|What's New in Political
What Happened to Social Democracy?
By John W. Warnock
October 18, 2012
Anyone who has followed the current economic and financial crisis in Europe knows that social democratic governments and parties have consistently lined up on the side of the banks and the rich in the ongoing political conflict. The policies they have implemented while in government have been nearly identical to those advanced by the traditional right wing parties and governments. In several counties, the social democrats have formed political alliances to govern with the right wing parties. What is going on here?
It is hard to get answers from social democrats who hold office. The leaders of the larger trade unions make excuses or remain silent. Those who have traditionally voted for these parties, or taken out memberships, are mystified. But you can find some answers in a new book edited by Bryan Evans and Ingo Schmidt: Social Democracy After the Cold War, recently published by Athabasca University Press.
The Third Way - Revised
I can remember when Sweden was referred to as the “Third Way” – the alternative to the Anglo-American version of unfettered and rapacious capitalism and the totalitarian version of state socialism that was the Soviet Union. Sweden was a deeply democratic country with the great majority of workers in trade unions, a solid base of democratic social organizations, where the Social Democratic Workers Party formed the government between 1932 and 1976. With a progressive system of taxation, they had created a society with a comprehensive, universal welfare state that had all but eliminated poverty.
Now the Third Way is identified with the neoliberal package of policies implemented by the same social democratic parties. This includes greatly reduced taxes on corporations and the rich, major cuts to universal social programs, privatization of state-owned enterprises, deregulation of the economy and the backing of the “free trade” treaties as advocated by the largest corporations and financial institutions. US President Bill Clinton and British Prime Minister Tony Blair led the way in deregulating the financial sector and refusing to regulate the new derivatives markets, directly leading to the financial collapse and the Great Recession which began in 2008.
Social democratic parties as we know them emerged after 1919 with a split in the broad working class movement. Parties which backed the new Soviet Union formed the Third International Workingmen’s Association. They wanted to replace the capitalist system with a government of the working class, implementing a socialist alternative. The remaining parties stayed in the revised Second International. While some parties hoped to create a socialist society through the electoral route, most sought simply to reform the system, to create a “capitalism with a human face.”
The high point for this reformist social democratic vision was the period between 1945 and 1975. The world economy was booming, workers were expanding the trade union movement, and governments were introducing the new welfare state. This boom period ended when Paul Volker and the central bankers raised interest rates and created the major world recession of 1980-2. The election of Margaret Thatcher’s government in 1979 and Ronald Reagan’s presidency in 1980 turned the tide, leading an all out war against the Swedish Third Way.
The major shift in social democracy
The essays in this book cover the experiences of social democratic parties and governments in Canada, the United States, the United Kingdom, Australia, Sweden and Germany. One of the conclusions is that the moderate reform of capitalism that social democracy has implemented while in government is only possible when there are good economic times. When there is economic stagnation, and corporate profits start to fall, the capitalists of all nations join together and launch a counter attack on workers and the poor. The shift in social democratic governments to embrace the neoliberal agenda began in Sweden in 1982 and New Zealand in 1984.
The authors point out that the social democrats have been unable to create an alternative to the current program of austerity which focuses on increasing the rate of profit for the corporations while implementing the package of regressive policies which fall almost exclusively on those on wages and salaries and the poor. Part of the problem is that they have never produced a serious analysis of how capitalism works. Kjell Ostberg, writing on the experience in Sweden, argues that “social democracy has ceased to function as a creator of ideas.”
The bankruptcy of the leadership of social democracy was demonstrated in their commitment to “free trade” and globalization. In this major battle, which began in the late 1980s, the social democratic parties stood with the capitalist class and its allies and against the trade unions and the popular organizations, the core of their supporters. If this was not bad enough, they also stood solidly behind the different US administrations in their more recent imperial wars, again in the face of majority popular opposition. In the massive world movement against the US war on Iraq in 2003, they were silent if not in support.
The transformation of social democracy
Most of the social democratic parties in the advanced industrialized countries were created by the trade union movement. In Canada the CCF-NDP was formed by a broad populist movement on the left. The authors report that there have been common developments in all these countries which have contributed to their transformation.
(1) The professionalization of the party. The leadership of the party and the parliamentary caucus run the party from the top down. They rely on professionals and media experts to set the party’s direction. The party membership and supporters have been marginalized.
(2) The complete shift to electoralism, with the conviction that politics is debate and voting in the legislature. There is hostility towards extra-parliamentary politics. This was most evident in Canada and the United States in the battle over the free trade agreements, where the opposition was led by the trade unions and the popular organizations which used to form the base of the social democratic movement. In the USA, Bill Clinton actively promoted the free trade agenda; in Canada, in the 1988 “free trade election,” the New Democratic Party under Ed Broadbent stood down on the issue.
(3) There has been a conscious move to separate the professional party from its historic base in the trade unions and the working class. The industrial working class has declined as this work has shifted to Asia, but neither the parties nor the trade unions have been able to mobilize the new working class.
(4) The parties have become Stalinist, permitting no open public debate on important issues. The leader sets the policies and supporters are expected to toe the line. When organized dissent emerges, it is contained or expelled.
(5) There is the development of the “nobility” of the party leadership, with key members, and the elected caucus, representing career party loyalists. Few representatives from the working class are allowed to win electoral nominations, and few are elected. The political orientation of this leadership is liberal rather than democratic.
The results have been the same in all the industrialized countries. Party membership has fallen dramatically. Voter turnout has dropped significantly, especially in working class and poor areas. New parties of the socialist left, the Greens and the neo-fascist right are increasing their support in areas which were historically the reserve of the social democrats.
In the present economic and financial crisis, we are seeing the collapse of the social democratic parties in Europe. They are unable to develop a critique of globalized capitalism and advance a program and vision which is different from the free market, free trade right. Since they are no longer a movement, how can they bring their former supporters back into the party? How can they convince the 40% to 50% who no longer vote that it is worth going to the polls? Is there any future for social democracy?
Bryan Evans and Ingo Schmidt, eds. Social Democracy After the Cold War. Edmonton: Athabasca University Press, 2012.
There are alternatives to the bankrupt neoliberalism
New Directions in Saskatchewan Public Policy
David McGrane, ed.
Regina: Canadian Plains Research Center Press
University of Regina, 2011. $39.95 paper
Reviewed by John W. Warnock
Canadian Dimension Magazine
February 18, 2012
From 1944 through 2007 Saskatchewan politics was dominated by the Co-operative Commonwealth Federation (CCF) and its successor the New Democratic Party (NDP). But the NDP was soundly defeated by the Brad Wall’s Saskatchewan Party in 2007 and routed in 2011. Today they hold only nine seats in the legislature.
The vote for the NDP fell from 275,000 in 1991 to 169,000 in 2007 and 127,000 in 2011. The party membership has dropped from 46,000 in 1991 to around 8,000 today. The provincial Liberal Party has all but disappeared; in the 2011 election they got fewer votes than the Greens. The Saskatchewan Party received 64% of the popular vote and the NDP only 32%. The NDP may never again form the government in Saskatchewan.
Obviously, the Saskatchewan NDP needs to seriously re-evaluate the political direction it has taken since 1991. The move to the right to embrace the neoliberal model has been a failure. Thus it is a good time for a book of serious papers which examine ongoing problems and set out an alternative policy direction.
The child poverty rate in Saskatchewan stands at 19.6%, tied with B.C. as the highest in Canada. James Mulvale and Kirk Englot explain how a progressive provincial government could implement a feasible strategy for poverty reduction.
Saskatchewan has a very high percentage of senior citizens with increasing health care costs. The Aboriginal population is growing fast. Daniel Beland stresses the need for major training and support programs. The province cannot meet the needs of the people while putting its highest priority on cutting taxes.
Bohdan Kordan concludes that recent provincial governments have had little interest in introducing multicultural policies to welcome new immigrants, even with the shortage of skilled workers and jobs unfilled. There are long waiting lists to get into training programs at our technical institutes.
