Japan – Like the U.S. – Turns to Censorship
2 weeks after the Fukushima accident, we reported that the government responded to the nuclear accident by trying to raise acceptable radiation levels and pretending that radiation is good for us.
We noted earlier this month:
Japan will likely pass a new anti-whistleblowing law in an attempt to silence criticism of Tepco and the government:
Japanese Prime Minister Shinzo Abe’s government is planning a state secrets act that critics say could curtail public access to information on a wide range of issues, including tensions with China and theFukushima nuclear crisis.
The new law would dramatically expand the definition of official secrets and journalists convicted under it could be jailed for up to five years.
Unfortunately, this is coming to pass. As EneNews reports:
Associated Press, Nov. 26, 2013: Japan’s more powerful lower house of Parliament approved a state secrecy bill late Tuesday […] Critics say it might sway authorities to withhold more information about nuclear power plants […] The move is welcomed by the United States […] lawyer Hiroyasu Maki said the bill’s definition of secrets is so vague and broad that it could easily be expanded to include radiation data […] Journalists who obtain information “inappropriately” or “wrongfully” can get up to five years in prison, prompting criticism that it would make officials more secretive and intimidate the media. Attempted leaks or inappropriate reporting, complicity or solicitation are also considered illegal. […] Japan’s proposed law also designates the prime minister as a third-party overseer.
BBC, Nov. 26, 2013: Japan approves new state secrecy bill to combat leaks […] The bill now goes to the upper house, where it is also likely to be passed.
The Australian, Nov. 25, 2013: Japanese press baulks at push for ‘fascist’ secrecy laws […] Taro Yamamoto [an upper house lawmaker] said the law threatened to recreate a fascist state in Japan. “This secrecy law represents a coup d’etat by a particular group of politicians and bureaucrats,” he told a press conference in Tokyo. “I believe the secrecy bill will eventually lead to the repression of the average person. It will allow those in power to crack down on anyone who is criticising them – the path we are on is the recreation of a fascist state.” He said the withholding of radiation data after the Fukushima disaster showed the Japanese government was predisposed to hiding information from its citizens and this law would only make things worse. […] The Asahi Shimbun newspaper likened the law to “conspiracy” regulations in pre-war Japan and said it could be used to stymie access to facts on nuclear accidents […]
Foreign Correspondents’ Club of Japan president Lucy Birmingham: “We are alarmed by the text of the bill, as well as associated statements made by some ruling party lawmakers, relating to the potential targeting of journalists for prosecution and imprisonment.”
Activist Kazuyuki Tokune: “I may be arrested some day for my anti-nuclear activity […] But that doesn’t stop me.”
Lawrence Repeta, a law professor at Meiji University in Tokyo: “This is a severe threat on freedom to report in Japan […] It appears the Abe administration has decided that they can get a lot of what they want, which is to escape oversight, to decrease transparency in the government by passing a law that grants the government and officials broad authority to designate information as secret.”
U.S. Charge d’Affairs Kurt Tong: It’s a positive step that would make Japan a “more effective alliance partner.”
Prime Minister Shinzo Abe: “This law is designed to protect the safety of the people.”
Rather than addressing the problems head-on, the Japanese government is circling the wagons.
Unfortunately, the United States is no better. Specifically, the American government:
- Censors journalists who raise inconvenient truths
- Pressured the Japanese government to re-start its nuclear program, and is allowing Fukushima seafood to be sold in the U.S.
- Weakened safety standards for U.S. nuclear reactors after the Fukushima disaster
As we noted 6 months after Fukushima melted down:
American and Canadian authorities have virtually stopped monitoring airborne radiation, and are not testing fish for radiation. (Indeed, the EPA reacted to Fukushima by raising “acceptable” radiation levels.)
The failure of the American, Canadian and other governments to test for and share results is making it difficult to hold an open scientific debate about what is happening.
Earlier this year, the acting EPA director signed a revised version of the EPA’s Protective Action Guide for radiological incidents, which radically relaxing the safety guidelines agencies follow in the wake of a nuclear-reactor meltdown or other unexpected release of radiation. EPA whistleblowers called it “a public health policy only Dr. Strangelove could embrace.”
When the economy imploded in 2008, how did the government respond?
Did it crack down on fraud? Force bankrupt companies to admit that their speculative gambling with our money had failed? Rein in the funny business?
Of course not!
The government just helped cover up how bad things were, used claims of national security to keep everything in the dark, and changed basic rules and definitions to allow the game to continue. See this, this, this and this.
So now that Japan is suffering the worst nuclear accident since Chernobyl – if not of all time – is the government riding to the rescue to help fix the problem, or at least to provide accurate information to its citizens so they can make informed decisions?
Of course not!
The EPA is closing ranks with the nuclear power industry ….
Indeed, some government scientists and media shills are now “reexamining” old studies that show that radioactive substances like plutonium cause cancer to argue that they helpprevent cancer.
In other words, this is a concerted propaganda campaign to cover up the severity of a major nuclear accident by raising acceptable levels of radiation and saying that a little radiation is good for us.
Any time the results of bad government policy is revealed, the government just covers it up rather than changing the policy.
By any reasonable measure, I think it is safe to say that the last quarter of 2013 has been an insane game of economic Russian Roulette. Even more unsettling is the fact that most of the American population still has little to no clue that the U.S. was on the verge of a catastrophic catalyst event at least three times in the past three months alone, and that we face an even greater acceleration next year.
The first near miss was the Federal Reserve’s announcement of a possible “taper” of QE stimulus in early fall, which sent shivers through stock markets and proved what we have been saying all along – that the entire recovery is a facade built on an ever thinning balloon of fiat money. Today, markets function entirely on the expectation that the Fed will continue stimulus forever. If the Fed does cut QE in any way, the frail psychology of the markets will shatter, and the country will come crashing down with it.
The second near miss was the possible unilateral invasion of Syria demanded by the Obama Administration. As we have discussed here at Alt-Market for years, any invasion of Syria or Iran will bring detrimental consequences to the U.S. economy and energy markets, not to mention draw heavy opposition from Russia and China. Though the naïve shrug it off as a minor foreign policy bungle, Syria could have easily become WWIII, and I believe the only reason the establishment has not yet followed through with a strike in the region is because the alternative media has been so effective in warning the masses. The elites need a certain percentage of support from the general public and the military for any war action to be effective, which they did not receive. After all, no one wants to fight and die in support of CIA funded Al Qaeda terrorist cells on the other side of the world. The establishment tried to hide who the rebels were, and failed.
The third near miss was, of course, the debt ceiling debate, which has been extended to next spring. America came within a razor’s edge of debt default, which many people rightly fear. What some do not yet grasp, though, is that debt default of the U.S. was NOT avoided last month, it is INEVITABLE. Debt default will ultimately result in the death of the dollar as the world reserve currency, and the petro-currency. This final gasp will lead to hyperstagflation within our financial system, and third world status for most of the citizenry. It is only a matter of time, and timing.
“Timing” is truly what we are all concerned about. Those of us in the field of alternative media and economics understand well that the U.S. is on a collision course with disaster; it is a mathematical certainty. We no longer think in terms of “if” it happens – we only question “when” it will happen. Our fiscal structure now hangs by the thinnest of threads, a thread which for all we know could be cut at a moments notice. However, economic and political storms appear to be brewing with the year 2014 as a target.
Globalists have been openly seeking the destabilization of U.S. sovereignty, and they have openly admitted that the destruction of the dollar and our economic foundations will aid them in their goal. It is important to never forget that international financiers WANT to absorb America into a new global economic structure, and that the U.S. must be debased before this can be accomplished. Here are a few reasons why I believe 2014 may be the year they make their final move…
Debt Debate On Steroids
Nothing concrete was decided during the highly publicized “battle” between Democrats and the GOP on what would be done to solve the U.S. debt addiction. Some people might assume that the fight will go on indefinitely, and that the “can” will be kicked down the road for years to come. This assumption is a dangerous one. If you thought the last debt debate was hair raising, the next is likely to give you a coronary. Think of 2013 as a practice run, a warm up to the main event in 2014. Why will next year be different? Because the motivations behind a debt ceiling freeze (and thus debt default) are now supported by the obvious failure of Obamacare.
