Here’s the full version of the summary posted earlier – a much longer analytical section, and more detail on our suggested policy response.
CLC Response to the Economic Crisis
Global capitalism: on the edge of the abyss
Dramatic recent events have thrown into sharp relief some chronic and long-standing problems of our global and national economic system: an over-developed financial sector which has fuelled rampant speculation rather than productive, job-creating investments in the real economy; huge returns for senior executives and corporate insiders while the wages and the incomes of working families have stagnated; rising household debt instead of a fair sharing of productivity gains with workers; over-reliance on the export of raw resources; a deep crisis in our manufacturing and forest industries; and massive global financial imbalances driven by unbalanced and unfair trade.
The global economy is now almost certainly headed for a deep and prolonged recession, even if we manage to avoid a systemic financial meltdown. In 2008 to date, global stock markets have already fallen as far as in the Great Crash of 1929. Grossly inflated housing bubbles have collapsed in the U.S., the U.K., and other countries, with no end yet in sight. Major U.S. and European banks are going under, and even profitable companies, including in Canada, are unable to access credit on reasonable terms. Production is now rapidly slowing in Canada and around the world because of the credit crunch.
The U.S., Europe and Japan, accounting for 55% of the world economy, were already in or on the brink of recession before the latest and most intense phase of the financial crisis. Growth in China, Russia, Brazil and other developing countries are now slowing fast, blowing up the theory that the world could â€œdecoupleâ€ from what seemed to begin as a U.S. crisis.
High commodity prices have, as a result of falling global growth and the liquidation of speculative positions, also suddenly collapsed, removing any grounds for the equally false and complacent belief that Canada could be insulated from the U.S. downturn.
The headline-grabbing global financial crisis has clearly spread far beyond a flight from near worthless U.S. sub-prime mortgage securities. The credit crisis, banking crisis, and stock market collapse reflect a panic-driven, but nonetheless plausible, calculation that many financial assets are worth much less than had been supposed. No one can be certain about the staggering scale of the eventual financial losses which the IMF now puts at $1.4 trillion, or whether they will or will not precipitate, not just a recession, but a deep and protracted global slump as happened in the 1930s. The real economy is already slumping and will continue to founder.
The immediate roots of the global crisis lie in deregulated global finance. Banks and, especially, the unregulated shadow banking system of investment banks, hedge funds and private equity funds which should be serving the needs of the real economy developed fiendishly complex, sometimes outright fraudulent, products, and then generated huge purchases of these â€œassetsâ€ by other parts of the financial system through massive extensions of credit.
Insiders and senior financial sector traders and executives made huge amounts of money as the real estate and other asset bubbles expanded, but no one in the interconnected world of global finance knows who is holding the most toxic assets, and who is on the hook for losses if and when borrowers default. By one estimate, the total value of credit derivatives and default swaps is more than $50 trillion. The financial sector spread the huge risks they had created in such a way that few, if any, islands of security remain intact.
An out of control financial sector also lies behind the destructive wave of private equity buyouts which has saddled productive companies with huge and perhaps unmanageable debts, and wild speculation-driven gyrations in energy, food and other commodity markets. These have had particularly devastating consequences for poor developing countries.
As Nouriel Roubini, the most gloomy but also the most prescient analyst, summarizes the situation:
â€œThe crisis was caused by the largest leveraged asset bubble and credit bubble in the history of humanity…. a housing bubble, a mortgage bubble, an equity bubble, a bond bubble, a credit bubble, a commodity bubble, a private equity bubble, a hedge funds bubble are all now bursting at once in the biggest real sector and financial sector deleveraging since the Great Depression.â€
The growth of the financial sector relative to the real economyâ€”to the point where it has recently accounted for one-third of U.S. corporate profits was built on a now rapidly collapsing house of cards. The collapse has precipitated to what was unthinkable until only a few days agoâ€”the near nationalization of the once commanding heights of Wall Street and the City of London by the strongest ideological advocates of deregulated global capitalism.
