The Lending Fly In The Economic Ointment

Adam Smith, Famous Scottish economist, “As Foreigners possess a share of our national funds, they render the public in a manner tributary to them, and may in time occasion the transport of our people and our industry.”

Smith’s quote about international and domestic creditors owning a portion (or all ) of a nation’s tax revenue relates to Canada’s debt and deficits but can equally apply to individual citizens’ debt via mortgages, student loans or consumer debts.

Lenders have access to a portion of your income and if you don’t pay they can take back your car, investments or house.

Smith’s most famous economic work, “The Wealth of Nations”, was first published in 1776 but his message regarding debt and the creditor class that control it are still very relevant today.

Today, Canadians are breaking debt records…

• $1.2 Trillion in consumer finance debt

• $1.7 Trillion in mortgage debt

• Savings rate less than 1% (down from about 20% in the early 80s)

• 40% of population living paycheque to paycheque

A Short History Lesson on How We Arrived at Today’s Debt Predicament

Smith and fellow Classical economic theorists knew back in 1776 what we’ve forgotten today about debt. They had studied their history from Babylonian times through the collapses of Greek then Roman empires to the Dark Ages. They understood where societal debt overheads (unpayable debts) originated and the collapses that followed.

The common denominator throughout history was a landed aristocracy of inherited wealth controlling land, banking and monopolies.  That common denominator today is a finance oligarchy with way too much say in our nation’s politics.

From Feudal Times to Gordon Gekko

Despite feudal overlords having lost a social advantage, they still possessed a massive economic advantage that resulted in growing societal debt, stunting the economy and confining much of the population to debt peonage.

History repeats itself unless rules are instituted that curb the power that flourishes disadvantage.

The Classical economists advocated the implementation of high taxes on inherited feudal financial interests who extracted transfer payments in the form of rent, predatory finance charges and monopoly costs far in excess of the cost of production.

By lowering incentives for these type of extractive (at the time called fictitious) capital industries, the Classicals sought to lift extractive charges off of the population, tap a stable source of tax revenue from inherited aristocrats while keeping personal income taxes and sales taxes low on the population.

Keeping more personal income could allow citizens to spend more on goods and services produced by businesses in the economy. Higher consumption by workers spending more of their productive capacity would fuel industrial expansion, technological innovation and endeavour to level out intense societal inequalities.

Many of these reforms were implemented throughout the world and, in Germany, the formerly predatory role of banking was modified to work in productive symbiosis with German industry.

Banking Reform

By the end of the 19th Century, German banks and industrial engineers coordinated capital investment to build up manufacturing and technological capacity. Industrial investment produced profits to pay back loans. Instead of requiring collateral upfront, banks took a stake in companies via equity positions (stocks). The health of banking was tied to the health of technologically innovative industry. This in turn provided employment and wages for workers to spend on goods in their economy.

In contract, speculative Anglo-Dutch-US bank lenders would not provide funds to get production underway; for example, the Anglo-Dutch-US banking system wasn’t willing to put money behind Watt’s steam engine or Ford’s automobile.  This “casino” finance was given a bad name right from the start as people lost fortunes in scandals surrounding the financing of the Suez and Panama Canals, America’s railroads and government created monopolies such as the East and West Indies companies, the Mississippi and South Sea companies.

Much like today, the banking system was unregulated, speculative and focused mainly on real estate lending, bond and stock trading/gambling.

What happened? How did productive financial reform and a regulated finance system working in concert with productive industry fall in favour of speculative casino banking?

A big fight started and Germany lost WW1.

Corrupt Anglo-Dutch-US speculative banking systems persisted in the aftermath instead of a regulated relationship between banking and industry.

Casino capitalism had won the day.

It only took a decade for these unregulated banking systems to implode.

Cue The Great Depression.

Governments finally reacted after the shit hit the fan in 1929. Franklin Delenore Roosevelt’s Glass-Stegall Act of 1933 isolated finance’s speculative practices from basic banking. No longer could speculators use average citizen’s deposits to speculate and raid.  In 1890, Theodore Roosevelt had broken up the monopolies with the Sherman Anti-Trust Act.