Saskatchewan has a horrendous record when it comes to greenhouse gas emissions and climate change. In 1997 Roy Romanow’s NDP government introduced a resolution in the legislature denouncing the Kyoto Protocol and insisting that no compulsory controls be placed on emissions. They shut down the Energy Conservation and Development Commission, which had produced excellent studies on projects suitable for the province.
When faced with the challenge from the New Green Alliance and the few environmental organizations in the province, Lorne Calvert’s government finally came up with a set of goals for reductions, but there was no attempt to actually implement any serious program.
Scott Bell and Jamesy Patrick outline a general path that could be taken. But they do not confront the reality of the situation in the province, where neither of the two major parties has ever had any commitment to doing anything which would reduce the consumption of fossil fuels.
Saskatchewan has the longest and deepest experience with CCF-NDP governments. Therefore, it is somewhat surprising to discover that this tradition is almost absent at the level of municipal government. The alliance of developers and builders rules. There is no history of planning municipalities for the general welfare. Ryan Walker’s excellent essay on “equitable urbanism” shows how urban planning and development should be in human-scale development.
But the reality today in Saskatchewan’s larger cities is the worst of suburban development: overpriced, oversized single detached houses, linked to “power centres”, where large transnational firms congregate, creating a huge black hole which sucks capital out of the community. Junkscapes are the norm. Heritage buildings are torn down. Older, affordable apartments are converted to condominiums. There is no concern for people who want to rent, seniors, people who have moderate or low incomes, the disabled, or the many with few resources coming to our urban centres from reserves. As Walker makes clear, our urban development is the opposite of smart growth.
Charles Smith’s article on the impact of neoliberalism on the trade union movement is one of the best in the collection. He contrasts the open support that workers got from the CCF government of T.C. douglas with the refusal of the NDP under Romanow and Calvert to in any way enhance the rights of labour. The first priority of the Romanow government was to build a special partnership with the business community. They refused to introduce any pay equity legislation. They legislated Sask Power employees and nurses back to work.
Labour must cease its practice of unquestioning support of the NDP and work in the broader community, Smith argues. It is surprising that he overlooks the example of the very successful role that labour played in helping to build and finance the Saskatchewan Coalition for Social Justice.
The shift in agricultural policy from the social democratic activist support of the CCF-NDP through the Blakeney government (1944-81) to the neoliberal program of the subsequent governments is covered by Darrell McLaughlin and Daniel DeLury The Romanow-Calvert governments (1991-2007) were aggressive in their support for agribusiness. Calvert’s government even lifted the restrictions on foreign and corporate ownership of farmland. The alternatives set forth are those we generally associate with the Food First movement. In the era of climate change, democratic justice, stewardship and decentralized control are required.
The failure of the NDP governments to address the status of Aboriginal peoples in the province is well covered by Bonita Beatty and Priscilla Settee. The democratic alternative to neoliberalism is set forth by Settee, who draws on traditional Cree principles which stress community life, well being for all, sharing, a deep respect for nature and animal life, and a commitment to the betterment of humankind. Local ownership and import substitution are required as well as the democratization of our important institutions.
The weakest paper in the book is by David McGrane, a look at the province’s tax policy from 1991 to 2011. He laments the “limited academic research” on the subject while ignoring Phillip Hansen’s Taxing Illusions, an excellent study which compares the tax policy of the CCF-NDP governments through Woodrow Lloyd with that of the Romanow period.
He completely ignores the role of the Personal Income Tax Review Committee under Jack Vicq, which strongly endorsed the Romanow government’s tax cut program. He needed someone other than Eric Cline, the former NDP finance minister, to read and comment on his paper. McGrane argues that the Romanow-Calvert governments were “ideologically committed to increasing economic equality” and “redistributing wealth.” But as Paul Gingrich has shown, under the Romanow-Calvert governments Saskatchewan experienced a dramatic increase in income inequality. This is the government that froze welfare rates between 1991 and 2006. McGrane does note that Brad Wall’s government reversed a key policy of the NDP governments when it raised provincial grants to school boards and municipalities and removed a large segment of low income earners from the taxation rolls.
The overall position of McGrane follows that of University of Regina professor Howard Leeson: we have seen the two major political parties “crowding the centre.” But most people would see a broad move to the right as both parties embraced the neoliberal agenda set by big business.
The papers in this book were first presented at a conference at the University of Saskatchewan in 2009. It coincided with the NDP choosing Dwain Lingenfelter, one of Romano’s key cabinet ministers, to replace Lorne Calvert. At the same time the world was watching the collapse of the neoliberal model and the social democrats’ Third Way. There are some very good alternatives presented in these papers. The key question, of course, is who is going to implement them. Certainly not the NDP as we know it.
John W. Warnock is a Regina political activist and author of Saskatchewan: the Roots of Discontent and Protest.
2012: The Year the Canadian Housing Bubble Will Burst
by John W. Warnock
January 5, 2012
This is the time of year when all economists (and some political economists) are called upon to make their forecasts for the year which is beginning. From the recent data it appears that the USA will have a very modest increase in economic growth, not enough to significantly reduce the number of people who are unemployed, working part time while wanting full time work, or who have given up looking for a job and have left the work force. The European Union has an enormous pile of debt to deleverage, is already in a double dip recession, and all forecasts are
for an overall negative growth rate for the year. This can only be bad news for the economies of the USA and Canada.
The housing issue
However, it does seem likely that the average price of a house in the USA will finally reach the bottom of the collapse of their housing bubble. As I write this prices have fallen back to where they were in 2000, the beginning of the formation of the bubble. We can see this in the
graph of the trends in house prices tracked by the three most respected sources of data, reported here by Calculated Risk.
As most people know by now, the housing market in the USA took off when the government deregulated the finance industry, drastically reduced the interest rates on mortgages, lifted the requirement for buyers to have 20% equity when buying a house, and instructed the federal chartered housing corporations (Fannie May, Freddy Mac, Federal Housing Authority, etc.) to insure all the marginal mortgages. This created what became known as the “sub-prime” mortgage market.
These very risky mortgages were then bundled together into mortgage backed securities (MSBs) which were then sold on the bond markets around the world as top rated investments. This Ponzi scheme collapsed when many of the new homeowners could not keep up the payments. There are still over four million houses in the USA in some phase of the foreclosure process.
Canada: “The housing market is different here.”
But as we are told over and over by our political leaders, the spokesmen for the housing industry, the banks, the mainstream economists and the mass media, Canada is fortunate that this did not happen here! There is no housing bubble in Canada! But is this really true?
Since the end of World War II the price of a house purchased in Canada (and the USA) has averaged between two and three times annual household income. When it rises higher than this ratio, owners become “house poor;” they cannot keep up with all the costs of owning a home and have enough income left over to lead a normal middle class life style.
Furthermore, our economy cannot function as it should when the average price of a house rises so high that the average family cannot afford to buy. In North America around 65% of families and individuals prefer to make monthly payments to bankers rather than landlords. This ratio rose to over 70% in the USA during the housing boom and has now dropped back to the 65% level. In Canada the option of ownership is still at the 70% level.
So where are we now? The average price of a house in the USA is $175,000, and the median family income is $50,000. In Canada the average price of a house today is $362,000 and the median family income is $65,000. So the average price of a house today in Canada is over five
times the median family income. But all the powers that be in Canada insist that there is no housing bubble.
Government policy and the Canadian housing bubble
To a very large extent it has been government policy which has promoted the housing bubble. In the 1990s most of the advanced industrialized countries sought to boost their economies by expanding the private housing market. It was hoped that the expansion of the housing industry would help to offset the decline of the manufacturing industry.
In Canada in December 2006 Stephen Harper’s government introduced 40 year mortgages with no money down. These policies were directly aimed at first time buyers. Interest rates were reduced, and the cost of carrying a mortgages fell significantly. A five year fixed mortgage can be purchased today with an interest rate cost of only 5%. Since World War II mortgage interest rates have averaged a bit over 8%.
As part of the change in policy, those who bought a house with less than the traditional 20% down payment were required to get mortgage insurance. This was the task of the Central Mortgage and Housing Corporation (CMHC). The risk of default on these mortgages was shifted from the banks and other lenders to the Canadian taxpayers, who own and bankroll CMHC. In 2011 the average first home buyer had only a 7% equity in the purchased home.