At a deeper level, the crisis reflects a fundamental imbalance between global production capacity and global demand, and chronic under-investment in the real economy. While the financial system can rightly be blamed for recently lending money to almost anybody to buy almost anything, it was the extension of cheap and easy credit, particularly in the U.S., which kept global factories humming. It was the U.S. housing bubble which allowed U.S. households to continue to buy imported goods despite the stagnant wages of the bottom 90%, and it was the recycling of huge Asian trade surpluses into loans to U.S. households and U.S. banks which allowed the equally huge U.S. current account deficit to continue for so long.
We will not escape the crisis if we do not create a new driving source of national and global demand through higher wages and higher real investment. Investing in a new â€œgreen economyâ€ to avert catastrophic climate change has the potential to create good new jobs in a revitalized manufacturing sector, and good new jobs can also be created by investing in public infrastructure and public services. We must ensure investment goes into productive enterprises and public infrastructure and services rather than into unproductive financial speculation.
Those who created this crisis should pay for resolving it. We need real controls on pay and stock options of financial insiders, and higher taxes on wealth and high income earners. We also need a major shift of bargaining power to workers and their unions.
Even heads of government of the largest advanced industrial countries are now saying that the age of deregulated â€œneo-liberalâ€ global capitalism is over. Financial collapse has led not just to the discrediting of an ideology, but also to a major reassertion of the role of governments in maintaining systemic financial stability. What remains to be seen as we await emergency international meetings is how far the re-regulation of finance will go, and how much more profound will be the needed re-assertion of the role of governments.
A co-ordinated international response
Governments have finally groped toward the beginning of a co-ordinated solution to the near collapse of credit marketsâ€”government injection of equity into troubled banks so that they can extend new credit (as opposed to just bailing them out by buying up bad loans, as in the original Bush/Paulson plan); government guarantees of inter-bank lending, and funds invested in money markets; government guarantees of deposits to prevent a run on the banks; and co-ordinated cuts to interest rates.
While these actions can be characterized as â€œbail outsâ€, they are essential to averting a systemic collapse. There will still be huge losses of wealth incurred by owners of all kinds of financial assets and strict limits should be placed on the compensation of executives in partially nationalized institutions.
Future financial crises will be avoided only by strengthening government regulation of the banks and other financial institutions, and by extending the scope of government regulation to include hedge funds and private equity groups. Leverage (the use of borrowed funds) must be both limited and closely monitored by regulators to reduce excessive risk-taking and to forestall future asset bubbles. Calls for self-regulation must be rejected. There must be regulation of credit rating agencies to prevent conflicts of interest.
Hopefully, the key elements of a new global financial architecture will be agreed to by all governments. U.K. Prime Minister Gordon Brown, French President Sarkozy and the head of the International Monetary Fund have proposed concerted development of a new international financial architecture. Canada should actively participate in these discussions as an advocate of re-regulation, along the lines supported by the International Trade Union Confederation. An international framework is needed since re-regulation at the national level would soon be undermined by capital moving to the least onerous locations. Governments should be encouraged to restrict or ban capital flight to locations which do not agree to abide by a new set of rules.
Governments must follow up with further concerted cuts to interest rates. Euro zone interest rates should be cut further, as should Canadian interest rates.
A small transactions tax should be levied on all securities trading, including the trading of commodity futures, to discourage short-term speculation in financial assets and to raise government revenues.
We also need a co-ordinated fiscal stimulus. Those countries, including Canada, which have no or very low deficits and paid down government debt should do the most given that there are real limits on the ability of the U.S. and the U.K. in particular to both re-capitalize their banks and stimulate domestic demand.
China and other countries running large trade surpluses must expand demand at home by increasing public investment and by allowing free trade unions to grow and function, while helping shore up the global financial system so that the U.S. can grow its way out of a recession through higher exports.
In the U.S. and other countries facing sharp falls in house prices, the banks must refinance mortgages on favourable terms to borrowers so as to avoid more foreclosures. Governments can help banks do this by taking on some portion of both the mortgage and home equity.
Financial Re-Regulation and Action at Home
Canada has participated in the international response by cutting interest rates and by allowing banks to effectively convert some mortgages into low risk federal government bonds. Interest rates must be cut further to help ease the credit crisis and to lower the cost of new borrowing.
More government assistance to the Canadian banks should be given only in return for an equity position, with a view to increasing the power of the federal government to regulate and supervise the banks on an ongoing basis through an internal, ownership-based window on the industry.
