shows Canadian Tire Bank, which did not exist until after 1998. President’s Choice bank which is Loblaws/Superstore also did not exist until after 2004.
Something doesn’t add up. Either, the act was amended, or “You or I, with or without investors” can open a bank with an amendment to this act.
Recently Shoppers Drug Mart and Walmart has started issuing credit cards. In order to do so, they have to either get bank status, or partner with someone that does. I’m pretty sure Shoppers received bank status.
oops, meant to see that Either, the act was amended, or “You or I, with or without investors” can open a bank without an amendment to this act.
This is a funny time to be beating this drum in light of all the stories the very worried public is hearing about how our stodgy old protected banking system is in much more solid shape than those relying on the cowboy bankers to the south. Yes it’s a privileged oligarchy of fat cats, yes the fees are usurious, yes the service is crappy and yes we need more banks, but to simply call for a free market in banking neglects to address the fact that those who hold and invest our money have a trust/fiduciary duty to us and have a knowledge about what is wise and what is not that is inaccessible to most people. It’s like the legal and medical professions. It’s one thing to call for easing the too-tight restrictions on entry and qualification, quite another to go whole hog and say the free market will somehow weed out shysters and quacks.
Besides, why worry? We have it on the best authority of one of our major caring banks that we’re all richer than we think.
Peter,
I’m not sure you understand the argument or what most of us mean by a “free market”. And this is precisely the time to talk about it Canada since we are inflating at least one bubble in Canada which will eventually burst and cause untold damage to the economy. The next recession will be extremely nasty and it will be your coveted system that will have caused it. So now’s the time to raise the alarm bells …
And btw, what makes you think the regs benefits or even protects the little guy?
One last thing Peter, it is precisely because of the fact that bankers have superior knowledge of the financial system than regular people that giving them a cartel with an entity willing to provide them with unlimited funds is like asking the fox to guard the henhouse.
And as I’ve asked you before, our regulated market does not weed out the shysters, it simply gives them the power to gouge us.
In a free market, nothing is stopping a Larger entity (ie. Walmart) with deep pockets to open up shop next to a small guy (ie. Ma & Pa); sell at or below cost until little guy goes bankrupt and then gouge little guy’s customers.
The problem with our economy isn’t lack of competition. It’s everyone using the very same marketing strategy of competitor pricing. Telus, Rogers, Bell behave the same way. Same goes for gasoline at the pumps. A legal form of collusion.
Not So Sure – If you look at the last 100 years as an example, the more involved government gets, the fewer mom-and-pop stores and the more big-box stores and “collusion” there seems to be. Do you think there just might be a connection.
Furthermore, there are two ways of weeding out competition.
One is to ask the government to regulate it out of existence. You can then permanently raise your prices without ever worrying about competition and really gouge customers.
Or you can compete by lowering prices and forcing your competition out of business. Obviously then you’d have a window to raise prices again, but capital is attracted to high returns and it would not be long before you’d have to compete again … as I explained in my earlier comment.
“In a free market, nothing is stopping a Larger entity (ie. Walmart) with deep pockets to open up shop next to a small guy (ie. Ma & Pa); sell at or below cost until little guy goes bankrupt and then gouge little guy’s customers.”
Yup. And in a free market, once the big guy raises prices, there is nothing to stop new competitors from entering the space and lowering prices again. And the historical record bears this out. Is your argument that regulations actually produce more competition or are you just arguing for argument’s sake?
And what does your reply have to do with my contention that a free market would result in less lending, less leverage, fewer if not no bubbles, and no financial catastrophes?
You know, I was having an argument with some left-wing hipster guy in a Starbucks of all places, and his theory of inflation was that it was a natural cause of an increase of greed in a capitalist system. Why else would prices go up, he wondered allowed.
When you’re arguing with a lot of economically illiterate people on the left, this is the sort of mentality you’re up against.
They’re convinced that everything bad they see in our economic system is a failing of capitalism, and the only reason we’re not all serfs of a conglomerate mega corporation like in movies like RoboCop, is that the government is holding them back.
I was using commerce as an example. Now replace Big Box Walmart with USA or China, and replace small guy with Canada. Bad analogy.
I’m trying to say that without regulation, over leveraged economies will out compete our economy or force us to over leverage ourselves. Jobs are lost when we aren’t as competitive, the competitor than leverages again due to the new jobs and the cycle repeats. It’ll be bubble territory if we do the opposite and over leverage ourselves to compete.
So in other words you agree with us? Leverage is the cause of financial crises? But you don’t want those measures to be enacted because you don’t want another country to “outcompete” us unsustainably in the short term?
In an unlevered economy, there is no reason there’d be less jobs; there’d just be slower but sustainable growth.
Correct, I’m in favor of an unlevered economy.
Something I can personally relate to:
I chose not to over leverage myself and buy real estate in this market. Now I’m paying rent to a land lord that could care less if his unit sits empty because capital gains has been outpacing interest rates for the past 3-5 years.
My choices for finance are:
Invest in the market and get creamed by corrections.
Invest in bonds and get killed by inflation and taxes.
Sit on cash and get killed by inflation.
In the end, I am also a loser for not over leveraging.