Today first home buyers can still purchase a home with 5% down and a 35 year amortization. Furthermore, banks have allowed some first time buyers to borrow the 5% down payment. The results have been as expected. In the United States, the federal agencies holds mortgages worth around $1.3 trillion. In Canada, CMHC has acquired and insured $600 billion of our “sub prime” mortgages. CMHC bundles up these mortgages into mortgage backed securities (MSBs) and sells them as bonds on the international market, 100% guaranteed by the Canadian government. Canada is different, Eh?
There are signs that the housing bubble in Canada is starting to break, even in some of the key markets like Vancouver and Toronto. Canadian households seem to have finally become concerned over their very high ratio to debt to income. So it is my projection that this is finally the year when our housing market will begin its path down to the normal level. But not in Regina, do to the influx of population. This would change if the oil and potash industries were to follow the general decline now evident in world commodity prices.
John W. Warnock is retired from teaching political economy and sociology at the University of Regina.
The Financial/Economic Crisis
December 5, 2011
The stock markets rose when the central banks of major capitalist countries pledged to provide the troubled banks of Europe with more liquidity, printing money guaranteed by their taxpayers. The Eurozone crisis is not really about bad fiscal practices by a number of the smaller states. It is about the bad lending practices of the big banks. F. A. Hayek would have insisted that the banks have to suck it up and take the losses, which were due to their own irresponsible practices. The neoconservatives have been ignoring him lately.
The central bank of the European Union does not have the funds to bail out the governments of Italy or Spain. Therefore, the only option seen by the political-economic elite is for a bank directed government imposing harsh austerity measures on the common people. Riots and general strikes are natural reactions.
This week Angela Merkel and Nicolas Sarkozy are meeting to come up with a plan for a new European union which would include the power to control the elected governments of the member states. These governments would be brought into line by a central authority operating on behalf of the international financial community. Needless to say, this is a diversion that would never be accepted by the member states.
Few want to mention that the real reason for the crisis is the dodgy level of solvency of the large banks. They made bad investments, like purchasing U.S. mortgage backed securities. They made loans to governments without checking to see if they could be paid back. The sovereign debt held by the banks was judged to be as good as cash and used to make inter-bank payments. There is no mark to market rule used by accountants today as it would reveal that banks hold a great deal of debt at a face value that is far above the real market value. That is why they are not rushing to foreclose on bad loans. It is a question of solvency.
Then there is Iceland. The first country that went bankrupt. Fortunately for the Icelanders, it was not a member of the European Union. The common people, through two referendums, refused to be held responsible for the horrendous practices of the private banks egged on by their mainstream economist advisers.
The OECD now reports that the GDP for Iceland will be +2.9% for 2011. Unemployment has fallen to 6.1%. Exports are recovering. Inflation is firm at 4%. The government is steadily moving to reduce the budget deficit. This turnaround was achieved by the Social Democratic-Green Left Movement government by devaluating the currency and introducing capital controls. This government rejected the calls for an austerity program and has chosen to follow the Argentine example of promoting growth from the bottom up.
November 11, 2011
It is Remembrance Day in Canada. The Saskatchewan government just announced the naming of the Trans-Canada highway between Regina and Moose Jaw our Highway of Heroes. This is to follow Ontario, to honour the memory of Canadians killed in the war in Afghanistan. Politicians and the mass media have been drowning us in PR pieces on what a great job we did there supporting the US/NATO war. A war for what? To keep in power Hamid Karzai, the corrupt president put in office by the U.S. government. To celebrate the Afghan parliament, which is dominated by misogynist warlords and drug lords. Our government has been there to block the participation of the democratic parties in the electoral process and to support the rewriting of the Afghan constitution to make the country completely dependent on the free market, free trade and foreign ownership.
Meanwhile, the two main parties in Greece have formed a temporary coalition government in order to impose the draconian “adjustments” on their own people. All of this, of course, is to protect the big European banks who made bad loans to the Greek government. Everyone who has half a brain knows that Greece will not be able to pay her debts and a default is just a matter of time. Another general strike has been called.
Suddenly, it was discovered that Italy has a huge debt and given its weak economy cannot pay it off. More political juggling. Another austerity budget is being imposed on the Italian people, a guarantee that the economy will further decline and debts will be impossible to pay. Such is the state of advanced capitalism today. Even the European Community Bank is warning that Europe is now falling into a double dip recession.
Far away in hinterland Saskatchewan, the oil is still flowing, potash is being dug out of the ground and exported, this year’s agricultural crops were blessed with good weather. Thus the right of centre Saskatchewan Party won the November 7 election with 65% of the vote cast, the largest margin of victory in the province’s history. The social democrat opposition, the NDP, was reduced to just nine seats and Dwain Lingenfelter, the leader brought back by the party’s caucus from his post at Nexen Energy, lost his own seat. The NDP had a good progressive platform, but with Lingenfelter, a strong neoliberal, as leader, they had no credibility.
October 20, 2011
Fall is finally here, and our summer construction project has ended. Around our area, about 100 km north of Regina, farmers have become heavily dependent on the miracle herbicide, glyphosate. Roundup Ready canola, manufactured by Montsanto, is everywhere, as well as the newer similar products from other seed/pesticide manufacturers. It suits the needs of the new sociology of farming: large farms run by families who own square miles of farm land and large business farmers who own some land but lease most of their land. We are moving to the system of capitalist farming discribed by Marx and Engels in Capital, based on the British experience: there are the land owners, the contract farmers who run the farms, and the wage labourers who do most of the actual farm work.
Our big farmers today love glyphosate, which kills all plants other than those protected by genetic manipulation. It allows them to minimize their time on the land. It is most suited for large acreages of a single crop. But as any real farmer knows, you cannot eliminate plant or animal pests. There is never a 100% kill. Those that survive, because of resistance, are the pests which reproduce. It is no surprise that the most persistent weed in our area is genetically engineered canola. The plants grow everywhere. In the wet areas of our fields, which were not planted this year because the machinery could not operate there, they have thrived, and in many cases I have seen, they appear to be a seeded crop. They grow in all the ditches and along the road. Furthermore, across North America the most dificult weeds are becoming resistant to this herbicide; this is even reported in The Western Producer, our local farm and agribusiness weekly.
A study conducted by the U.S. Geological Survey found glyphosate in every sample taken from streams in Mississippi and Iowa, as well as in most air samples. Another study by Cynthia Sagers of the University of Arkansas found genetically engineered canola everywhere in North Dakota. Furthermore, she discovered that these herbicide resistant genes manufactured in laboratories were being swapped with plants in the wild, such as field mustard, a serious pest for grain farmers. Real farmers knew this would happen. In the 1970s, when I was an orchardist in the Okanagan Valley, I was asked by the Science Council of Canada to write a short paper on what I thought about the introduction of new genetically engineered plants. All my farmer friends knew what would happen. There was a lot of history available. But agribusiness rules.
The Financial Crisis remains the big story of the day. The focus the past few days is on Europe and the impossibility of bailing out all the troubled banks. Belgium's largest bank failed, and it had passed the ECB's "stress test." The IMF warns that Canada's household debt is far to high. Builders in Canada are still constructing more houses than new households are being formed. The U.S. Federal Housing Finance Agency has sued the biggest financial institutions in the USA for misleading them on the ability of the people who bought houses with no money down to actully make their mortgage payments.
The headline news today is again Greece, where the trade unions are beginning a two day general strike. The PASOK government is reported to be mobilizing the armed forces. Riot police have already attacked striking garbage workers. As in Portugal, Spain and Ireland, the social democratic governments are coming down hard on the working class. The Financial Times points out that the austerity plan of the Greek government will cost the average family at least 11% of their household income. This is the social democratic alternative? As Margaret Thatcher once commented, her greatest success as Prime Minister was transforming the Labour Party into another conservative party.