Funding for Obamacare was the underlying issue that gave strength to the push for new debt ceiling extensions. The U.S. government has overreached financially in ever way imaginable. We have long running entitlement programs that have been technically bankrupt for years. But, Obamacare was so pervasive during the debt debate that we heard nothing of these existing liabilities. Ultimately, Obamacare is the primary reason why so many Americans on the “left” want unlimited spending and inflation, and why so many Americans on the “right” are actually seeking debt default.
We all know that at the top of the pyramid the debt debate itself is false left/right theater, but it is still theater with a purpose.
In my articles ‘The Socialization Of America Is Economically Impossible’ and ‘Obamacare: Is It A Divide And Conquer Distraction’, I discussed why universal healthcare could not be implemented in America, and I predicted in advance that Obamacare was actually a farce that was designed to fail. The program’s only purpose is to provide a vehicle by which divisions between the fake left and the fake right could be solidified in the minds of the common populace. A lot of cynicism was directed at the notion that the government might create a socialized healthcare initiative and then allow it to fail. Of course, we now know that is exactly what they had in mind.
During the last debt debate, Obamacare was just a policy waiting to be implemented; next debate, that policy will be rightly labeled a train wreck. Obamacare is falling apart at it’s very inception, and evidence makes clear that the White House KNEW in advance that this would occur. In the days before it’s launch, performance tests on the Obamacare website showed conclusively that the system could not handle more than 500 users.
Obama promised that preexisting healthcare plans would be retained by Americans and that the Affordable Care Act would not do damage to established insurance models. He made this promise knowing full well that he could not or would not keep it. This dishonesty has resulted in rebellion by Democrats who have sided with Republicans to pass a bill which obstructs the erasure of existing health coverage.
States once disturbingly loyal to the White House are now moving to limit the application of the Obamacare structure.
The White House had foreknowledge that the program was nowhere near ready, yet, they moved forward anyway. Why wouldn’t they stall? Why would Obama knowingly unleash his “opus” before it was finished? He had it in the bag, right? He won, right? All he had to do was build a functioning website and keep his promises at least long enough to sucker the majority of Americans into the system. Instead, he throws the fight and hits the canvas before he’s even punched? Why?
It all sounds rather insane if you aren’t aware of the bigger picture, and I’m sure the average Democrat out there is wide-eyed and bewildered. Some might blame it on “ego”, or “hubris”, but this makes little sense. Obamacare is an American socialist’s dream. With a simple working public interaction model, Obama would be worshiped by leftists for decades to come as the next Franklin Delano Roosevelt. Hubris should have ENSURED that the White House launch of Obamacare would be flawless.
Once you realize that this is not about Obama, and that Obama is nothing but a middle-man for the globalists, and that the actual implementation of Obamacare never mattered to the establishment, the fog begins to clear.
With Obamacare in shambles, the dynamic of the debt debate theater changes completely. Some Democrats may well show support for a hold on the debt ceiling, for, what reason do they have to champion more spending? Obama has already made fools of them all, and the Obamacare motivator is essentially out of the picture. The GOP will be energized and more unified than the last debate, giving more momentum to a debt ceiling lock. The argument will be made that a resulting debt default will not be harmful, and that the U.S. can carry the weight of existing liabilities until the budget is balanced.
This is certainly a lie, but it is a fashionable lie that Americans will want to hear.
Americans do not want to hear that our economy is too far gone and that any motion, to spend, or to cut, will have the same result – currency collapse and fiscal implosion. They do not want to hear that pain must be suffered before a realistic solution can be applied. They do not want to hear the the system will have to be brought down before it can be rebuilt. And, they definitely do not want to hear that the system will be deliberately brought down and replaced with something even worse.
Will the next debt debate in Spring 2014 end in debt default and the collapse that globalists desire so much? It’s hard to say, but many insiders appear to be preparing for just such a scenario…
The Fed’s Buzz Kill
No one, and I mean no one, believes the private Federal Reserve will ever commit to a taper of fiat stimulus. Hell, I barely believe it’s possible, and I’m open to just about any scenario. That said, I have to ask a question which few analysts seem to be asking – why does the Fed keep pre-injecting the concept of taper into the mainstream if they never intend to implement it? When has the Fed ever pre-injected a plan into the MSM which it did not eventually implement?
The banksters have the markets in the palm of their hand, or at least they seem to. Stocks now rise and fall according to whatever meaningless press release the central bank happens to put out on any given morning. What do they have to gain by consistently shaking the confidence of investors around the world by suggesting that the fiat party they created will abruptly end?
The impending approval by the Senate of Janet Yellen, a champion of the printing press, would suggest to many that QE-infinity is assured. We know that the black hole generated by the derivatives implosion cannot be filled (debts still exist in the quadrillions of dollars), and that the Fed will have to print endlessly in order to slow the deterioration of the the banking sector. We know that none of the currency flows created by the Fed are trickling down to main street, which is why credit remains mostly frozen, real unemployment counting U-6 measurements remains at around 25%, food stamp recipients have risen to around 50 million, and the only sales boosts to property markets are those caused by big banks buying bankrupt houses and then reissuing them as rentals.
We know that it makes sense for the central bank to continue QE, if only to continue pumping up banks and the stock market and hide the truly dismal state of the overall system. But let’s forget about what we think “makes sense” for just a moment…
What if the Fed no longer WANTS to hide the true state of the system anymore? What if QE is now giving back diminishing returns, and will soon be no longer effective at hiding economic weakness?Central bankers surely don’t want to take the blame for a collapse, but what if the perfect patsy is already lined up? A patsy so hated and despised that no one would think twice about their guilt? I am, of course, talking about the Federal Government itself.
Think about it; the failure of Obamacare promises a debt debate in the Spring of 2014 that will rock the very foundations of the global economy. Both sides, Democrat and Republican, are ready to blame the other fully for any disastrous outcome, though “Tea Party” conservatives have been painted by the mainstream media as the lead culprits behind a financial catastrophe that began before the Tea Party was born. The idea of “gridlock” leading to impasse and calamity is already built into the country’s consciousness. The general public’s opinion of all areas of government has recently hit all time lows. In fact, our opinion of government could scarcely go any lower than it already has. Everyone HATES what government is, or what they think it is. Most Americans would be happy to place the brunt of the blame for an economic disaster on the shoulders of Washington DC.
The genius of it is, they deserve a large part of the blame. They helped to make possible all of the horrors the citizenry will face in the coming years. The problem is, the public may become so blinded with rage over the failure of the political system, that they may completely forget about the role of international and central banks and turn on each other instead.
Why is the Fed now discussing, just before the possible confirmation of Janet Yellen, a stimulus dove, the need for taper measures by 2014?
Is it just coincidence that the taper discussion is taking place parallel to the debt ceiling battle, or are these two things related? What if the Fed plans to apply QE cuts during or after the renewed debt debate in order to make the market effects even more negative? What if the Fed is timing the taper to give energy to a debt default? What if the Fed wants to reduce support, so that later, when all hell breaks loose, we’ll come begging them for support?
Whether you believe a debt default will be deliberately induced or not, certain foreign investors have been preparing for such a U.S. breakdown for years, and once again, the apex investor, China, has made plans for dramatic economic policy changes to take place in 2014…
China Is Ready To File For Divorce
The economic marriage between China and the U.S. has been touted Ad nauseum as an invincible relationship chained in eternity by unassailable interdependency. I’ve just never bought this fanciful tale. For years I’ve written about the likelihood that China will decouple from the American dollar apparatus, and so far, most of my warnings have come to pass.
