A tale of the tail that wags world’s fi­nan­cial dog

Pri­vate coali­tion of banks con­trols global money sys­tem — and your mone­tary fate

The Hamilton Spectator - - COMMENT - FRANK GUE Frank Gue lives in Burling­ton

The U.S. Fed­eral Re­serve holds the en­tire world fi­nan­cial sys­tem, in­clud­ing the Cana­dian parts of it, pris­oner through its com­mand of things like the in­ter­est rate.

The Fed­eral Re­serve is not, as most peo­ple as­sume, a U.S. govern­ment depart­ment: It is a coali­tion of pri­vate banks. Thus we have a U.S. fi­nan­cial service provider set­ting the rules for the pro­vi­sion of fi­nan­cial ser­vices through the world.

Do you catch the odour of con­flict of in­ter­est em­a­nat­ing from one of the most im­por­tant el­e­ments of our fi­nan­cial sys­tem?

Any Cana­dian cit­i­zen’s net worth, what­ever it is, is one ten- thou­sandth of one hair on the tail that wags the fi­nan­cial dog, the U.S. Fed­eral Re­serve.

One of the re­sults of this con­flict of in­ter­est was the 2008 fi­nan­cial crash and the re­ces­sion we have had since. Many big U.S. banks, grasp­ing for ever higher prof­its, took risks that drove them to the very edge of bank­ruptcy and fi­nally over that cliff.

Their vast risky in­vest­ments of bor­rowed money, com­bined with un­eth­i­cal busi­ness prac­tices, ex­posed the fact that they owed far more than they owned — they were bank­rupt, along with mil­lions of their small in­vestors like you and me, even though Canada con­trib­uted very lit­tle to the dis­as­ter.

Ex­cept that there was one big dif­fer­ence be­tween the banks’ fate and yours and mine: The banks’ rules en­sured that the big­gest banks (“too big to fail”), some­times us­ing un­eth­i­cal trick­ery, were bailed out at taxpay­ers’ ex­pense; whereas you and I had to bail our­selves out best we could by los­ing part of our in­vest­ments and liv­ing with tax in­creases that spilled-over from the U.S. prob­lems.

How one big bank was able to make this can’t-lose dou­ble bet is an in­ter­est­ing study. Look up Gold­man Sachs+un­eth­i­cal for a com­plete ex­pla­na­tion. Gold­man’s be­hav­iour, ac­cord­ing to the U.S. Se­cu­ri­ties and Ex­change Com­mis­sion, was “un­eth­i­cal, but not il­le­gal.” Us­ing it, they made bil­lions out of the fi­nan­cial col­lapse, both on its way up and on its way down. Taxpay­ers and small in­vestors paid for it all.

To­day, we hear mut­ter­ings to the ef­fect that the Fed should again re­lax its re­serve re­quire­ments. Fur­ther, we in Canada should take more care of such warn­ings as ris­ing house prices; per­haps we our­selves have one wheel over the edge of the bank­ruptcy cliff.

Yet there is a flicker of light in all this black­ness, as re­ported in the June 25 po­lit­i­cal-eco­nomic mag­a­zine The Econ­o­mist. Rep­re­sen­ta­tive Jeb Hen­sar­ling, of the U.S. House of Rep­re­sen­ta­tives, has hit the hot but­tons when he rec­om­mends that the U.S.:

Switch the fund­ing of the Con­sumer Pro­tec­tion Bu­reau from the Fed­eral Re­serve to Con­gress and its con­trol out of the hands of bankers, and switch the man­age­ment of the Bu­reau from the Fed also to Con­gress;

Elim­i­nate laws that pro­tect banks from go­ing bank­rupt;

Re­quire banks to carry a “hefty” cap­i­tal re­serve (Canada sur­vived the crash bet­ter than the U.S. be­cause we kept our re­serves above 7 per cent, while U.S. banks were al­lowed to keep mere frac­tions of one per cent.);

Let fail­ing banks fail in­stead of be­ing bailed out by the taxpay­ers;

Sim­plify the reg­u­la­tions so that “banks can­not find ways to game com­pli­cated rules.”

Three deaf­en­ing cheers and a tiger for Rep­re­sen­ta­tive Hen­sar­ling. Would he come and run for Par­lia­ment in Canada if we paid him what he de­serves — per­haps the pay of some bank­ing CEOs who, suc­ceed or fail, get two or three hun­dred mil­lion dol­lars per year? He’d be worth ev­ery nickel of it.

Per­haps then we could shake our­selves free of the Fed­eral Re­serve tail that wags the world’s fi­nan­cial dogs, in­clud­ing ours.

MANUEL BALCE CENETA, THE AS­SO­CI­ATED PRESS

Fed­eral Re­serve chair Janet Yellen heads up a pow­er­ful coali­tion of pri­vate banks. Wed­nes­day she ap­peared be­fore the U.S. House Fi­nan­cial Ser­vices Com­mit­tee on U.S. mone­tary pol­icy.

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