September 18, 2011
This summer's construction project is winding down. We are adding insulation to the renovated barn so that we can use it this fall and winter. All around us the crops have been harvested, and in our area the farmers are optimistic. The downside is that the Conservative government of Stephen Harper insists that it will end the role of the Canadian Wheat Board in the marketing of wheat and barley. The CWB held a referendum among western Canadian grain growers, and 62% wanted the CWB to continue as the sole sales agent for wheat and 51% wanted the same continued for barley. But this is the era of neoliberalism, and democratic organizations are steadily being eliminated. The provincial NDP governments under Roy Romanow and Lorne Calvert helped the management team at the Saskatchewan Wheat Pool change it from a farmers' co-operative into another private agribusiness corporation. No membership vote was permitted.
This week investors focused on the financial crisis in Europe. Central banks pledged to come to the support of the generally insolvent big European banks, who hold large chunks of toxic assets including bonds from the southern European countries. In Canada, we are different. Housing prices continue to rise. Households keep expanding their debt. The Canadian Payroll Association's new survey reportd that "57% of Canadians surveyed said they would be in a tough spot if their paycheque was delayed by just one week." What, me worry?
In the USA the Federal Housing Finance Agency has sued 17 lenders, including the big banks, for misleading the two big quasi-government housing agencies, Fannie May and Freddie Mac, on the soundness of the residential mortgages that were included in the mortgage backed securities bought by the two agencies. The FHFA has charged that the loans were far more risky than the descriptions provided to the two agencies. The lending institutions did not reveal that a great many of the people who received the mortgages to buy a house had little financial ability to pay back the loans. The two GSEs have been under federal governmemt "conservatorship" since 2008.
What about Canada? Stephen Harper's Conservative government changed the rules for residential mortgages, allowing mortgages to cover 40 years. Instead of requiring the historic 20% down by the purchasers, Harper ordered the Central Housing the Mortgage Corporation to insure mortgages where the purchaser could buy with no money down! That has been revised to require them to have 5% down, although the banks and other mortgage companies have found ways to get around this new rule. CMHC has guaranteed $600 billion in mortgages where buyers have had less than 20% for a down payment. For newbies ("property virgins") the average down payment over the last year was only 7% of purchase price.
But Canada is different, it is argued. For those who really believe that, I highly recommend reading this widely praised empirical study: Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different; Eight centuries of Financial Folly.
Princeton University Press, 2009. Available in paperback where people still buy actual books.
August 20, 2011
The dog days of summer are here. Hot but not humid. The mosquitoes are leaving. The deer confidently run across our posted land. So do the coyotes and fox, and we have seen the moose tracks, but the animals remain hidden. Hardly any rain for the past few weeks, and the crops are ripening. The pulse crops are now in the bin. The canola is being cut, although ours is still not quite ready. Some wheat is being taken off. In our lucky area, the crops look very good.
As I go back to Regina, I come to learn that the only public issue of any importance is the state of the Saskatchewan Roughriders. They have started the football season at one win and seven losses. The fans are uneasy. Coaches are to be fired. There is a November 2011 election scheduled, but no one cares. It is a foregone conclusion that the formally right wing Saskatchewan Party will easily defeat the informally right wing New Democratic Party. Like last time, around 50% of the people will not bother to vote. There is no choice, and relative to the rest of Canada, we in this province are all right. House prices are holding. China is stilll buying our resources that do not go to the USA.
The stock markets have been dropping the past week. All the pundits say it is just investor fear. Why should anyone be worried? An adviser in the Globe and Mail tells readers when fear strikes it is time to buy stocks. But there are a few issues around that would lead many people to have some doubts about the economy:
* House prices and sales in the USA continue to decline. The bottom has not been reached.
* This week initial claims for unemployment insurance have once again gone up. Growth forecasts drop again.
* 90% of Europe's biggest banks hold $6.7 trillion of short term loans which must be financed over two years.
* Heliocopter Ben says that the Fed will help to prop up the stock market by guaranteeing that interest rates will remain at
historic lows until into 2013. The Fed is not supposed to do this, but President Obama is desperate.
* Italy and Spain have serious sovereign debt problems and the European Central Bank cannot begin to bail them out.
* The advanced industrialized countries are incapable of undertaking another financial bailout. Austerity rules.
But our Minister of Finance and the head of the Bank of Canada say not to worry.
July 10, 2001
Summer is finally here. The canola crop looks very good, and farmers in our neck of the woods are quite optimistic. The nearly dry marsh on the land has become a rather large lake. The main grid road access is still blocked as it has been swallowed up by an expanded slough. Wood ticks are down, but other biting insects are up. I am back doing construction work for the second summer in a row and am enjoying once again being a producer of something useful.
“Bankers are pigs, not the people!” A common sign seen in Greece as the people struggle against international finance and their social democratic government. George Papandreau and the Panhellenic Social Movement (PASOK) are imposing a draconian austerity program on the Greek people, all to prevent international bondholders from taking any kind of a loss on their investments in the Greek economy.
The plan imposed by the financial Troika includes: higher property taxes, higher taxes on heating oil, an increase in all of the consumption taxes and users fees, a major extension of the income tax system to low income people, raising the retirement age, wage cuts for public service workers, major government spending cuts, and a special “solidarity tax” on everyone earning more than $17,000 per year. Furthermore, there is a broad privatization program being introduced.
Major general strikes and unending protests have not undermined the ability of the leadership of PASOK to crack the whip on their members of parliament. Currently the PASOK government has the support of 27% of the population; 90% in recent polls say the government is on the wrong path. The rightist New Democracy Party has opposed this round of cuts arguing that the economy is already in decline, and this fifth austerity program will only deepen the recession. They are right, of course.
All commentators seem to agree that this is just another example of kicking the can down the road. No one really believes that Greece will be able to pay their enormous debts. All those in power argue that the people as a whole must swallow the medicine: the alternative of a default might be the failure of some larger European banks holding Greek government bonds. In all the so-called PIIGS, social democratic and labour parties supported financial deregulation and now are imposing harsh regimes on the working class and the poor. Canadians are crossing their fingers and holding their breath. So far so good. We are different, Eh? So is our New Democratic Party opposition?
There was an alternative proposed for Greece: follow the model of Argentina, which defaulted on some of its international bonds in 2002. Nestor Kirchner’s solution to the neoliberal disaster was debt default, devaluation of the national currency, import substitution policies, improved tax collection, and more money for social welfare. It worked. Since the change in policy Argentina has had nine straight years of high rates of economic growth, a decline in unemployment and a significant reduction in the poverty rate. Growth this year is projected to be 6.7%.
June 18, 2011
The only thing that has changed over the past month is the growing fear that there is a very weak economic recovery. In the United States, key to the Canadian economy, house prices fell to an eight year low, and the Case-Shiller report says they may fall another 15%. The University of Michigan survey reports that consumer confidence is dropping. The Chicago FED reports that manufacturing activity is falling. There are few good news items on the employment front. U.S. consumers have decided it is time to start paying down their debts. But not the U.S. Congress, which is in gridlock. A new poll finds that Mitt Romney, the likely Republican candidate for president, would defeat Barrack Obama if an election was held today.
The primary concern of the business elite is the absolute inability of the Greek government to pay its debts and the growing popular demand across Europe to stop trying to bail them out. The European Central Bank is adamant that it would be a disaster to allow the Greek government to default on its enormous debt. European banks would have to take a hit (or as they prefer to say, a haircut) and many would fail. The Irish government caused a stir when they suggested that private bond holders must assume some of the cost of the collapse of their ponzi schemes.
Then there is the concern over the Chinese economy. Many observers see a highly leveraged economy, using soft government finance to promote speculative investment. Some economists argue that the Chinese government is following the very path that the Japanese government took in the 1990s, producing a financial/housing bubble which ended with serious deflation. The Chinese government is beginning to take measures to pull back on the rate of growth and inflation. If that policy is successful, business economists warn that the raw materials commodity markets will take a big hit. Needless to say, that would radically shift the economy in Saskatchewan.
May 30, 2011
Mark Carney, head of the Bank of Canada, tells us that the economic situation is not that good and we should be wary. Jim Flaherty, the Minister of Finance, says he is worried that the economy may fall back into recession unless there is a real recovery in the USA and the sovereign debt crisis is not solved. The election promise to eliminate the Canadian budget deficit over four years has been put off for a while. There will be no increase in interest rates over the summer.