China has pushed forward with massive physical gold purchases despite all arguments by skeptics that gold is no longer necessary or prudent as a safe haven investment. Apparently, the Chinese know something they do not. China is on pace to become the largest holder of gold in the world as early as 2014.
China has now issued Yuan denominated bonds and other assets around the globe, and its central bank has expanded its total balance sheet to at least $24 Trillion, outmatching the reported increased balance sheets of all other central banks:
Now, some feel that this Chinese liquidity should be considered a massive bubble on the verge of exploding, and that it will be Chinese instability, not U.S. instability, that triggers renewed crisis. I would like to offer an alternative view…
I am not shocked at all by this incredible spike in Yuan circulation. In fact, I expected it. The fall back argument against China dumping the dollar as the world reserve has always been that there is no alternative currency that boasts as much liquidity as the dollar. Well, as we now know, China has been raining Yuan down on every continent. International banks like JP Morgan have been HELPING them do it.
China is not desperately attempting to prop up its own markets like we are in the U.S. China is DELIBERATELY generating massive liquidity because they seek to aid the IMF in its longtime plan to replace the greenback as the world reserve currency. These are not the activities of an investor that wants to stick with the U.S. or the dollar. These are not the activities of a nation that wishes to continue its limited role as a source of cheap industrial labor.
China, being the largest importer of petroleum surpassing the U.S., is now planning to price its crude oil futures in Yuan, instead of the dollar.
And, the Chinese central bank has announced that it now plans to stop all purchases of U.S. dollars for its reserves.
These decisions are part of a precision strategy, a formula which was finalized during a little discussed and very secretive economic policy meeting which took place in China this past month.
While much of the media was focused on China’s call for softer restrictions on its one-child policy, they ignored the thrust of the meeting, which was to establish Chinese consumption over exports, and internationalize the Yuan. All that is left is for China to “float” the Yuan’s value on the open market, which is an action the head of the PBOC, Zhou Xiaochuan, says he plans to expedite.
All of the reforms discussed at China’s Third Plenum meeting are supposed to begin taking shape in…that’s right…2014.
A Storm Of Septic Proportions
As I have always pointed out, economic collapse is not necessarily an event, it is a process. The most frightening elements of this process usually do not become visible until it is too late for common people to react in a productive way. All of the dangers covered in this article could very well set fires tomorrow, that is how close our nation is to the edge. However, the culmination of events so far seems to be setting the stage for something, an important something, in 2014. If the worst is possible, assume the worst is probable. The next leg down, or the next economic carpet bombing. Maybe slightly painful, maybe mortal. Sadly, as long as Americans continue to remain dependent on the existing corrupt system, global bankers can pull the plug at their leisure, and determine the depth of the wound with scientific precision.
Ed Snowden’s latest revelation may leave SEC officials quaking as the NSA “has been gathering records of online sexual activity and evidence of visits to pornographic websites as part of a proposed plan to harm the reputations of those whom the agency believes are radicalizing others through incendiary speeches.” Of course, as we have seen, this ‘information’ would never be used by the government for non-radical-terrorist suppressing reasons, as the ACLU notes, is is “an unwelcome reminder of what it means to give an intelligence agency unfettered access to individuals’ most sensitive information using tactics associated with the secret police services of authoritarian governments.”
The National Security Agency has been gathering records of online sexual activity and evidence of visits to pornographic websites as part of a proposed plan to harm the reputations of those whom the agency believes are radicalizing others through incendiary speeches, according to a top-secret NSA document.
The document, provided by NSA whistleblower Edward Snowden, identifies six targets, all Muslims, as “exemplars” of how “personal vulnerabilities” can be learned through electronic surveillance, and then exploited to undermine a target’s credibility, reputation and authority.
The NSA document, dated Oct. 3, 2012, repeatedly refers to the power of charges of hypocrisy to undermine such a messenger.”
Full ACLU Statement:
The NSA considered discrediting six people by revealing surveillance evidence of their online sexual activity, visits to pornography websites, and other personal information, according to a report today in The Huffington Post. The article cited documents leaked by former NSA contactor Edward Snowden. The targets of the NSA’s plan were all Muslims whom the NSA characterized as “radicals” but who were not believed to be involved in terrorism. The documents say one of the targets was a “U.S. person,” a term describing American citizens and legal permanent residents, but all of the targets were reportedly outside the United States.
American Civil Liberties Union Deputy Legal Director Jameel Jaffer had this reaction:
“This report is an unwelcome reminder of what it means to give an intelligence agency unfettered access to individuals’ most sensitive information. One ordinarily associates these kinds of tactics with the secret police services of authoritarian governments. That these tactics have been adopted by the world’s leading democracy – and the world’s most powerful intelligence agency – is truly chilling.”
“Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must).”
I often refer to debt serfdom, the servitude debt enforces on borrowers. The mechanism of this servitude is interest, and today I turn to two knowledgeable correspondents for explanations of the consequences of interest.
Correspondent D.L.J. explains how debt/interest is the underlying engine of rising income/wealth disparity:
Here is a table of the growth rate of the GDP.
If we use $16T as the approximate GDP and a growth rate of, say, 3.5%, the total of goods and services would increase one year to the next by about $500B.
Meanwhile, referencing the Grandfather national debt chart with the USDebtClock data, the annual interest bill is $3 trillion ($2.7 trillion year-to-date).
In other words, those receiving interest are getting 5-6 times more than the increase in gross economic activity.
Using your oft-referenced Pareto Principle, about 80% of the population are net payers of interest while the other 20% are net receivers of interest.
Also, keep in mind that one does not have to have an outstanding loan to be a net payer of interest. As I attempted to earlier convey, whenever one buys a product that any part of its production was involving the cost of interest, the final product price included that interest cost. The purchase of that product had the interest cost paid by the purchaser.
Again using the Pareto concept, of the 20% who receive net interest, it can be further divided 80/20 to imply that 4% receive most (64%?) of the interest. This very fact can explain why/how the system (as it stands) produces a widening between the haves and the so-called ‘have nots’.
Longtime correspondent Harun I. explains that the serfdom imposed by debt and interest is not merely financial servitude–it is political serfdom as well:
As both of us have stated, you can create all of the money you want, however, production of real things cannot be accomplished with a keystroke.
Then there is the issue of liberty. Each Federal Reserve Note is a liability of the Fed and gives the bearer the right but not the obligation to purchase — whatever the Fed deems appropriate. How much one can purchase keeps changing base on a theory-driven experiment that has never worked. Since the Fed is nothing more than an agent of the Central State, the ability to control what the wages of its workers will purchase, is a dangerous power for any government.
If a Federal Reserve Note is a liability of the central bank, then what is the asset? The only possible answer is the nations productivity. So, in essence, an agent of the government, the central bank, most of which are privately owned (ownership is cloaked in secrecy) owns the entire productive output of free and democratic nation-states.
People who speak of liberty and democracy in such a system only delude themselves.
Then there is the solution, default. That only resolves the books, the liability of human needs remain. Bankruptcy does not resolve the residue of social misery and suffering left behind for the masses who became dependent on lofty promises (debt). These promises (debts) were based on theories that have reappeared throughout human history under different guises but have never worked.
More debt will not resolve debt. The individual’s liberty is nonexistent if he does not own his labor. A people should consider carefully the viability (arithmetical consequences) of borrowing, at interest, to consume their own production. The asset of our labor cannot simultaneously be a liability we owe to ourselves at interest.
Thank you, D.L.J. and Harun. What is the alternative to the present system of debt serfdom and rising inequality? Eliminate the Federal Reserve system and revert to the national currency (the dollar) being issued by the U.S. Treasury in sufficient quantity to facilitate the production and distribution of goods and services.
Is this possible? Not in our Financialized, Neofeudal-Neocolonial Rentier Economy; but as Harun noted in another email, Governments cannot reduce their debt or deficits and central banks cannot taper. Equally, they cannot perpetually borrow exponentially more. This one last bubble cannot end (but it must).