Together, these measures protected and stabilized the banking system and curbed monopoly behavior up until the end of the 1970s.

80s Gilded Age of the Raiders – History Repeats Itself

Then the 1980’s arrived, ushering in a new gilded age for the landlord, predatory finance and monopoly class. The elections of Margaret Thatcher in 1979 and Ronald Reagan in 1980 sounded the death knell for policies meant to free society from the costs of rent extractive, non-productive predatory finance and monopolies. Manufacturing in both countries was gutted by the end of the 80s and the “trickle-down” market policies of the Chicago School economists and Milton Friedman had, once again, put in place a “free” market for a privileged hereditary class living on unearned income in the form of land rent, monopoly rent and financial extraction.

Gordon Gekko’s “Greed is good” speech from the Oliver Stone movie Wall Street is indicative of this time. Short term profit policies were the rage, Wall Street was off the regulatory leash, corporations were gutted by bank financed raiders, wages stopped keeping up with productivity gains, massive corporate off-shoring began. Speculation and gambling with deposits was rampant.

Bill Clinton made things worse in 1999 when he repealed FDR’s 1933 Glass-Stegall Act.

What Do Banks Actually Do Today?

Banks rarely fund tangible capital investment or tech innovation.

They mostly fund real estate (80%), stocks and bond purchases. They love providing debt to finance asset price inflation then when the bottom falls out of the overpriced market (reference 2008 financial collapse), bought and paid for politicians bail them out, condition free, to the tune of $4 Trillion USD. 

Since 2008, after the big salaries and hefty bonuses were paid out, the dance started all over again.  Today real estate is re-inflating fast and the stock market is inflated to record levels.

Banks really like real estate because if you cannot pay, they will simply take back the property (and the lost interest payments, fees and extra charges if the loan was government insured). Collateral is king now that financial firms are in charge of the economy. Why risk lending if you have to produce something and wait for a profit to materialize?

Democratically elected governments with deep financial ties

One would be remiss to assume that either of the main blue (Conservative or Republican) or red (Liberal or Democrat) political parties in North America are independent of the finance, insurance or real estate oligarchies in any way.

National policies in today’s federal governments are put together by financial lobbyists serving the interests of the largest financial investment players.

The revolving door between government and financial services is real. A study by the European Bank for Reconstruction and Development gathered data on 400 central bank governors and finance ministers from 32 OECD countries between 1973-2005 finding that governors with past experience in finance are more inclined to deregulate the financial industry and ministers are more likely to be hired by financial entities following their tenure if they pursue pro-finance reforms during their time in office.

How does finance’s conflict of interest affect society?

As a result of incessant lobbying to government, our current unregulated banking systems do not promote new tangible capital investment, R&D or employment growth.

Financial firms promote a major loan market in rent extraction at the expense of economic growth. As extractive industry, financial firms are charged with fine after fine for civil frauds against counterparts and clients. They squeeze out maximum fees, interest and conduct financial and commodity speculation at the economy’s expense. The crash in 2008 was evidence. The transfer of real estate, stocks and bonds at ever-inflated asset values is a non-productive switcheroo between buyers and sellers. The financial industry is non-productive but very powerful. We’ve moved from democracies to oligarchies.

Canada’s Turn  – Mortgage Debt and Consumer Debt

Canada is at record levels of mortgage and consumer debt. High costs of living, 40 years of stagnated wages and a predatory financial industry selling products with compounding interest, extortion level late penalties and mortgage pre-payment penalties leaves a society unable to pay back its debts.

Add to that the recent announcement of Canadian job numbers (-71,000). This is the worst since the 2008 financial crisis.