News from Obama's American is not all that good. There is a glut of homes in the foreclosure process, and house prices continut to fall. House sales fell 12% in April. The Fed reports that there is stagnation appearing in the economy, especially in the industrial sector. Auto sales are down. Durable goods order fell 3.6% in April. Jobless claims are again rising. In the first quarter economic growth fell to 1.8% on an annualized basis. U.S. consumer spending, 70% of GDP, is again slowing. Greece and the European debt crisis is the focus of international capital.
Is there anything wrong with this picture?
Average price for a single family house in April 2011: USA $173,000 Canada $372,000
Median family income in April 2011: USA: $64,400 Canada $83,010
In the period since the end of World War II the price of house has normally ranged between two and three time median family income. Everyone in authority, including the leader of the Official Opposition, says that there is no bubble in the housing market in Canada
May 11, 2011
Everything is still all right. In the USA the economic indexes are slowing moving upward. Investors believe that the markets will continue to rise. It is believed that the European governments will continue to bail out the debt ridden EU countries and the banks who hold a tonne of bad debt. As Whitney Debefoise (formerly of the IMF) recently pointed out, a restructuring of the economies of Greece, Ireland and Portugal is not possible, for the European banks do not have enough capital to cover the expected losses.
But behind the headlines there are still some troubling realities. U.S. house prices and sales continue to fall in their double dip. With increases in gasoline and food prices, household budgets are stretched. The market rose when it was announced that U.S. citizens are again starting to borrow and spend more than they earn. But a Gallup Poll in late April found that 26 % of Americans think there is still and recession and another 29% believe the USA is experiencing a depression.
Aside from this there is the troubling U.S. labour market. New applications for unemployment insurance rose “unexpectedly.” Some wayward economists pointed out that in 2010 the U.S. population rose by 1,817,000 but the labour force declined by 1,099,000. Over January through April 2011 548,000 people dropped out of the labour force. A report by TD Economics found that while 33% of those employed in the USA were in high skilled and relatively high paying jobs, the number of people holding low skilled and low paying jobs (20%) was rising. Jobs in the middle, which paid a living wage, were being rapidly lost, being shifted overseas in the free trade and free market era., outsourced to low wage countries. Other good jobs are lost through automation.
The other major concern in the world economy in the decision by India and China to raise interest rates and take other measures to stem inflation and speculation in the housing markets. One fallout from this policy shift is predicted to be a decline in the price of commodities.
So how are things in Canada? Not as good as the media would suggest. There was actually negative growth in February. The free money from Ottawa has ended. The housing market is now definitely starting to head downward. On top of this, the Harper government has pledged to cut $11 billion from the federal budget over the next three years. The Canadian dollar continues to rise in value compared to the U.S. dollar, and Canada is still heavily dependent on exporting to the USA.
April 10, 2011
The Great Recession in over. That is the near unanamous expert opinion. The USA is in recovery mode. The U.S. Labor Department says that employment is up and the unemployment rate is down. But the Gallup Poll on employment, which interviews over 20,000 U.S. working age Americans, reports that those officially unemployed and those who want a full time job and can't find one rose to 20.3% of the labour force in March. Who are we to believe?
One statistic is widely acknowledged. The labour participation rate in the USA is now at 64.2%, the lowest in 25 years, and it has been shrinking steadily over the past four years. Around 7.5 million jobs disappeared during this recession, the worst since WWII.
Other news from the USA: The upper 1% of employees take home 25% of all income. The upper 1% of those who file tax retruns own 40% of all wealth. The federal budget for March 2011 included revenues of $128 billion and expenditures of $1,053 billion. The government covered most of the difference by borrowing another $786.5 billion. President Barrack Obama's budget deficit for 2011 is now set to be $1,645 billion. Not to worry. Less than 80% of Canada's exports go to the USA.
March 22, 2011
Back from a holiday in British Columbia. Vancouver is no doubt one if not the nicest cities in the world. I have always really enjoyed my visits there. But who in their right mind would spend over $1 million for a detached single family house? Or who would want to spend between $350k and $500k for a small box (380 - 500 sq ft) thirty storeys up in some high rise building? Who in their right mind would choose to spend over 70% of their take home pay on housing? Canada is a huge country, and there are a great many very nice places to live.
I had a pleasant trip back to the Okanagan, where I used to live and farm. Good to see old friends. But the speculation in land there is ridiculous. The two farms we once owned both sold for over $1 million in recent years. The fruit and vegetable industry has been decimated. Our co-op fruit packing plant has shut down for lack of tonnage. Lots of well off hobby farmers are now making mediocre wine. In the future we won’t have food to eat, but some will be able to drink lots of wine and get drunk. So much for the experiment in the preservation of arable land, the Agricultural Land Reserve. Furthermore, B.C. Hydro has decided to build the Site C dam on the Peace River, when other much more rational alternatives are available.
Meanwhile, the stock market continues to rise and all the important people and the mainstream media have proclaimed that the Great Recession is over. In the USA manufacturing is up. On the other hand, house prices and sales continue to fall. Oil and food are inflating. The number of jobs being created do not even cover the new younger people entering the labour force. U.S. homeowners have lost $6.3 trillion in equity since the 2007 peak in house prices. The U.S. federal budget deficit in February set an all time record. Thus it is no surprise that the Michigan survey of consumer confidence is once again falling.
Oh and there are a few other known unknowns. There is still a sovereign debt crisis in Europe. Major conflicts in the Middle East. U.S. quantitative easing (QE2) ends in June. There is the major disaster in Japan, the third largest economy. The Chinese government continues to tighten the screws, trying to head off rising inflation and contain the property bubble.
In Canada the focus is on the upcoming federal budget. Will it pass? Will the New Democratic Party give Stephen Harper the votes he needs to get it approved? If not, the federal Tories will call an election and could well get their hoped for majority government. They want an election before the Canadian housing bubble breaks.
February 1, 2010
Well it is -35C in Regina this morning, and the snow continues to pile up. It looks like we will have another very wet spring. Saskatchewan farmers are already worried. A fair number hardly got anything seeded for the last two years. How could they survive a third year of virtually no crop? The snow around the farm at Bulyea is much deeper than last year. Our back-40 road was nearly impassable when the snow began to arrive in November. A four wheel drive truck is a necessity for some of us. But all those men cruising around Regina looking for girls?
Of course the big news these days is the popular protests spreading from Tunisia and Egypt across the Middle East. The trigger seemed to be food shortages and rising prices - on top of high unemployment and widespread poverty. This is after thirty years of the free trade and free market miracle imposed on them - and us - by Margaret Thatcher and Ronald Reagan and a whole host of their followers. In Egypt the government shut down the Internet and other media. In the USA the private media cut off Al-Jazeera English. The government of Israel formally asked the U.S. and Canadian governments to end all criticism of President Mubarak. The Globe and Mail, which calls itself Canada’s national newspaper, warns the government of Egypt about the dangers of democracy and free elections. It much prefers the type of elections that are staged in Haiti, Honduras and Afghanistan. So does Stephen Harper and his government.
Meanwhile, the media hypes the increase in industrial production in the USA as a sign that the economy has finally turned around. Consumers are more confident, spending more, and going deeper in debt again as incomes are stagnant. House prices are still falling as is the labour participation rate. Not to worry. The Fed and the Treasury are printing more free money.
In Canada the GDP is up, thanks to increases in finance, insurance and real estate. Mining is doing well, although we are worried about inflation and the real estate bubble in China. But manufacturing and construction remain stagnant. Then along comes Mario Mendonca of Canaccord Genuity with a study which argues that Canada’s banks are not any better than the larger U.S. banks when it comes to Tier 1 capital ratios.
David Rosenberg still insists that what we are experiencing is a long bear market rally. He makes a convincing argument. So it is time for me to head to British Columbia to visit the kids.