What we are discussing is what will replace the current system after it self-destructs.
While one can make an argument that the central banks have now destroyed all traditional “cycles”, including the economic “virtuous cycle“, the business cycle and even the leverage cycle, the question remains how much longer can the Fed et al defy mean reversion and all laws of nature associated with it. That said, assuming the fake market environment we find ourselves in persists for at least another year, this is what the leverage cycle would look like assuming $10 trillion in global central bank assets were a pro forma new normal.
Keep a close eye on China: it is on the cusp between the end of the leverage cycle (where as we reported over the past two days, it has been pumping bank assets at the ridiculous pace of $3.5 trillion per year) and on the verge of having its debt bubble bursting. What happens then is unclear.
Some thoughts on the above graphic from SocGen:
For the first time post-crisis, we expect advanced economies in 2014 to see a marked increase in their contribution to global growth. Emerging economies have over the past few years offered a welcome support to global growth, but this relied in part on a build-up of credit that now needs to be paid down. The hope is for advanced economies to take over the baton from the emerging economies as the main driver of global growth. The US is now poised for sustainable recovery and in Japan hopes remain that Abenomics will work. The euro area, however, continues to lag. As such the growth relay from emerging to advanced is likely to prove a bumpy process. Commodity markets will sit at the heart of this dynamic – our strategists look for range-bound markets in 2014.
This new rotation of the global leverage cycle is an integral part of our monetary policy outlook, which we discuss in greater detail in the following sections. Several features are worth noting:
Time for emerging economies to deleverage: Post crisis, emerging economies adopted accommodative economic policies to offset the collapse in demand for their output. Providing a further boost, accommodative monetary policies in advanced economies drove significant financial flows into the region. Combined, these fuelled credit expansion. With the turn in the US interest rate cycle back in the spring, external financing conditions tightened. Moreover, in a number of emerging economies, policymakers have become increasingly concerned by a build-up in leverage; this is not just a story of level, but also one of speed. As seen from our leverage cycle, we believe the emerging economies have now moved to a phase of deleveraging. Our emerging market theme, however, is not just one of a cyclical downturn. As we have highlighted on several occasions, we believe potential growth is structurally slowing and no more so than in China.
China must tame excess capacity: With NFC debt at over 150% of GDP and significant excess capacity, China is ripe for deleveraging. Already in 2013, a notable feature of our forecast has been that the Chinese authorities would resist market pressure to ease monetary policy and further fuel the credit bubble. Nonetheless, shadow bank credit has continued to expand and, with that, problems of excess capacity. China’s challenge now is to deleverage and reform. The two in many ways go hand in hand and we discuss these issues in Boxes 5 and 14. It is worth nothing here that reform in China is tantamount to removing the 100% implicit state guarantee. And looking ahead, even state-backed companies could be allowed to fail. Herein resides also a potential trigger for the risk scenario of a hard landing, should such a company failure be poorly managed and spin out of control.
Japan’s corporate sector to cut savings to invest:Investment and savings are two sides of the same coin and to secure sustainable recovery in Japan, corporations need to reduce savings and invest. The BoJ’s monetary policy is already working through the currency channel and our expectation is to see a pick-up in corporate investment next. This is not just a function of monetary policy, but also the two remaining arrows of Abenomics, namely fiscal stimulus and structural reform. We see significant opportunities medium-term from reform as discussed in Box 13. Short-term, the BoJ is poised to deliver further stimulus and we look for additional asset purchases to be announced early in the new fiscal year (commencing April 1).
US credit cycle is turning: Credit channels have been repaired, household balance sheets deleveraged and excess housing stock unwound. Combined, these lay the foundations for sustainable recovery. In 2013, fiscal tightening exerted a headwind to growth, but this is now easing allowing GDP growth to accelerate to 2.9% in 2014. For the Fed, setting the right monetary policy during this transition will be challenging. A glance at our leverage cycle suggests that the challenge as recovery gains traction over time is to avoid a build-up of excess leverage. This is not an immediate concern to our minds. Although we forecast household credit expansion, our forecast for household income growth is higher, entailing some further reduction of the household debt-to-income ratio.
UK housing credit has been boosted by government measures: Supported by policy initiatives, UK housing is staging a recovery. This is highly dependent on mortgage loan conditions and the BoE will be keen to keep rates low. We expect the Bank to lower the unemployment rate threshold on its forward guidance from 7.0% to 6.5% (and reduce the NAIRU from 6.5% to 6.0%). The hope medium-term, is that this housing-driven recovery will eventually become broader based with stronger confidence, consumption, exports, corporate investment and lower unemployment. Much will depend, however, on euro area recovery as of 2015. Longer-term, a possible UK referendum on EU membership remains a point of uncertainty.
Euro area still facing headwinds: Individual euro area economies are in very different stages on the leverage cycle. Germany is the most advanced, followed by France, Italy and Spain. For several euro area economies, financial fragmentation and fiscal austerity remain serious headwinds. 2014 will see the arrival of a Single Supervisory Mechanism. As we discuss in Box 10, progress on a Single Supervisory Mechanism continues to disappoint and our base line remains for only a gradual repair of credit channels. Moreover, structural reforms are also not progressing at the desired pace, albeit with significant variation from country to country. The danger for the euro area is to become trapped in a lost decade of very low growth and low inflation. The ECB still has options. The real game changer opportunities, however, reside with governments to deliver quantum leaps on reform – at both the euro area and national levels. For now, progress remains disappointingly slow.
Summing up our view, 2014 will thus be the first year post crisis when advanced economies make an increased contribution to global GDP growth.
* * *
Jim Love, Canadian Mint chairman, helped run offshore ‘tax-avoidance scheme’ for clients – Politics – CBC News
For years, the fortune of a former prime minister was quietly mired in a hefty court battle pitting members of a prominent Canadian family against a big bank, Bay Street law firms and each other, CBC News has learned.
The fight over the financial legacy of Arthur Meighen, who served as prime minister in 1920-21 and 1926, grew to embroil 15 parties, two dozen lawyers and thousands of pages of records.
There were claims that a plaintiff attacked his own father in a bathroom, and legal bills in the millions of dollars.
As the spat unfurled, it roped in entities as diverse as Canada Trust, the former law firm Ogilvy Renault, offshore companies in the Caribbean and a senator.
But despite the big names and historic appeal, from its start in 2008 until it was discreetly settled three years later, the entire legal saga was kept out of the public eye — until now.
‘Significant manipulations’ alleged
One of the principal players in the drama was Toronto tax lawyer James Barton Love, whose connections in Ottawa have seen him appointed in recent years as chair of the Royal Canadian Mint and a consultant to Finance Minister Jim Flaherty.
Well before that, though, Love befriended and became an adviser to several members of the Meighen family, including patriarch Donald Wright, a composer, philanthropist and Order of Canada recipient.
“I knew of his great friendship with my cousin Patrick Wright, who died prematurely, and of the great esteem with which he was held by my uncle Donald Wright,” said Arthur Meighen’s grandson Michael Meighen, who was still a Conservative senator while the lawsuit was unfolding.
Wright consulted Love on investments, hired his law firm for legal work and made him a director of a number of holding companies within the $20-million-plus heritage known as the Arthur Meighen Trust, court documents show.
Arthur Meighen, born in Ontario in 1874 and initially trained as a mathematician, took up law in Manitoba in the early 1900s and was elected to the House of Commons as a Conservative MP in 1908. He went on to serve in Prime Minister Robert Borden’s wartime cabinet, and then became prime minister himself when Borden retired in 1920.
Meighen lost the 1921 election to Mackenzie King’s Liberals but won a minority in the 1925 vote, though King would stay in power for eight more months with the backing of a third party. The King-Byng affair in June 1926 brought Meighen back to power, but for less than three months before he lost another election.