But GDP is rising?! Don’t be fooled…

GDP is a false indication of a nation’s wealth. Approximately 40% of GDP total consists of non-productive, unearned income from extractive landlord/real estate, finance and monopoly sectors. A rise in GDP tends to mean a gain for the top One Percenters in society and a cost for those having to pay more to finance a home purchase (bigger mortgage) or a retirement plan (buying inflated stock/bonds).

In Canada, real estate is thought of as a main store of wealth and a Canadian status symbol. 70% of the population own vs. rent. It’s all about making affordability easier (easing lending requirements) in areas where prices are inflated too high and all about pumping up markets (ie. decreasing affordability) in regions that are depressed.

Income levels are disconnected from property values.

Wages have stagnated since the early 80’s so lax lending criteria and government mortgage insurance has allowed the 99% to finance widening inequality by incurring more debt to the 1%. This is not a natural or sustainable economic result.

How Can Canada and Other Countries Avoid Mortgage, Consumer and Government Debt Collapse?

1) Learn how government is owned by non-productive FIRE sector (Finance, Insurance, Real Estate) oligarchies.

Because today’s financial oligarchy is raiding what was expected a century ago to be the social functions of capital, to expand output and employment, those not in the billionaire clique are on the losing end.

The inflation of asset prices for real estate, the purchase of a retirement plan and interest charges impose carrying costs on buyers. This is what makes bubble economies like Canada high cost; too much money being sent to the FIRE sector (finance, insurance, real estate), the remainder to cover survival costs, little left for consumption or investment.

The post 1980’s financial system doesn’t look at the economy as a social system. It excludes as “externalities” the environment, debt dependency and economic polarization. It only asks how to make a short-term hit-and-run gain, regardless of whether this is done in a way that has a positive or negative overall social effect.

This explains why certain “problems” seem so persistent in society. When government (all parties) is actually incentivized to not curb poverty, inequality, environmental degradation, etc. and are campaign funded by the creditor class, problems remain perpetually unsolved.

2) Recognize through government policy that landlord, finance and monopoly income is “unearned” income that increases the cost of living and cost of production.

Don’t provide it with tax breaks. Tax unearned income hardest. It is an overhead cost to society.

3) Remember that the proper function of banks is to coordinate tangible capital investment with industry, to improve production levels, provide employment and lower the costs of doing business with strategic infrastructure investment.

Early America used industrial capitalism to build first-rate infrastructure, making their economy low cost at the time and a great place to do business.

4) See that polarization will widen until people believe that there is an alternative and decide to fight for it. 

This alternative is to take power in government back from extractive oligarchy lobbyists, impose serious restrictions back onto the FIRE sector industries and implement policies that increase job opportunities, wage levels and societal self-sufficiency.

5) Note that many times in our human history, debt overhead has crushed civilizations. 

Ours may be next if the FIRE sector parasite isn’t put in its place.

6) Understand that finance affects our lives far beyond our pocketbooks. It affects the quality of our environment, our democracy, our mental health and our family lives.

Society and governments will have two alternatives when asset price inflation and debt overhead crash the economy as it did most recently in 2008:

1) Let banks and bondholders LOSE by writing down bad debts (normal bankruptcy procedures when business provides an un-competitive or predatory service) then nationalize certain banks, re-linking them with industrial engineers to plan productivity and tech enhancing innovation.

This would free citizens from debt bondage, allow them to stay in homes while freeing up funds to spend in the real economy, keeping businesses and society functioning.

OR…

2) Bail out the banks at the expense of the real economy, putting people in the streets, handing billions again to the predatory creditor class and further concentrating wealth in the hands of the One Percenters.

Seems like a no-brainer to me.  Society would be wise and brave to pick the former rather than the latter.

If you are interested in a related article from Eudaimonia entitled “This Is How A Society Dies” by Umair Haque click HERE.

Want to learn more about how banks operate and indebt?  Click HERE

One of my hobbies is blogging about mortgages, debt and government policy.  During the day I’m a MORTGAGE BROKER!

Check out the Huber Mortgage Home Buyers Guide HERE

Sincerely,

Michael