December 21, 2010
Yes it has been two months since I have added a post to this web site. I had to move and that has been a very trying and time consuming experience. I am finally getting my office set up. Then I had to prepare a paper to present at a conference on trans-national corporations and mining and mineral industries, held at Laurentien University in Sudbury, Ontario. I had just finished this when the debate emerged over the proposed take over of the Potash Corporation of Saskatchewan Inc. by BHP Billition, the mining giant from Australia. A paper on the history of the potash industry in Saskatchewan, to be published by CCP/SK, had to be done by the end of November, supposedly before Investment Canada made its final decision on the matter. The crisis ended when Stephen Harper reversed policy and blocked the takeover. This paper is done but won't now be published until mid-January 2011.
But over this time period the business elite, our political leaders and the mainstream media have proclaimed that the Great Recession is finally over and we are into recovery. The stock markets are up. In the USA industrial production and capacity utilization are up a bit. So are retail sales. Initial claims for unemployment insurance are starting to decline. The Fed has announced another $600 billion will be printed by June 2011. President Barrack Obama has consolidated his political position by forging an alliance with the Republicans in the U.S. Congress and agreeing to extend the tax cuts for the rich granted by former President George W. Bush.
But behind the headlines are some continuing problems. U.S. house prices continue to decline. Including homes now in some stage of foreclosure, the U.S. has a two years' supply of empty houses. Zillow reports that the value of U.S. homes fell $1.7 trillion in 2010 and $9 trillion since the beginning of the Great Recession. Unemployment remains high at 9.8% and 17.5% by the U-6 standard. Furthermore, many are dropping out of the labour market; participation rates are very low by historic standards. The U.S. Census recently reported that centres where median incomes declined over the past five years were 10 times greater than those which had an increase. Many U.S. states and municipalities are facing bankruptcy. On top of this, the European sovereign debt problem is becoming much more serious, and many North American banks stand to lose big time if the European Union cannot continue to finance the bail outs. Not to worry . . .
In Canada the Harper government is a bit more cautious when boasting about how well the economy is doing. In the third quarter of 2010 the growth rate was only 1%. The housing market across Canada is starting to show some decline. Income and wealth inequality continues to grow dramatically. The Conservative government has done well in boosting the price of houses through its very low interest rates, no down payment and long term mortgages, and risky loans by banks all backed 100% by the Central Mortgage and Housing Corporation. But household debt continues to rise much faster than incomes; it is now the highest in the G-7 at 148%. Even Mark Carney has warned that any real drop in the housing market or an increase in interest rates could bring an economic recession. But this is the time to be jolly.
October 18, 2010
The summer is over. But what has changed? Today the business media reports that in the USA industrial production has declined by 0.2% in September and capacity utilization fell to 74.4%. There is a foreclosure crisis which is creating bedlam in the still weak U.S. housing market. The University of Michigan consumer sentiment index has fallen. Is there a jobs crisis? The Pew Research Center reports a survey where 85% of college seniors say that after they graduate they will be moving back home to live with their parents. Yet today the U.S. stock markets are up!
So what else is new? The great hope now is quantitative easing, where the U.S. Federal Reserve is expected to soon print $1 trillion which is supposed to keep the banks open for a while and hopefully trigger some recovery in the sluggish economy. No one knows where to park their money. The great fear is still deflation.
Meanwhile, I have enjoyed working out doors all summer. I found time to write a paper on the history of resource policy in Saskatchewan, presented on October 2 at a conference on resource policy at Laurentian University in Sudbury, Ontario. I am currently working on a paper on the history of the potash industry in Saskatchewan, to be published by the Canadian Centre for Policy Alternatives, Saskatchewan office. The Potash Corporation of Saskatchewan, once a proud Crown corporation earning economic rent for all the people, was privatized by past Tory and NDP governments. The present owners, mainly large pension and investment funds in the United States and Canada, face a hostile takeover bid by BHP Billinton of Australia.
August 13, 2010
It's the dog days of summer.I have been out at a friend's farm doing construction and living outside. Despite the unusal amount of rain, it is good for the soul and general health to get out of the rut whenever possible. Gardening is very good for you. Try it some time.
The economic news has not been great lately. The modest "recovery" in the USA has apparently stalled, with unemployment once again on the rise, consumer confidence weak, and housing prices beginning another downward trend. President Obama is doing everything he can to try to prop up the housing market, not to aid homeowners, but to keep the banks and the federal housing agencies from collapsing. Bankruptcies and foreclosures are at all time highs for the post war period. But in the present political state, where there is a vacuum of political leadership, the result will most likely be a major return of the Republicans to the U.S. Congress in the November election. Americans are trapped in the "duopoly" of a two party system where both represent Wall Street and the rich. Obama's press secretary recently denounced the "professional left" for criticizing the president, saying he was too much like George W. Bush. These crazies were demanding a Canadian type medicare system and a major cut in military spending.
It is also interesting that even mainstream economists are now talking about the possibility of deflation, at least in the United States, following the model of Japan in recent years. A year ago only the "looney left" was on this page.
Political leaders and economists in Canada have been rather smug as the Canadian economy has performed much better than the USA. But there are signs that this is ending. Underemployment is rising. The housing bubble has apparently reached its peak and is starting to head down. If popular confidence wanes, as in the USA, the housing bubble will burst and follow the U.S. pattern. The economy will tank.
Think about it. Individual and family income in Canada is about the same as in the USA. But the last time I looked the median price of a house sold in Canada was $355,000 and in the USA only $172,000. What is going on here? Does anyone really believe that this is sustainable?
Time to go back to pounding nails, driving screws and cutting boards. It is nice to work at a job where at the end of the day you can actually see that you have accomplished something real.
June 28, 2010
This past weekend the G-8 and its creation, the G-20, met in Toronto. In preparation for these meetings of heads of state, the Canadian government spent $1.2 billion to build a Berlin Wall around downtown Toronto and pay for 19,000 police and security officers. Just recently Canadian governments spent $1 billion to load up Vancouver with 15,000 police and security personnel for the winter Olympics. This is a serious growth industry.
The G-8, created to try to manage the world capitalist system after the collapse of the Soviet Union, does not know exactly what to do at the present stage of The Great Recession. Some leaders, like Barrack Obama, think that if government “stimulus spending” is cut there is a good chance of a double dip recession. Others, like the new Tory-Liberal Democrat government in Great Britain, feel that the massive debts run up by the industrialized countries to counter the recession has reached a crisis state and debt reduction is an absolute necessity. This central issue was not resolved.
Across Europe there are general strikes by workers and the poor. All governments, whether conservative, liberal or social democrat, are insisting that the huge costs of the crisis, which was created by the financial, insurance and real estate sectors, must be paid for by program cuts, postponed retirement, and even higher consumption taxes. But wars must continue.
In Toronto an estimated 25,000 marched in protest against this right wing agenda. The alternatives were presented at the People’s Summit at Massey Hall. But as in similar past events, the media was only interested in the Black Bloc of young anarchists and how many shop windows they managed to break. They burned three abandoned police cars, shown endlessly on television. This is the formula established in Seattle in December 1999. It works for the ruling classes. No one knows what the popular groups were proposing as a progressive alternative.
In Toronto the bulk of the police were stationed behind the impenetrable three metre high chain link fence, anchored in concrete. As in Seattle, when the Black Bloc broke windows on Queen and Yonge streets, the police were absent or stood by and watched. Later, when local business organization protested the lack of police protection, the police shifted to mass arrests of over 900 people, almost all of whom were peaceful protesters. The police used tear gas, clubs and rubber bullets on peaceful protestors in the designated “free protest zone.” The police then stormed homes on Sunday, arresting more people, without warrants.
This is part of the New Canada, the post 9/11 move towards a police state, where civil liberties are ignored, where government officials ignore the law, and where the power of state repression is used to try to stifle dissent. Much like what happened in Honduras over the past year.
June 5, 2010
Boosterism. How can we tell what is really going on in the world of economics and finance? The governments all lie – they are only interested in staying in office and keeping themselves and their friends in good jobs. And as Steig Larsson points out in his popular novels (now at an end with his life), financial reporters for the mass media are in the business of boosterism. They work for large corporations, and media outlets depend on corporate advertising. This past year a financial editor for a Toronto newspaper was fired after he did a relatively objective article on the local housing bubble, and the real estate industry protested.