Meighen resigned as Tory leader and went on to serve in the Senate, and then briefly as party leader again from 1941 to 1942. Following the Second World War, he amassed his wealth from investment funds he had set up.
But some of Meighen’s heirs — Wright’s granddaughters Tara and Alyssa — would eventually claim Love abused his powers, alleging he worked with Wright to retool the Meighen Trust, effectively cut them off from their inheritance, and depleted the family’s money through administrative and legal fees.
“It is clear from my grandfather’s records that Love was the chief architect of all of the significant manipulations of the trust from the 1980s onwards,” Alyssa Wright says in a sworn statement filed in court.
Alyssa Wright and her sister stood to inherit about $3 million each when they turned 35. But as that day came and went for each of them, they claimed, neither Love nor Legacy Private Trust (LPT), the trust company he runs that had a role managing the Meighen fortune, was forthcoming about the money or how it was kept.
“My requests for information from Love and LPT have been met with significant delays and claims from Love that he is too busy to answer my questions, or alarmingly, that he does not consider that he owes any duty to me to provide the requested information,” Tarah Wright said in an affidavit as part of the lawsuit.
Around that time, Love had been appointed to the board of the Mint and then to a panel advising the federal finance minister on tax issues. “Part of the difficulty with scheduling a time when we might get together,” he wrote to Tarah Wright, “relates to my very busy travel schedule.”
The Wright sisters weren’t satisfied and sued — for $15 million — alleging Love and Canada Trust, which had also had a hand in managing the Meighen millions, breached their fiduciary duties and acted negligently. None of the allegations was ever tested in court, and Love and Canada Trust emphatically denied any wrongdoing.
Offshore tax shelter
Among the lawsuit’s grievances: that Love and Canada Trust had participated in moving $8 million of their great-grandfather’s legacy into offshore havens to try to avoid Canadian tax. The Wrights said they “lost capital and income” as a result, but were also exposed to “taxes, interest and penalties” due to the transaction.
In court records, Love acknowledges he played a role in the offshore arrangement, but says that it was limited, and that ultimately the Meighen family enjoyed “significant savings of Canadian tax.”
Just as scathing is the Wrights’ allegation that Love drained a chunk of their family’s wealth through the fees his trust company and law firm charged to the Arthur Meighen Trust and to their grandfather’s estate.
Records filed in court show Legacy Private Trust, Love and his law firm have made at least $1 million from their roles advising the Meighen family and administering its money.
Some of that came from two side trusts set up for Alyssa and Tarah Wright. Each account had just over $70,000 in it in the early 1990s, the court records show, but by the time they were wound up in 2008, Love’s law firm had absorbed nearly $57,500 of that in fees.
An accountant’s report submitted to court shows that, starting in about 2002, the law firm would bill on average hundreds of dollars a month to each trust — far more than the trusts were making in investment income.
Alyssa Wright said in a sworn statement that she “asked Love directly” how so much of the funds could have been eaten up by expenses, but “Love was unable to provide an answer.”
Love countered in an affidavit that the fee arrangements were agreed to by the women’s aunt, who was overseeing the money and who “approved each account …. and signed each trust cheque in payment of the accounts.”
The aunt, for her part, said that she naively signed the fee agreements “without having any idea what usual fees” are.
And she, too, worried about the amounts of Meighen family money that were going to administrative and legal fees, particularly in the case of the offshore transaction.
“Trusts and corporations offshore over which I have no control … have been depleted by poor investments, fees, disbursements and claims for compensation which are outrageous,” the aunt, Priscilla Wright, affirmed.
Love, however, said the fees his company was charging were “considerably lower than what other trust companies would charge and recognizes the longstanding relationship between Legacy and the Wright family,” according to an email he wrote that was filed in court.
The lawsuit also recounts a meeting in mid-January 2006 between Love and Alyssa Wright, just days before the Conservatives would triumph in that year’s federal election.
Wright said she asked about bringing her share of the offshore Meighen money back to Canada. Love, who would later be appointed as an adviser to Finance Minister Flaherty on international taxation, “gave me a vague answer to the effect that this would depend on the results of the upcoming Canadian election [and] anticipated changes to the tax laws,” Wright’s sworn statement says.
The lawsuit was finally settled in 2011, with Canada Trust, Love, his current and former law firms and his trust company on the hook for a total of $8.9 million, though none of them admitted any fault.
It’s not clear how much of that, if anything, each defendant had to pay, or whether their insurers are footing the bill. Besides Michael Meighen, none of the parties would talk due to their promise of confidentiality.
One thing that is clear, though, is that Love and the Meighen estate are parting ways. The settlement calls for him and his firms to relinquish their positions within the array of Meighen family companies, foundations and investments.
Japan approves new state secrecy bill to combat leaks
The lower house of the Japanese parliament has approved a state secrecy bill that imposes stiffer penalties on civil servants who leak secrets and journalists who try to obtain them.
The move had been criticised by reporters and freedom of speech campaigners as a heavy-handed effort to suppress press freedom.
But the government says the move is needed for national security reasons.
The bill now goes to the upper house, where it is also likely to be passed.
Critics say the new law could allow the government to withhold more information and ultimately undermine Japan’s democracy.
Security informationThe bill was approved by the lower house – the more powerful of the two chambers in the Japanese parliament – after it was delayed following hours of protests by opposition lawmakers.
The bill’s supporters in the government confidently expect it to be approved by the upper house next month.
Prime Minister Shinzo Abe’s Liberal Democratic Party says the law is needed to encourage the US and other allies to share national security information with Japan.
Correspondents say that it is part of Mr Abe’s efforts to strengthen his country’s role in global security.
“This law is designed to protect the safety of the people,” Mr Abe said, promising that people’s concerns about the bill would be addressed through further parliamentary debate.
The bill allows heads of ministries and agencies indefinitely to make secret 23 types of information related to defence, diplomacy, counter-intelligence and counter-terrorism.
Under the law, public servants or others cleared for access to state secrets could be jailed for up to 10 years for leaking information.
Journalists and others in the private sector convicted of encouraging such leaks could get up to five years in jail if they use “grossly inappropriate” means to solicit the information.
Opponents of the legislation say the new rules fail to address basic concerns on civil liberties and the public’s right to know.
They say that the regulations will adversely affect freedom of information and block critical reporting of the government.
Campaigners have also warned that reporting on a wide range of sensitive issues will be affected by the changes, which will also have a dampening impact on whistleblowers.
The Japanese move has been welcomed by the US, which wants a stronger Japan to offset China’s military rise.
But correspondents say it has also raised fears that Japan could be edging back toward its militaristic past, when free speech was severely restrained.
Some experts say that the new legislation eases the way for Mr Abe’s campaign to revise Japan’s US-drafted pacifist constitution.
It didn’t take long to escalate Iran-Saudi relations, or the lack thereof, following this weekend’s nuclear (non) deal. Moments ago Iran’s Fars news agency reported that Iran’s coast guards have seized two Saudi fishing vessels after they entered the Islamic Republic’s territorial waters, a provincial official announced on Wednesday. “Yesterday, the coast guards deployed in the country’s Southern waters came to spot two vessels in Iran’s protected waters in the South using electronic and optic tools and equipment,” Commander of Bushehr province Coast Guards Qalandar Lashkari said. He said that the Iranian coast guards rushed to the scene and were faced with two vessels which were illegally fishing in the Iranian waters under the Saudi flag.
It was not immediately clear if, as in the case of China’s air defense zone, the US promptly decided to drive a battleship in Iran’s territorial waters, just because it can. However, the Saudi response will certainly be just as acute.
Noting that 9 sailors were arrested thereafter, Lashkari said further investigation showed that the 9 people are nationals of different countries.
Also earlier this year, forces of the Islamic Revolutionary Guards Corps (IRGC)’s second naval zone seized another Saudi vessel and its four-strong crew after it illegally entered Iranian waters. The vessel was later expelled.