While it is claimed that the large Canadian banks are strong and well capitalized, this should be confirmed through a thorough audit. CDIC deposit guarantees should be increased to the U.S. level of $250,000 to protect depositors and to avoid any shift of deposits to the U.S.
As needed, the federal government must be prepared to guarantee operating lines of credit to viable companies which cannot obtain credit from the banks. Consideration should be given to creating a public investment fund which would take equity positions in companies seeking funds for long term investments.
Moving forward, the Bank of Canada should be given the power to impose asset-backed reserve requirements on the banks and near bank lending institutions so as to slow the growth of asset bubbles in areas such as housing, commercial real estate, and equities without raising overall interest rates. If the Bank saw a bubble emerging in a specific set of assets, they could require banks, hedge funds, and other institutions to deposit reserves against the risk of defaults, slowing the pace of lending.
It is a myth that Canada has not experienced a housing bubble. While not of the same scale as in the U.S. and the U.K., many recent buyers are mortgaged to the hilt, and house prices are now falling (they are already down 5% from the recent peak). Lending requirements have already been modestly tightened. As we enter recession and unemployment rises, more homeowners will face negative equity situations and more will have trouble making payments. CMHC must be given access to government guaranteed funds to be drawn upon as needed to refinance distressed mortgages at lower rates in return for a partial equity stake so as to forestall any wave of foreclosures.
In addition to reviews by the Competition Bureau, all major corporate mergers and acquisitions, including leveraged buyouts and private equity purchases, should require government approval, preceded by an open public interest review of the impacts on real investment and employment.
Fair Solutions to the Crisis
To help limit financial speculation and counter the one-sided distribution of income to the very affluent, executive compensation in the form of stock options must be restricted to reasonable amounts and limited to long-term gains in share values. A maximum limit should be placed on senior executive compensation which can be deducted for corporate tax purposes. To ensure that those who created this crisis help pay for cleaning it up, capital gains should be fully included in taxable income, and there should be a surtax on very high incomes to help pay for the costs of bail-outs.
The Canadian economy was already in deep trouble in the first half of 2008. Growth was zero and recession loomed because of the deepening manufacturing and forestry crisis spawned by the overvalued Canadian dollar and the U.S. slowdown, as well as by an end to our own housing boom. Since then, the U.S. economy has slowed sharply, credit markets have been in turmoil, cutting off new business and household borrowing, housing and stock prices have fallen sharply, and commodity prices have suddenly slumped. While a lower Canadian dollar will help the economy as a whole, the energy and mineral boom will go bust long before we see any significant real recovery in manufacturing.
The question today is not whether we will see large job losses and rising unemployment in Canada, but rather how deep and prolonged the crisis will be.
It should be added that Canada has not been very different from the U.S. when it comes to the real â€œfundamentalsâ€ facing working people. As in the U.S., wages for all but the top 10% or so have been stagnant, and the growth of consumer spending and of the housing market was fuelled by unsustainable increases in household debt.
The federal and provincial governments must maintain current public programs, services and employment. It would be folly to take the Herbert Hoover route of slashing spending as we fall into a Depression. Even Canadian bank economists now recognize that we should run cyclical deficits, and even the International Monetary Fund has advised countries with strong fiscal positions to provide fiscal stimulus. Increases to public investment are far more potent job creators than tax cuts, since most forms of public investment are labour-intensive, and draw heavily on Canadian as opposed to imported inputs. Public investments have lagged badly behind our needs in recent years, even though they help raise productivity in the real private economy.
Governments should provide an immediate emergency fiscal stimulus to the economy of at least $10 billion over each of the next two years. Such a program mainly directed to energy efficiency and renewable energy projects including building retrofits and public transit would create at least 200,000 jobs.
Immediate priority should be given to public infrastructure and affordable housing projects which would offset the growing construction slowdown and could be rapidly implemented. Control of public infrastructure must remain within the public sector. Funds which have already been allocated to basic municipal infrastructure and to energy efficiency, renewable energy and green investments should be fast-tracked and increased, and planning for major public transit projects and passenger rail and similar projects should begin immediately. Funding must be provided to help municipalities cope with falling revenues.