That is why the good blogs are very important. There are a number around which are quick to look at the current news and the data and report how governments and spin doctors are distorting reality. For myself, I begin the day by reading the Globe and Mail’s business section over breakfast, then go to the computer to read Bloomberg.com and the Financial Times. This gives me the official government-big business view of the economic situation.
Next I go to the blogs which I have come to respect. These are economists who are not part of the mainstream apologists. The ones I regularly read are as follows, not in any ranking as to reliability. They dig for the real facts:
(1) Calculated Risk. http://www.calculatedriskblog.com By Bill McBride.
(2) Naked Capitalism. http://www.nakedcapitalism.com. By Yves Smith.
(3) Credit Writedowns. http://www.creditwritedowns.com. By Edward Harrison and a few others.
(4) The Automatic Earth. http://theautomaticearth.blogspot.com. This is the great Canadian web site. Done by Ilargi and Stoneleigh, formerly of The Oil Drum. Excellent.
(5) Seeking Alpha. http://seekingalpha.com. On this site I read John Lounsbury.
Stock markets go up and down with emotion. This is mob behaviour as we know it. Furthermore, with all the program trading, and the enormous influence of trading by the big banks, it cannot be a short term guide to investment or reality. Look for the long term trends. Stocks are down this week as there are fears that Europe is going to fall back into recession due to the end of government stimulus and the fact that many countries are beginning to cut spending to try to tackle their large debt problems. Others worry that China, which has been the bright spot over The Great Recession, is facing a collapse of their housing bubble and a cut back in economic activity. This would hit Canada. Including Saskatchewan.
Remember the bottom line. All bubbles eventually must burst. That is an historic reality. The economic boom after 2001 was caused by an enormous expansion of household, business and government debt. There has to be a deleveraging of this debt. There may be short term ups and downs, but real governments (not Zimbabwe) just can’t print money, and eventually the mortgage must be paid or defaulted. As Ilargi and Stoneleigh pointed out this week, the government of Kazakstan has shown the better way. No taxpayer bail outs of big banks which are ready to collapse. Make the investors and speculators pay.
May 22, 2010
This weekend Canadians celebrate Queen Victoria's birthday. In Saskatchewan, it is the first weekend of camping at the provincial parks. It almost always rains, and this weekend is no exception. Perhaps that is why it has always been characterized by big drinking parties. This year there are some good reasons for people to turn to the bottle.
The stock markets fell this week as investors finally began to realize that the Greek bailout cannot work, that it is just a short term effort to buy time. Across Europe the countries where governments have driven up the "sovereign debt" are being called on to not only end their stimulous programs but to drastically cut program spending. This will clearly push a number of them back into a recession. The United Kingdom is right up there.
In the United States new unemployment insurance claims were up, the prices for commercial property fell, mortgage applications fell to a 13 year low, foreclosures on houses hit a record high of 14% of all mortgages, and Fannie Mae and Freddie Mac asked for more capital from taxpayers to cover their billions of dollars of toxic mortgages.
The administration of Barrack Obama lifted the ban on offshore oil drilling on the U.S. East coast and told BP and others that they could go ahead and do deep water drilling in the Gulf of Mexico without complying with environmental regulations. Now we have what seems to be the greatest environmental disaster in U.S. history unfolding. But all our respected leaders say we must keep drilling in dangerous offshore waters.
In Canada the Harper government keeps holding its breath, hoping that the housing bubble will not burst and that the general population will keep going deeper in debt. Time to go on a holiday.
April 18, 2010
It’s spring! Not only do we have green shoots, the politicians, business leaders, Bloomberg.com, the Wall Street Journal, and the mainstream media have all proclaimed that The Great Recession is over and that the economy is back on track. There is some concern over the size of government debt everywhere, but as we can see from Greece these problems can be solved.
But looking behind the work of the spin doctors, are we in a real recovery? Or is this just a long bear market rally? Those of us who are skeptical discovered the following facts that were revealed this past week. For the United States:
* Unemployment is still rising. The U-6 broad index which includes underemployment is close to 20%. Long term unemployment remains at an all time post-depression high.
* Consumer spending is starting to rise again but not incomes. More household debt is being added.
* House prices continue to fall, foreclosure rates continue to go up, and one-third of all sales are now distressed sales. Applications for new mortgages continues to fall. A second downturn is developing in the U.S. housing market.
* Consumer confidence is falling again, pushed down by the poor job market.
* Bank credit continues to fall, which never happens during a recovery from a recession.
* More banks are expected to fail, as they are still holding their toxic assets at make-believe face value (not market value). More banks are being forced to foreclose on broken mortgages, and this means a capital squeeze for many banks.
In Canada Stephen Harper's Conservative government has been doing everything it can to prop up the price of housing. Interest rates are being held at 0.25%. Banks continue to issue mortgage with 5% down and record low interest rates. The banks then pass on these risky loans to the Central Mortgage and Housing Corporation, a federal Crown corporation, which in turn packages them and sells them as Mortgage Backed Securities, the equivalent of federal government bonds, backed 100% by the taxpayers. Does that sound familiar?
But the banks are getting worried. Because of the dramatic increase in world wide government debt, long term bond interest rates are rising. Mortgage rates parallel these rates. Thus we are seeing the Canadian banks begin to raise mortgage interest rates and tighten up requirements for acquiring them. They are doing this on their own because the Harper government will not take action for fear of triggering a downturn in the housing market, which could prick the bubble of consumer confidence, and start a downturn in the economy. An election is coming up.
But behind all this is the fact that The Great Recession was triggered by an enormous leveraging up of personal, household, corporate and government debt. Personal debt in Canada continues to rise and is now at 147% of household income, an all time high. But our political and financial leaders expect to solve the current recessed economy by adding more debt. This cannot work.
March 11, 2010
The recovery is going well, as we are told every day. Barrack Obama's administration is projecting a $1.6 trillion deficit in the current budget, three times the greatest deficit of the George W. Bush administration. Stephen Harper's Conservative government in Ottawa reports that it expects of budget deficit of $56 billion, the highest in Canadian history. When it is suggested that our governments must stop printing money, and perhaps try to find ways to begin to pay off this debt, there is a chorus of "No!!" from the professional economists. They are afraid that any move to reduce government spending and raise interest rates up from zero will threaten the recovery and bring on a period of deflation.
The contrarians insist that the recovery is fragile. Real wages continue to fall. There is little evidence that jobs are being created. In the USA all states and most municipalites, facing steep declines in revenues, are cutting programs and laying off workers. In Canada all provinces but Saskatchewan are running significant budget deficits and making cuts. Both the U.S. and Canadian governments are doing everything they can to prop up the price of housing. A second downturn appears to be developing in the United States.
In Canada personal debt is rising around 7% per year. This is ten times greater than the rise in inflation, and six times more than the increase in personal income. While household debt is falling in the United States, it is still rising in Canada and is now up to 140% of annual income.
Here on the prairies Environment Canada reports that over the past winter the average temperature was four degrees above normal. They also report that moisture levels are only 40% of normal. But in Saskatchewan everyone knows that the climate change scientists are just a bunch of left wingers falsifying data.
January 24, 2010
Not to worry. That is the message we get every day from our political leaders, the economists, the financial media, and everyone in a position of authority. The economy is in recovery. The Great Recession is over.
There are some lagging problems. Unemployment remains very high and is not falling. In the United States, house prices continue to fall, foreclosures are still increasing, and new housing starts are lagging. Commercial property values are in free fall. Retail sales are stagnant. Personal and business lending is tanking. All North American governments are in debt as revenues have been falling. But the stock markets continue to rise, so what else really matters?
However, if anyone mentions that it is time for the governments to stop printing money, the captains of industry and finance quickly proclaim that it is much too early to do that. Mark Carney, head of the Bank of Canada, says it is no time to raise interest rates from their level of one quarter of one percent; the result could be a collapse of the housing market and the onset of a real recession in Canada.
While some economists worry about the threat of inflation, it seems to me that the biggest threat remains the real possibiliy of a prolonged period of deflation, as in Japan. Despite the collapse of manufacturing in Canada, the economy has struggled along thanks to the major stimulous provided by the federal and provincial governments. George Athanassakos of the University of Western Ontario pointed out a week ago that among the G-7 countries, Canada ranked first in fiscal stimulus as a percentage of gross domestic product. Massive debt by consumers and businesses is what caused the financial bubble that broke in 2008; more spending and debt is supposed to get us out of this mess. Makes sense, eh?
