In his latest rabble.ca column Duncan Cameron takes on a piece of the federal budget that got little play in the media:
Why did the Liberals support the Conservative budget when the analysis is clear: the Finance Minister ignored the vulnerable, punished women, did not provide a serious stimulus to a flagging economy and tied up infrastructure spending in so much red tape that no shovels will be sighted this year?
The reason the Liberals did not oppose it, and would not have opposed it — regardless of the prospects of taking power in coalition with the NDP — is that Budget 2009 contains a huge spending programme directed to Bay St., and Liberals do not want to be the party that opposes Bay St.
Though you may not have read about it, the federal government is borrowing up to $200 billion to provide cash to mortgage lenders, cash to crown corporations that lend to business, cash to life insurers, and cash to shore up the reserves of our chartered banks.
Called the Extraordinary Financing Framework, or EFF, you have to go back to the Canadian postwar loan to Britain to find a financial operation anything like (though a lot bigger than) the 2009 Bay St. bailout. In 1945-6 we were lending to an overseas customer, so that it could buy our products. This time the government is providing cash to the financial sector, so its shareholders can stay afloat.
In the U.S., Joe Stiglitz (Nobel Memorial Prize in economics) calls this lending — cash for trash — because a government buys mortgage debt no one else wants to buy. Of the EFF money, mortgage purchases amount to $125 billion — a lot of cash. Another, inelegant, way to think of it is as the government covering the asses of the bankers who made bad loans, and the shareholders who stand to lose their investments.
From Davos on the weekend, where he was attending the World Economic Forum, the networking opportunity for the world financial elite, where respectability is now in short supply, Finance Minister Flaherty re-affirmed that he would do whatever was needed to protect the Canadian banking system. The $200 billion the government is borrowing to back up his words is almost what taxes will bring the government this coming fiscal year.
Central Bank Governor Mark Carney, speaking in Davos as well, complained that despite a G7 pledge on October 10, 2008 — that no large financial institution would be allowed to fail — rather than lend to each other, the major banks were accumulating cash for reserves.
What is going on is the clearest, most recent, example of common capitalist practice: when things go wrong, citizens pay the costs; when they go right, owners pocket the profits. This (socializing of risk, and privatization of gain) is also known as socialism for the rich.
Capitalism is for the graduate student who cannot get a scholarship without entering “business-related studies” (Budget 2009, pp. 106-7) or the over 60 per cent of the unemployed who pay for unemployment insurance, but do not get it when they are thrown out of work.
Under EFF, the Canadian public is on the hook for anything bank management have done wrong, or will do wrong. Who gets protected? The owners and executives of the banks get protected. They can loot their institutions, paying themselves millions in salaries and bonuses, and when things go wrong, as they now have, turn to the public for the bailout, and get it, thanks to the Conservatives, and their Liberal allies.
Finance Minister Flaherty is borrowing all this money so that he does not have to do the sensible thing, have the government take over ownership of the Canadian banking system, in order to protect depositors, not shareholders, and ensure that loans flow to deserving borrowers, not into the pockets of overpaid executives.
A much cheaper, much smarter alternative to EFF would have the Department of Finance see to that the banking system is run as a public utility, providing reliable services at cost. Instead of representing shareholders, bank boards would represent the communities they serve, and include employees, depositors and borrowers.
Bankers want to build up their capital because they know loan defaults are coming. The government borrowing under EFF gives banks the money they need to make good on losses from bad loans.
Instead of bailing out Bay St. the government could take over ownership of the banks at less cost, and use the sizable amount left of the $200 billion to stimulate the economy, so that people could make a living, and businesses not go belly up in the first place.
At the end of the day, both the banks and the economy would be in better shape using the public utility model of banking.
The message of Budget 2009 is that the Liberal party is not about to turn its back on the Toronto branch of the financial capitalists recognized once upon a time as the “masters of the universe,” and now better seen as the masters of using public credit for protection of private shareholders.
Duncan Cameron writes from Quebec City.
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