We need sectoral economic strategies to rebuild our industries, particularly the hard-hit manufacturing and forestry sectors. Further corporate tax cuts should be cancelled and replaced by direct government support for new private sector investment in machinery and equipment, research and development and training.
Taking advantage of the opportunities likely to be opened up by President Obama, NAFTA and other unbalanced one sided trade deals must be renegotiated to promote labour rights and higher environmental standards and to remove investor rights provisions. Measures must be taken to reverse our large and growing manufacturing trade deficit with countries running large trade surpluses.
The federal and provincial governments should launch significant improvements to public services which people need, and which will also save and create new jobs. We need major investments in child care and early learning, home care and long-term care and high quality public education. Post-secondary education and training programs must be expanded to help upgrade the skills of laid off workers.
Protecting workers and working families in a crisis
a. Employment Insurance (EI)
EI is a critically important program for Canadian workers, especially in tough times like we face today. Laid off workers obviously need adequate benefits to support themselves and their families while they search for a new job. In the last two recessions, those of the early 1980s and early 1990s, Canadaâ€™s national unemployment rate rose sharply, from about 7.5% to over 11%.
Compared to when we hit previous recessions, our EI program will leave many Canadians out in the cold, unable to qualify for benefits. And it stands on much shakier financial ground.
Not only do only a minority of unemployed workers even qualify for EI today, the average benefit is just $335 per week, payable for an average of just 32 weeks.
Even in a period of fairly low unemployment, more than one in four claimants exhaust their benefits. Access to and the level of benefits must be immediately increased.
Even todayâ€™s shrunken EI program will cost an extra $1.4 billion per year for every one per cent rise in the national unemployment rate. This would, under the current financing rules, force a damaging increase in EI premiums. With an accumulated surplus of more than $50 billion in the EI Account, the federal government must maintain and increase benefits, and also expand spending from the EI Fund to pay for labour adjustment and training programs.
The federal government should promote higher minimum wages and allocate significant additional funds to the Canada Social Transfer to support provinces which increase and improve social assistance benefits and supports for the working poor.
The financial crisis, combined with a major recession, threatens to produce a severe pensions crisis as companies in major difficulties face large pension fund deficits. As in other countries, notably the U.S. which guarantees pension benefits of up to about $50,000, Canadian pensions should be backstopped by a national pension guarantee fund. Revenues from a financial transaction tax should go to this fund.
This crisis has shown that Defined Benefit plans provide far more income security in retirement to working people than RRSPs and individual savings. However, pension funds must be more closely regulated to limit investments in hedge funds, private equity and other risky assets. Action must be taken to recover losses to pension plans from purchases of assets such as ABCP which were misrepresented.
Public pensions are the fundamental basis of income security in retirement. Old Age Security benefits must be raised immediately.
Building the labour movement
As noted, the roots of this crisis lie not just in the excesses of finance, but also in the fundamental imbalance of power between workers and employers here in Canada and around the world which has been fostered through restrictive laws. The latter insisted, not just on less and less regulation, but also on the need to repress wages and living standards in order to compete in a dog-eat-dog global market place. High and rising household debts in the advanced industrial countries are the flip side of stagnant wages, and destabilizing global financial imbalances reflect repressed wages and living standards in the developing countries which have run large trade and current account surpluses.
We must ensure that growth is driven by the flow through of gains from greater real investment and higher productivity into higher working class living standards. When people can earn decent wages, all parts of the economy do well. As was shown in the 1930s, this will be achieved not just through more government intervention in the economy, but also by building strong unions and increasing the bargaining power of labour. Governments must facilitate new union organizing through card check certification, first contract arbitration and anti scab legislation.
The labour movement must be consulted and our voice must be listened to by governments as we deal with this crisis.
- The Return of the Gilded Age: Consequences, Causes and Solutions (April 27th, 2015)
- THE EURO, THE DRACHMA AND GREECE: limited options in an impossible situation (March 8th, 2015)
- Grocery Wars: Lessons from Canada’s Changing Retail Landscape (March 2nd, 2015)
- Seccareccia on Greece, Austerity and the Eurozone (February 5th, 2015)
- Responsibility for Housing (February 4th, 2015)