Dissection Friday: Bank Bailout Propaganda

Let's dissect a little piece from the Toronto Sun.  The heading says it's an Opinion piece, therefore I may be at fault for wasting time to identify where truth doesn't get in the way of a good story.  But let's begin...

From the article...

It sounds like a wonderful conspiracy theory: Banks get secret bailout worth $114 billion during the 2008 recession!
Bailout discovered by the Canadian Centre for Policy Alternatives.
In fact, this is all hooey. There was no bailout of our banks.

That is essentially correct.  Assuming we define "bailout" as a capital injection (the Government pays way too much for a large share of a company as it happened in other countries including Ireland), no such thing happened in Canada, and for that I am very glad, because we overpaid to rescue GM and Chrysler and did not get all the money back.

The government did, in 2008, set aside $200 billion to help all Canadian businesses and households hit by the global credit crunch and banks were the tool the government used to help us all out.

I do not have the specific numbers, and surely I don't have all the sources handy, but aside from $125 billion allocated for the IMPP (for which under 70 billion got used), the Bank of Canada (which technically doesn't count as "the government") has intervened massively with about $40 billion at one point in early 2009.

Taxpayer money was never at risk of being lost

That is not true.  CMHC, under the IMPP, bought up insured mortgages.  Who insures the mortgages?  CMHC, meaning ultimately the government and therefore the taxpayer.  Therefore, had there been significant defaults (avoided at the time due to a renewal of the property bubble with the sudden drop in interest rates), the taxpayer could have been on the hook.

and, in fact, taxpayers are making a tidy profit with the credit crunch assistance program.

That is true.  But the interest rate on any loan depends on underlying costs: cost (in this case, of the government) to borrow in the bond market, and the risk associated with default.  If we are making a profit, it's only because the risk was well managed.

And secret? Well, it was announced in the glare of the 2008 federal election campaign and Parliament has since voted on these deals in at least two federal budgets — all of which was widely reported in our largest-circulation newspapers.

[... useless rant agains the political left omitted to save some brain cells ...] 

As Laval University economist Stephen Gordon noted on Twitter, the CCPA “took a low-grade Internet conspiracy, worked it up to a 25-page ‘study’ and managed to get the media to report it as news.”

I agree.  But who understands money and economics?  Very few people.  It seems to me that governments and journalists will gladly swallow whatever economists tell them, because it can be very difficult to understand it all.

I took the time to learn as much as I could about macroeconomics, and I found it a challenging task.  In comparison, I found that learning electrical engineering physics, signal processing math, the inner workings of computer processors, operating system basics, European history from the 5th century to the 18th century, the history of the Industrial revolution, and the Breton language a lot simpler in comparison.

And at my job, I'm the youngest member of my team of about 10 but I'm the most senior.  I routinely have to handle very complex issues due to a product that's nearly as old as I am, yet it's still easier to figure out than the modern financial system.

I pointed this out to our dear Stephen Gordon on Twitter:

@stephenfgordon Hardly masterful, just condescending. Not surprised, cdns just don't understand $ system. Economists and govts like that.
— Jonathan Meijer (@jnmeijer) May 2, 2012

His reply was predictable:

@jnmeijer Well, you got us dead to rights. Economists *are* conspiring to confuse people, but you're just too smart for us.
— Stephen Gordon (@stephenfgordon) May 2, 2012

But what people don't know is just how much of a good memory I have for this kind of thing.  So I replied with the following and never heard anything back:

@stephenfgordon ;) Wasn't it Henry Ford who said he believed there would very soon be a revolution if ppl understood banking and money?
— Jonathan Meijer (@jnmeijer) May 2, 2012

The rest of the original article praises Canadian banks and claims that they would have survived anything but businesses which have significant payroll would have all a terrible death in large numbers.

While that may be more or less accurate, that is only because of the current legislated way of doing things.

The Bank of Canada can do a few things to encourage people and businesses to spend savings and  borrow more, such as adjusting interest rates, but these measures are indirect.  In the US, the Federal Reserve went beyond flooring borrowing rates for banks by engaging in multiple rounds of quantitative  easing (QE), but all these measures don't work because there's simply too much debt and deleveraging needs to happen before people with money would want to invest in production again.

In both cases, the central bank cannot have a direct impact on the money supply in the economy.  The commercial banks manage their risk, and in a suddenly deleveraging environment such as the fall of 2008, the reasonable approach for anyone to take is to pull back from lending because the risk just shot through the roof.

As pointed out very clearly by Graham F. Towers, first governor of the Bank of Canada, most of the money (even back in 1939) was actually created by of the commercial banks.  These days, the percentage is about 95%, if I read the numbers clearly.

The fact that commercial banks control such a large segment of the money supply is, as Mr. Towers explained, the responsibility of Parliament.  The Bank Act allows banks to manage most of Canada's money supply as they see fit, and basic macroeconomics tell us that a contraction in the money supply tends to cause a recession.

Banks will do so to the extent required for their survival, even if that means, as David Akin says in the linked Sun article, that "What might not have survived, on the other hand, is hundreds or even thousands of Canadian businesses which were literally running out of money they needed to carry on."

It sounds to me like what we need is a state bank, such as the Bank of North Dakota or Alberta Treasury Branches.  One that takes deposits and charges no silly fees for using our own money.  One that would stick mostly to holding Canada government bonds on the asset side of the balance sheet to reduce the federal borrowing costs and return the surplus either to customers as interest or to the government as dividend.

Perhaps it is time to reintroduce the previous version of section 457 of the Bank Act, and to set a decent minimum reserve requirement, in order to allow the federal government more control over the money supply, and to use its new state bank to make loans available to companies who need them even during recessions.

Perhaps that’s something for the Occupy crowd to consider this week — how small businesses depend on a healthy, functioning banking system.

Perhaps this is something for all Canadians to consider this week: that the banking system doesn't have to control Canada and its governments, and that we as a people can take back control.