In a relevant event on January 3, Saudi Arabia detained 21 Iranian nationals who were aboard two boats near al-Harqus Island 42 miles (78 km) off the Saudi coast, the Saudi border guard said.
We may need before an Israeli boat is arrested, and mysteriously blows up, before the middle-east returns to its wild type irrational, militant state.
Charles W. Calomiris and Stephen H. Haber | How Politics Explain Why Banking Systems Succeed–and Fail | Foreign Affairs
People routinely blame politics for outcomes they don’t like, often with good reason: when the dolt in the cubicle down the hall gets a promotion because he plays golf with the boss, when a powerful senator delivers pork-barrel spending to his home state, when a well-connected entrepreneur obtains millions of dollars in government subsidies to build factories that will probably never become competitive enterprises. Yet conventional wisdom holds that politics is not at fault when it comes to banking crises and that such crises instead result from unforeseen and extraordinary circumstances.
In the wake of banking meltdowns, one can rely on central bankers, Treasury officials, and many business journalists and pundits to peddle this view, explaining that well-intentioned and highly skilled people do the best they can to create effective financial institutions, allocate credit efficiently, and manage problems as they arise but that these Masters of the Universe are not really omnipotent. After all, powerful regulators and financial executives cannot foresee every possible contingency and sometimes find themselves subjected to strings of bad luck. Supposed economic shocks that could not possibly have been anticipated destabilize an otherwise smoothly running system. According to this view, banking crises are like Tolstoy’s unhappy families: each is unhappy in its own way.
This conventional view is deeply misleading. In reality, the same kinds of politics that influence other aspects of society also help explain why some countries, such as the United States, suffer repeated banking crises, while others, such as Canada, avoid them altogether. In this context, “politics” refers not to temporary, idiosyncratic alliances among individuals but rather to the way a society’s fundamental governing institutions shape the incentives of officials, bankers, bank shareholders, depositors, debtors, and taxpayers to form coalitions with one another in order to shape laws, policies, and regulations in their favor — often at the expense of everyone else. A country does not choose its banking system; it gets the banking system it deserves, one consistent with the institutions that govern its distribution of political power.
THE GAME OF BANK BARGAINS
A country does not choose its banking system; it gets the banking system it deserves.
One obvious way to underline how politics influences the stability of banking systems is to note that some countries have had lots of banking crises whereas others have had few or none. Consider the records of the 117 countries that have populations in excess of 250,000, that are not current or former communist countries, and that have banking systems large enough to report data on private credit from commercial banks for at least 14 of the 21 years from 1990 to 2010. Only 34 of those 117 countries (29 percent) avoided crises entirely between 1970 and 2013. Sixty-two of those countries had one crisis. Nineteen experienced two. One underwent three crises, and another weathered no fewer than four crises. In other words, countries that underwent banking crises outnumbered countries with stable banking systems by a ratio of more than two to one.
To remain competitive, modern economies need to establish banking systems capable of providing stable access to credit to talented entrepreneurs and responsible households. Why are such systems so rare? How can it be that a sector of the economy that is highly regulated and closely supervised works so badly in so many countries? The crux of the problem is that all governments face three inherent conflicts of interest when it comes to the operation of their banking systems. First, governments supervise and regulate banks while looking to them as sources of government finance. Second, governments enforce the credit contracts that discipline debtors on behalf of banks while relying on those debtors for political support. Finally, although governments must spread the pain among creditors in the event of bank failures, they also simultaneously look to the most significant group of those creditors — bank depositors — for political support.
The property rights system that structures banking is thus the product of political deals that determine which laws are passed and which groups of people have licenses to contract with whom, for what, and on what terms. These deals are guided by the logic of politics, not the logic of the market. The fact that the property rights system underpinning banking systems is an outcome of political deal-making means that there are no fully private banking systems; rather, all modern banking is best thought of as a partnership between the government and a group of bankers, and that partnership is shaped by the institutions that govern the distribution of power in the political system. Government regulatory policies toward banks reflect the deals that gave rise to that partnership, as well as the power of the interest groups whose consent is politically crucial to the ability of the factions in control of the government to sustain those deals. Banks are regulated and supervised according to technical criteria, and banking contracts are enforced according to abstruse laws, but those criteria and laws are not created and enforced by robots programmed to maximize social welfare; they are the outcomes of a political process.
Call it the Game of Bank Bargains. The players in the game are the actors with a stake in the performance of the banking system: the group in control of the government, bankers, shareholders, debtors, and depositors. The rules governing play are set by the society’s political institutions: those rules determine which other groups have to be included in the government-banker partnership, or, alternatively, who can be left out because the rules of the political system render them powerless.
Coalitions among the players form as the game is played, and those coalitions determine the rules governing how new banks are created (and hence the competitive structure and size of the banking sector), the flow of credit and its terms, the permissible activities of banks, and the allocation of losses when banks fail. What is at stake in the Game of Bank Bargains is, therefore, the distribution of the benefits that come from maintaining a system of chartered banks.
Contrary to the way debates about banking are generally framed, the focus should be not on whether banks require more or less regulation but rather on the goals that give rise to regulation and the way those goals are shaped by political bargains. In some countries, the institutions and coalitions combine to produce regulation that improves market outcomes. In other countries, they establish regulations that primarily serve special interests, often with disastrous consequences for the rest of society.
One way to understand the intersection of politics and banking is to examine two pairs of relatively similar neighboring countries where political systems and historical forces produced very different banking systems: England and Scotland and Canada and the United States.
LUCK OF THE SCOTTISH
When the Bank of England and the Bank of Scotland were chartered, in 1694 and 1695, respectively, England and Scotland were separate kingdoms with separate parliaments but were ruled by the same sovereign, William III. At that time, William was hunting for a way to finance his war against France. Since Scotland was poor and remote, the king realized that he would gain little by creating a monopoly Scottish bank to help finance his military exploits and instead relied on England to generate war funding. Moreover, the creation of such a bank would have required negotiating with the Scottish parliament, which was not as committed to the idea of financing the king’s imperial ambitions as was its English counterpart. In fact, the charter of the Bank of Scotland prohibited it from lending to the crown without an act of parliament; the Scottish parliament was quite conscious of the problems that could arise if the Bank of Scotland were turned into a vehicle of public finance. Thus, from the king’s point of view, it was easier to adopt a policy of laissez faire with respect to the Scots and simply use the Bank of England (as well as other English companies) to finance the war.
In the past 180 years, the United States has suffered 14 major banking crises. Canada has suffered two.
So began the English banking system’s history as a crony enterprise. Until well into the nineteenth century, the Game of Bank Bargains in England was structured to serve the fiscal interests of the state and the personal interests of a small group of well-connected private citizens. From 1694 to 1825, the Bank of England was the only English bank that was allowed to take the form of a joint-stock corporation, in which the company is owned by shareholders. All other banks had to organize themselves as partnerships limited to six partners, which kept them relatively small. Other banks were also subject to strict usury laws, which discouraged them from expanding their circle of borrowers. But the English government effectively exempted itself from those laws, thereby channeling credit to itself rather than the private sector. This repressive banking system constrained capital accumulation by the private sector during the early years of the Industrial Revolution, as investment was financed out of the pockets of tinkerers and manufacturers rather than through bank lending.
Merchants and manufacturers complained about the scarcity of credit that resulted from constrained bank chartering, which resulted in a reliance on small country banks as the main source of private credit, and so the Bank of England attempted to mollify them by committing to buy the short-term debt obligations issued by other banks and brokers to finance trade. But this only made England’s fragmented system of banks even more unstable than it already was: knowing that the Bank of England would buy their bills regardless of the circumstances, country banks and other small lenders had little incentive to behave responsibly. As a result, English banking was prone to boom-and-bust cycles, and England suffered frequent major banking crises in the eighteenth century and quite a few in the nineteenth century, as well.
