Free Market Principles for Banks

Morgan Duchesney


Apparently, Stephen Harper is not concerned by the fact that Canada’s big banks decided not to share their blessings with consumers after they received yesterday’s Bank of Canada rate cut. While Harper harmed his electoral prospects the bankers were merely being bankers, as Eric Keirans wrote in Remembering, “Money has no motherland; financiers are without patriotism and without decency, their sole object is gain.” Evidence for these statements exists in stupefying quantities.

Let’s be realistic about the concept of profit. On a quarter-to-quarter basis, is it really a crisis if RBC or CIBC earn a mere $500 million instead of a billion? It strikes me as obscenely greedy to complain about the regular crests and troughs of the profit cycle when one is dealing with such huge sums of money. Defenders of the banking system justify the presence of chartered banks on the various stock markets by emphasizing the value of dividends to the holders of bank stock. A tiny minority of extremely wealthy individuals who treat the stock market like a giant casino owns the vast majority of bank shares. They have little concern for working people dabbling in bank stocks.

The current banking situation need not continue because we have at least two practical alternatives. Here is the first one. Chartered banks can be nationalized and removed from the stock market after all shareholders have been reimbursed. The new Bank of Canada could then be divided into specialty branches to serve the public and generate revenue for everyone. All the existing banks and their employees would be absorbed by the new federal entity and bank employees would be become public servants. As well, the bank would be required to be fully transparent in its dealings. This public accountability would reduce the likelihood of future scandals like RBC’s TD Canada Trust’s ill-considered and costly Enron entanglements.

Here is another alternative: rather than extending low interest loans to chartered banks to finance their high interest lending; the existing Bank of Canada could instead offer low interest loans to working Canadians and leave the chartered banks to deal with one another at their own risk and expense. Why should working Canadians, through their taxes, be expected to subsidize incredibly wealthy organizations whose prime mission is creating wealth by exploiting need? Let the so-called free market rule literally – if a bank fails, so be it. Let the others learn from the mistakes of their reckless peers. The ‘market’ is a convenient abstraction trotted out as an excuse for any and all acts of ruthless financial expediency when times are good. When times toughen, the big players retreat from their market discipline posture and go begging. It is happening right now all over the world with little government resistance. This hypocrisy has also been labeled a two-headed fallacy called, “The Too Big-Too Weak Paradox. This involves the twin ideas that corporations are so big and powerful that challenging their prerogatives is fruitless, and that market forces beyond corporate control leave corporations relatively helpless.” (Multinational Monitor, 2008.) Imagine histories sadder record if every emancipatory struggle had been hamstrung by such hopelessness.

There is another operative concept I choose to call trickle-down disaster theory. It operates in much the same way as the widely accepted nonsense called trickle-down economics that is regularly employed to justify business subsidies or corporate welfare. In the trickle-down disaster model we are told that we must accept bank bailouts to prevent economic Armageddon. We are told that the failure of the financial system will more than trickle-down to working people - it will drown them in a roaring tsunami of debt. Suitably terrified, working people acquiesce and pick up the tab for the Bay street brain trust or the wizards of Wall Street. It’s funny how trickle-down disaster theory only applies to gargantuan financial institutions when there are plenty of other worthy candidates seeking mercy. Perhaps the Canadian government might be interested in forgiving all outstanding student loans? Collectively indebted post secondary students represent a huge voting block whose debt prevents them from fully participating in the consumer economy. Their purchase of houses, cars and cottages is delayed by the onerous repayment terms of their student loans. This collective debt is likely much higher than the total sum of Canada’s corporate subsidies to organizations like the impoverished Mont Tremblant ski resort, various Quebec aerospace firms, Paul Martin’s CSL and of course, Bombardier, the poster child of government subsidy.

The real question about chartered banks is actually this: Why should private organizations on behalf of mainly mega-wealthy investors enjoy the incredible privilege of lending money at interest when government could perform this amazingly-profitable activity on behalf of all citizens. This question has spawned much ingenious evasion. Chartered banks have become so influential that they are a danger to genuine participatory democracy. As Thomas Jefferson said, “ I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the Government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.” Obviously, this is not a new idea.

I would also like to like to introduce the concept of trickle-up economics as a practical alternative to the familiar and tired concept of trickle-down economics. Under this new wealth redistribution model, generous amounts of public cash will be gifted to working people to freely invest as they see fit. Under the old trickle-down model, public funds are awarded to wealthy organizations like chartered banks and transnational corporations in the form of outright cash grants, tax breaks and low or no interest loans.

Trickle down economics suggests that the success of theses mighty entities somehow benefits working people. It is actually a corruption of genuine free-market principles where the government subsides certain favored players ostensibly to protect “the economy.” It is also the bedrock of a fantastical free market mythology that is worshiped in some circles with quasi-religious fervor. When corporate Canada comes begging in hard times, it uses the fate of its employees and the “economy” as an excuse. Free market principles are temporarily suspended until access to public cash is assured. When good times return, blithe free market assumptions temporarily reassert themselves until the next crisis.

Trickle up economics is consistent with the genuine Darwinian free-market principle of survival of the fittest. Working people, with a fist full of their own redistributed cash, will be free to support the bank or corporation of their choice. Those banks and corporations who fail to garner enough financial support will fail and be replaced by superior entities. The oft-misquoted philosopher Adam Smith called this phenomenon,“ the invisible hand of the market.”” Smith was actually quite critical of rapacious capitalism and favored enough regulation to promote ethical business practices. Here is a question worth asking: Why is it considered reasonable for government to gift billions of dollars to corporations but utterly reckless to divide the same sum amongst working Canadians to invest as they see fit?

Morgan Duchesney is an Ottawa writer and martial arts instructor with an interest in social justice and international affairs. He holds an MA in Political Economy from Carleton University.