By a CRC Investigative Team
The two biggest defenses of the “conservative Canadian financial culture” and “near-invulnerability” of Canadian banks are made up of the following oft repeated mantras:
1) The $67 CMHC bailouts were actually a good investment because those securitized housing assets actually turned a profit since the housing values continued to rise. This statement, of course betrays the fact that the housing bubbles continued growth had everything to do with the continued rise in mortgage prices long after the emergency bailout, and subsequent liquidity injections.
2) That our banks have capital reserves in line with the 20:1 ratio demanded by Basel II, unlike the 40:1 ratios of our irresponsible American or European counterparts and thus will never need to have to use the bail-in regime or apply another bail-out ever again.
While this second sophistry has a touch of truth, it treats the issue of Canada’s financial “health” in an idealized vacuum outside of the breakdown of the entire post-Bretton Woods monetary system now deeply underway. This sort of self-adulation inspires one to think of a young man bragging that while his irresponsible brother eats at McDonald’s 40 times per week, he only eats there 20 times per week. Little does such a fool realize that he is still degenerating into rampant obesity… merely at a different rate.
The fact is, that the “financial crisis of 2008-2010” is not something which “happened” as is now an “event” in the past, as the apologists for the current system are wont to suppose. In fact, there never was a sub prime crisis, or national debt crisis. What occurred beginning in 2008 was merely the first small waves hitting the shoreline of the sleepy village as a precursor to full tsunami whose shock front initiated by the collapse of the global financial derivatives bubble is building up steam fast. It is in fact, the underlying axioms of the system which must be addressed for that shockwave to be kept from crashing into society. “Value” is not to be found in “the markets”, but in something far more important to human survival.
As the two graphs above and to the left address, the Canadian banks’ equity and assets are only a fraction of the nominal values in derivative exposure held by our big six banks. Which now account for over $20 trillion dollars in derivatives exposure while their assets amount to a mere $3.4 trillion and their equity only $151 billion [Graph 1]. When “experts” speak of the 20:1 ratio, it is the last two of the three forms of revenue just mentioned. Derivatives are not even considered. Looking at the individual layout of the “big 6” banks’ exposure to the derivative cancer, one is struck by the astronomical degree of exposure of the Royal Bank of Canada whose balance now exceeds the $7 trillion it was only beginning to touch in 2010 [Graph 2]. The third year of record profits posted by the Canadian banks in 2013 is directly tied to this fraud.
The disappearance of $50 billion worth of securitized mortgages, (or other forms of personal or national debts) is really only a fraction of the leverage built up on top of those sums via the vast array of “over the counter” (largely unregulated) derivative contracts and other forms of insurance build on top of that debt. When someone tells you that the Canadian bail outs were a good investment, you know that they are not taking into consideration the derivative leveraging built atop that $67 billion.
As an example of this problem, the Levy Institute produced a December 2011 policy study demonstrating that in fact the total sum of bailouts by the Federal Reserve bank to banks both within the United States, as well as Internationally actually exceeded $29 trillion! (1) The real issue of course, is that while these sums are vast in scale, they do not address the primary driver for the current breakdown crisis.
As the Federation of Canadian Municipalities made clear in their November 2007 report “Danger Ahead: The Coming Collapse of Canada’s Municipal Infrastructure”, nearly 80% of Canada’s municipal infrastructure is beyond death. Meaning that 28% of Canada’s infrastructure (bridges, water management, transportation, electricity grids, etc) are 80-100 years, 31% is 40-80 years and 41% is less than 40 years. Indeed, ever since the dismantling of the fixed exchange rate Bretton Woods System in 1971, the “values of economic processes” were no longer associated with production of real goods driven by long term investments into basic infrastructure and science. This “post industrial model” would open the door for massive growths of fictitious capital on the one side, by ceasing to invest in capital budgets for the maintenance and improvement of infrastructure, while the destruction of manufacturing would be the consequence of the Darwinist fixation on outsourcing to poor underdeveloped regions of the world in order to maximize shareholder profits in the ephemeral present.
American economist Lyndon LaRouche was alone to point out at this time, that were values of money not retied immediately to the physical economic system instead of speculative markets, then the new ideological dynamic of monetarism would create a physical economic boundary condition which would by its nature breakdown by the end of the century. By 1996, LaRouche demonstrated this physical (not monetary) systemic breakdown crisis with his famous triple curve graph, that has been updated twice since then [see graph 3].
We have now reached that breakdown. The system can no longer be saved by any monetary means including budget cutting, bailing out, bailing in, quantitative easing, or the like. As LaRouche has said, nothing short of the immediate cancellation of vast sums of fictitious hyperinflationary assets, including ALL of the cancerous derivative contracts, would begin to cure the plague infesting mankind. The quickest way for such a cancellation to occur, is through the restoration of Franklin Delano Roosevelt’s original Glass-Steagall Law, returning immediately to a sound system of national banking procedures, under the framework of a New Bretton Woods fixed exchange rate credit (aka: not monetarist) system.
Under this new system among sovereign nations, the vast investment into large scale, capital intensive infrastructure projects such as the North American Water and Power Alliance could occur post haste. The intention of this new system would be to heal the self-induced wounds of the past 40 years, and begin an endeavour of unbounded scientific and technological progress for all mankind.