In sharp contrast to England, Scotland, by the middle of the eighteenth century, had developed a highly efficient, competitive, and innovative banking system, which promoted rapid growth. Unlike in England, where the crown’s demands on the Bank of England required the state to protect the bank’s monopoly, in Scotland, the government allowed for the free chartering of banks. Also unlike in England, in Scotland, the banks were able to link their urban headquarters with branches that operated in areas that could not otherwise have supported banks. Free from the obligation to finance the state and allowed to compete and invest everywhere, Scottish banks pursued profit-seeking strategies that provided credit to all sectors of the economy.
As a result of Scotland’s free chartering rules, competition among Scottish banks was fierce during the nineteenth century, spurring the banks to innovate, inventing new services such as interest-bearing deposits and lines of credit. Scottish banks enjoyed remarkably narrow spreads (roughly one percentage point) between the rates of interest charged on loans and the rates they paid on deposits. Nevertheless, they earned respectable rates of return for their shareholders, indicating a high level of efficiency.
The Scottish system served the public well, too: by 1802, the value of bank assets per capita in Scotland was 7.5 pounds, compared with just six pounds per capita in England. Scottish banks were also less likely than English banks to fail or impose losses on their debt holders. Between 1809 and 1830, bank failure rates in England were almost five times as high as those in Scotland, a reflection of the Scottish banks’ greater size, competitiveness, and portfolio diversification.
The United Kingdom’s defeat of France in 1815 began a period known as the Pax Britannica. A combination of reduced war-financing needs and expanded suffrage brought pressure for political change that led England to imitate Scotland’s success: it relaxed its bank-entry restrictions and reformed its bailout policies. By the last quarter of the nineteenth century, the United Kingdom’s unified system was a model of stable, efficient, and competitive branch banking.
Perhaps no pair of countries more clearly demonstrates the way politics determines banking stability than Canada and the United States, two countries that are very similar but that have had starkly different experiences when it comes to banking crises. The banking system in the United States has been highly crisis-prone, suffering no fewer than 14 major crises in the past 180 years. In contrast, Canada — whose southern border with the United States stretches 4,000 miles and whose society and culture closely resemble those of its big brother to the south — experienced only two brief, mild bank-illiquidity crises during that period, both of which occurred in the late 1830s, and neither of which involved significant bank failures. Since then, some Canadian banks have failed, but none of those failures led to a systemic banking crisis. The Canadian banking system has been extraordinarily stable — so stable, in fact, that there has been little need for government intervention in support of the banks since Canada’s independence, in 1867.
The causes of this disparity stretch all the way back to the Colonial era. The original 13 colonies that went on to become the United States were surrounded by hostile neighbors. The colonists faced constant threats from the Spanish in Florida, the French in Quebec and the Ohio Valley, and Native Americans nearly everywhere else. In order to survive, the colonies had to defend themselves with force. There was no obvious source of wealth that could pay for a large standing army to keep enemies at bay. But the colonies did enjoy seemingly endless expanses of farmland suitable for growing tobacco, maize, and wheat, provided that the colonists were able to clear the Native Americans off the land. This combination of hostile neighbors, abundant land, and storable crops that could be grown on modest scales meant that some of the most influential colonists were small, freeholding farmers — who happened to be armed to the teeth.
When the large landowners and merchants who composed the colonies’ economic elite decided to declare independence from Great Britain, they had to secure the loyalty of this class of armed, independent farmers. That was no easy trick: the revolutionary leaders were asking the farmers to go toe-to-toe against the most disciplined and best-equipped army in the world. Motivating them to do so required promises that the farmers would actually enjoy a measure of liberty, freedom, and equality if they won the fight.
In the immediate decades following independence, the merchant elites still managed to maintain the upper hand when it came to economic policy, including bank chartering. But their grip on the banking system soon succumbed to populist challenges, culminating in the failure, in 1832, of the attempt to recharter the federal government’s nationwide Bank of the United States. From that point until the late twentieth century, U.S. banking policies were determined by a durable alliance between small unit banks (banks with no branches) and agrarian populists — farmers who distrusted corporations of nearly every type and the elites who controlled them. The populist support for unit banking reflected, in part, the fact that local banks depended on local economies, making unit banks more willing than big banks to provide credit to existing borrowers even during lean times.
The economic organization of U.S. banking during this rural populist era entailed significant costs: a banking system composed of thousands of unit banks was inherently unstable, noncompetitive, and inefficient. The absence of branches meant that banks could neither spread risk across regions nor easily move funds in order to head off bank runs or coordinate collective responses to problems that arose. As a result, the United States became and remained the most banking-crisis-prone economy in the world. Furthermore, the fact that unit banks operated local monopolies meant that they were able to charge more for loans and pay less for deposits than would have been the case had they had to compete with one another. But the rural populist coalition survived, thanks in part to the decentralization of authority over bank chartering, which allowed the coalition to defeat efforts to allow the federal government to charter its own banks. Even the banking crises of the Great Depression failed to undermine the coalition that supported this inefficient and unstable system.
Indeed, not until the 1990s was the U.S. banking market completely opened up to competition. A steady process of liberalization that had begun in the 1970s culminated in 1994, when Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act, allowing banks to open up branches within states and across state lines. The new law sounded the death knell of the populist coalition that had shaped U.S. banking institutions since the 1830s and permitted a wave of mergers and acquisitions that created the megabanks that now have branches in nearly every city and town in the United States.
In this new American Game of Bank Bargains, populism continued to play a central role in determining the allocation of credit and profit. However, by the late twentieth century, the center of populist power had shifted from rural areas to big cities. In 1977, Congress passed the Community Reinvestment Act to ensure that banks were responsive to the needs of the communities they served. The CRA required banks that wanted to merge with or acquire other banks to demonstrate that responsiveness to federal regulators; the requirements were later strengthened by the Clinton administration, increasing the burden on banks to prove that they were good corporate citizens. This provided a source of leverage for urban activist organizations such as the Neighborhood Assistance Corporation of America, the Greenlining Institute, and the Association of Community Organizations for Reform Now, known as ACORN, which defined themselves as advocates for low-income, urban, and minority communities. Such groups could block or delay a merger by claiming that the banks were not in compliance with their responsibilities; they could also smooth the merger-approval process by publicly supporting the banks. Thus, banks seeking to become nationwide enterprises formed unlikely alliances with such organizations. In exchange for the activists’ support, banks committed to transfer funds to these organizations and to make loans to borrowers identified by them. From 1992 to 2007, the loans that resulted from these arrangements totaled $850 billion. From the point of view of an ambitious banker who was seeking to create a megabank of national scope, making such loans, which represented risks that the banks might not otherwise have taken, was simply part of the cost of doing business.
The alliance between megabanks and urban activist organizations became even more ambitious as it drew in a third set of partners: the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation, commonly known as Fannie Mae and Freddie Mac. CRA-mandated loans posed higher levels of risk to banks than more traditional mortgage loans. To reduce the potential harm to the their bottom lines, banks made it clear to their activist partners that there was an upper limit on how much credit they would extend. In response, activist groups successfully lobbied Congress to require Fannie Mae and Freddie Mac to repurchase the mortgage loans that banks had made to low-income and urban constituencies to meet the obligations of the CRA. After Congress enacted those requirements in 1992 — and especially after the Clinton administration progressively increased the proportion of Fannie Mae and Freddie Mac loan repurchases that met the low-income or urban criteria — even more credit could be directed to targeted constituencies at less cost to the banks. The banks were now able to resell some of their CRA-related mortgages to Fannie and Freddie on favorable terms.
The government mandates on Fannie and Freddie were not vague statements of intent. They were specific targets, and in order to meet them, Fannie and Freddie had little choice but to weaken their underwriting standards by permitting higher leverage, weaker mortgage documentation, and lower borrower credit scores. By the mid-1990s, Fannie and Freddie were agreeing to purchase mortgages with down payments of only three percent, compared with the 20 percent that had long been the industry standard. By 2004, they were purchasing massive quantities of “liar loan” mortgages, made to borrowers who were not required to document their incomes or assets at all.
Fannie and Freddie, by virtue of their size and their capacity to repurchase and securitize loans made by banks, set the standards for the entire industry. When Fannie and Freddie weakened their underwriting standards in order to accommodate the partnership between megabanks and urban activist groups, their weakened underwriting standards ended up applying to everyone. Thus, when Fannie and Freddie started taking huge risks, they changed the risk calculus of large numbers of American families, not just the urban poor. Middle-class families could now borrow heavily and buy much bigger houses in much nicer neighborhoods than they could have bought previously. The result was the rapid growth of mortgages with high probabilities of default for all classes of Americans — and the widespread effects of the subprime crisis. By distorting the incentives of bankers, Fannie and Freddie, government agencies, and large swaths of the population through implicit housing subsidies, the new American Game of Bank Bargains led to a crisis of phenomenal proportions. For a while, almost everyone who played was a winner. When the bubble burst, of course, almost everyone — most particularly and tragically the urban poor — became a loser.
THE TRUE NORTH, STRONG AND FREE — AND STABLE
During the 2008 financial crisis, hundreds of banks failed in the United States, and the U.S. Federal Reserve and the U.S. Treasury had to marshal massive quantities of taxpayer dollars in loans, guarantees, and bailouts to prevent the collapse of still more banks, including some of the very largest. Canada’s banks, meanwhile, never came under severe pressure. None had to be bailed out by taxpayers. Americans were envious and puzzled by the good fortune of their northern neighbors; Canadians were unsurprised. After all, the extraordinary stability of the Canadian banking system had been one of Canada’s most visible and oft-noted characteristics for nearly two centuries. This achievement is especially remarkable in light of the fact that Canada’s economy has relied heavily on exports and is thus quite vulnerable to changing market conditions overseas that are out of Ottawa’s control. More remarkable still, the stability of Canada’s banks for nearly two centuries has been maintained with little government intervention.
Many observers have attributed the Canadian system’s relative success to its structure, one that is very different from that of the U.S. system. The Canadian banking sector has always been composed of very large banks with nationwide branches. This has not only allowed Canadian banks to diversify their loan portfolios across regions; it has also allowed them to transfer funds in order to shore up banks in regions affected by adverse economic shocks. Nationwide branch banking has also allowed Canada’s banks to achieve economies of scale while competing among themselves for business in local markets. Historically, Canadian banks have had lower interest-rate spreads than U.S. banks, especially in remote areas.
One potential shortcoming of a concentrated system such as Canada’s is that it could undermine competition among banks, resulting in less accessible, more expensive credit for households and businesses. But Canada’s democratic political institutions have limited the extent to which the banks can earn monopoly profits. For more than 150 years, the Canadian parliament has carried out periodic legislative reviews and recharterings of the country’s banks. Until 1992, this occurred every ten years; since 1992, it has occurred every five years. The practice of revising the Bank Act (the primary legislation governing banks in Canada) and rechartering the banks is not solely a stick with which to threaten bankers; it is also a carrot that rewards sound business practices by giving the bankers themselves a voice in the crafting of new legislation. Mindful of parliament’s power, Canadian bankers follow the dictum “Pigs get fat, hogs get slaughtered.” The stability of Canada’s banking system, therefore, is not the mechanical result of its branching structure; after all, if branching alone guaranteed stability, U.S. banks would have avoided falling prey to the subprime crisis. The true source of Canadian banks’ stability has been Canada’s political institutions.
One overarching factor shaped Canada’s political economy, including its banking sector: following the American Revolution, British policymakers were determined to hold on to Canada. But the vast majority of Canadian colonists in the late eighteenth century were of French origin and not particularly loyal to the United Kingdom. Keeping control of Canada thus required British policymakers to make concessions to the colonists’ demands for increased self-government while also limiting the political power of the large French population. The British solution was a federal system that diminished French-Canadian influence and gave the central government control over economic policymaking. One result was that even after Canada became functionally independent from the United Kingdom, Canada’s provinces, such as Quebec, never enjoyed the power to create local banks that could serve as the nucleus of a coalition opposed to a national bank, as happened in the United States.
There were populist challenges to Canadian banking laws, but Canada’s political institutions made it difficult to change the basic rules of the country’s Game of Bank Bargains. Banking reforms had to originate in the House of Commons, where it was much harder to create and sustain a winning agrarian populist coalition than would have been the case had bank laws been enacted at the provincial level. Any reform that got through the House of Commons then had to be approved by the appointed Senate, where groups favoring the status quo were usually able to delay changes, propose watered-down compromises, or block proposals entirely. Throughout the twentieth century, this system fended off populist calls for bailouts when banks failed.
In the latter part of the century, Canada’s system was effectively immune to the capture of banking policy by special interests, such as the alliance of urban populists and emerging megabanks that led the United States into the subprime crisis. After World War II, the return of hundreds of thousands of Canadian servicemen led to rapid urbanization and an explosion of demand for housing in Canada’s cities. The government took a number of steps to provide housing credit to this crucial new urban constituency, but it did not do so by pressuring the banks. Rather, the government initially responded to the demand by passing legislation and reforms that, in essence, encouraged insurance companies to underwrite mortgages. And when the market looked unattractive to insurance companies, the federal government directly subsidized homebuilders using taxpayer dollars. This form of support avoided the sort of dangerous subsidization of extremely risky mortgages that took place in the United States. Thus, when Canada’s banks finally entered mortgage markets in the 1980s, they did so with quite conservative underwriting standards.
Many observers of the Canadian banking system attribute its superior performance and stability to its regulatory structure, but effective regulation is best seen as a symptom of deeper political forces. In the United States, regulators permitted instability because it served powerful political interests: rural populists and unit banks prior to the 1980s and urban populists and megabanks afterward. In Canada, the government did not use the banking system to channel subsidized credit to favored political constituencies, so it had no need to tolerate instability.
TOO FLAWED TO FIX?
If deeply rooted political and historical forces largely determine the quality of countries’ banking systems, it is fair to ask how reformers can hope to improve those systems. Within a democracy, effective reforms in banking require more than good ideas or brief windows of opportunity. What is crucial is persistent popular support for good ideas. That is easier imagined than accomplished. Self-interested parties with strong vested interests distract and misinform the public, making it very hard for good ideas to win the day. Banking is a complicated subject, and dominant political coalitions exploit that complexity to make it difficult for the majority of voters to understand how banking systems can be manipulated.
Compounding that problem, it can be hard for ordinary people to identify disinterested third parties, especially in the mass media. If you are a financial wizard, being a reporter tends not to pay as much as being a banker. The result is that many reporters, even at top news outlets, deal with financial reform on a superficial level. Partly as a result, the only ideas for reform that have much hope of gaining widespread popular support are those that can be conveyed in simple terms. Consequently, it is harder for reformers to push for good policies in banking, since good policies almost always reflect the complexity of the system and are hard to reduce to sound bites.
Nevertheless, an unvarnished appreciation for the realities and ironies of the political world and the difficulties of bank regulatory reform should not lead to cynicism or hopelessness. Despite its challenges, political entrepreneurship within a democracy can reshuffle the deck in the Game of Bank Bargains by getting participants in the game to revise their views of what best serves their interests. Those who wish to improve banking systems must begin from a clear sense of how political power is allocated and identify gains for those who have the power to change things for the better. It does no good to assume that all the alternative feasible political bargains have already been considered and rejected. As George Bernard Shaw wrote, “The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” Meaningful banking reform in a democracy depends on informed and stubborn unreasonableness.
In this exclusive Press For Truth video report Dan Dicks interviews Caily DiPuma of the BC Civil Liberties Association about their lawsuit against the Communications Security Establishment Canada (CSEC) which calls on the government to state clearly who they are watching, what is being collected, and how they are handling Canadians’ private communications and information.
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