The Canadian Centre for Policy Alternatives pointed out recently that at the beginning of the 2008 recession around sixty percent of Canadian households were in a net debt position. This indebtedness has risen since, reaching an all time high. For every $100 of personal disposable income, each Canadian now carries $145 in debt. In 1990 it was $88.60.
Is there a housing bubble in Canada?
No one in any position of authority in Canada is willing to suggest that there might be a housing bubble. But if you look at the charts, as in the Case-Shiller Index and the Teranet survey of six major Canadian cities, you will see that between 2000 and 2008 house prices in Canada balooned almost as much as in the United States. But while there has been a correction in the market in the USA, there has been none in Canada. Can it be that Canada is the only industrialized country where house prices are not out of line?
Yale economist Robert Shiller, and a few other brave souls, have pointed out that over the long run the price of houses has remained closely tied to household income. The economy requires affordable housing, at least for the vast majority. Historically, house prices in the United States have ranged between two and three times total household income. It has been similar in Canada.
This is the basis for the annual Demographia International Housing Affordability Survey. Housing is judged to be affordable when the median price of houses sold is 3.0 or less times the median household income. Quite a few Canadian cities rank among the most unaffordable housing markets in the world: Vancouver at 8.4, Victoria at 7.4, and Kelowna at 6.8. Regina, where the most recent real estate report has the average price of a house sold at $246,000, and with a median household income of $60,000, would have a ratio of 4.1, at the bottom of the "seriously unaffordable" category under the Demographia rating. For Regina, this only tells part of the story. There are fewer apartments to rent today than ten years ago, and there are fewer social housing units than ten years ago.
What of Canada as a whole? In July 2009 the median price of a house sold was reported to be $326,613. Statistics Canada estimates that the median household income in 2009 was around $62,000. That is a ratio of 5.3 Don't worry. Mark Carney and Tim Flaherty insist there is no housing bubble in Canada.
Why has the price of Canadian housing remained high when there has been a collapse in the USA? The Bank of Canada has kept interets rates, and thus mortgage rates, at an all time low. In 2006 the Conservative government of Stephen Harper introduced no money down 40 year mortgages, reduced in 2008 to 5/35. The Central Mortage and Housing Corporation has been provinding 100% insurance for all the Canadian "subprime" mortgages (those with less than 20% downpayment). The banks have been allowed to dump their risky mortgages on the CMHC, moving them off their books. This makes the banks look really good compared to those in the United States. In turn, CMHC has securitized them into Mortgage Backed Securities and sold them as bonds with 100% insurance from the government of Canada (the taxpayers, of course). CMHC can now hold $600 billion in government-insured mortages. There is no moral hazard in the Canadian mortgage market.
November 21, 2009
We are now nearing the end of November and the stock markets are maintaining their pollyanna view of the state of the world economy. In Canada the real estate market has surged again, particularly in the large urban centres. While all the basic economic numbers are weak, to say the least, the public seems to have bought the argument that the Great Recession is now over. The next hurdle will be the Christmas buying season. A poor year for the retail sector will certainly bring another downturn in the stock markets and the economy in general.
While all the people in responsible positions keep up the green shoots hype, this past week there were a number of significant developments:
* The G-20 refused to declare the end of the Great Recession and urged governments to keep spending on their stimuous packages and maintain interest rates near zero.
*In the U.S. housing market, mortgage delenquencies reached an all time high, new residential housing construction was down, mortgage bankruptcies surged higher, and commercial real estate was beginning to collapse. Some economists noted that there will be major defaults in 2010 and 2011 as the Alt-A and ARM mortgages come due.
* The U.S. Federal Deposit Insurance Corporation needs even more cash from the federal government as banks keep on failing.
* Almost all new mortgages in the United States are being insured by Freddie, Fannie and the FHA. They are sitting on a pile of toxic assets and fearful of collapse.
Everyone in Canada of importance says we do not have to follow developments in the United States. Things are different this time.
September 12, 2009
All of the important political pundits, government officials, the mass media and the business press have declared that the Great Recession is over and we are now entering the recovery. Green shoots are seen everywhere. The stock market has led the way, with a recovery of around 48% since hitting bottom. The $12 trillion of U.S. taxpayers' money thrown into the markets by the federal government and the Federal Reserve has been a success.
Canada has fared very well compared to the other industrialized economies. Indeed, while U.S. housing prices have fallen and homeowners have lost over $4 trillion in equity, house prices in most of Canada have remained high, near the peak of the bubble. With record low mortgage interest rates, and schemes for no money down mortgages again insured by CMHC, first time buyers are plunging into the market.
It is only the economists and political economists outside the mainstream who are still not convinced that we are in a recovery. Many of these dissenters whose blogs I read still believe we are in a long term bear market and the future will more likely be a period of stagnation if not deflation and/or depression.
Canada, of course, is deeply integrated into the U.S. economy. What happens in the United States inevitably has a major impact on the Canadian economy. Despite all the optimism we hear and read in the mainstream media, outsiders like myself are still very skeptical. For example, how can house prices collapse all across the industrialized world and not in Canada?
It is important to remember that the betting on the stock markets has little to do with the real or productive economy. Consumer spending now accounts for almost 70% of U.S. gross domestic product. Thus we should pay attention to the fact that while U.S. consumer confidence has risen in recent weeks due to the media/political hype, household income is declining as hours of work and pay decline, retail sales are still stagnant, unemployment is still rising, and bank lending is still declining. U.S. house prices are still falling, and U.S. (and Canadian) household debt remains very high at 125% of disposable income.
In the United States (and Canada) government revenues are falling. Federal, state and municipal governments face large deficits and the need to borrow money and raise taxes. U.S. state and municipal governments are radically cutting jobs. Interest rates will have to increase as governments around the world seek to borrow money to fund their services.
We are now approaching October, traditionally the worst months for the stock markets. Another major decline on Wall Street would quickly convince consumers that we are not on the road to recovery.
Then there is the elephant in the room. The mountain of debt created in the economy since 2000 remains as high as ever. The major change has been to shift this debt from the private sector to the public sector, where it is to be covered by the taxpayers. Economists used to call this a "moral hazard." We see it in the Canadian housing market today, where realtors and lenders are giving people mortgages when they could not possibly afford them if interest rates rise above the 3% level. CMHC (the taxpayers) are insuring these very risky loans. Few want to be reminded of the fact that mortgage rates in Canada averaged 8% over the past twenty years.
One of Canada's best known economists is David Rosenberg, former chief economist at Bank of America/Merrill Lynch. He points out that the current rally in the New York stock markets parallels the bear market rally that began on November 12, 1929 and rose 47% over the next five months. Of course, the stock markets then began a long downward trend, characterized by a number of other bear market rallies. Could we be seeing a repeat?
If you are interested in looking at this in more detail, I would recommend: Barry Eichengreen and Kevin H. O'Rourke, "A Tale of Two Depressions," published on VOX on July 4, 2009. http://www.voxeu.org
All eyes these days are on the stock markets. There is presently a Bear Market Rally, but this is in the middle of what is now called the Great Recession, a world wide phenomenon. The political, business and media elite are all praying for a bottom. Endless talking heads wonder how much of the taxpayers' money (and those of future generations) will have to be thrown at the banks and other financial institutions before they will start lending. But housing prices are still falling, unemployment is still rising, and there is still negative economic growth. But to read the headlines in the business media these days, one would get the impression that the bottom has been reached and that we are well on the road to recovery. Everyone in authority is assuming that we can just return to the debt-financed boom from 2001-2007.
However, most of the large financial insititution are in deep trouble. Locked away in their vaults, hidden from the public, are all those strange derivatives which appear to have little or no market value. When some of them were put up for auction in the Lehman Brothers' collapse where they got 9.5 cents on the dollar. The Bank for International Settlement in its third quarter 2008 report estimated that there were $79 trillion worth of derivatives held by financial institutions around the world. This Ponzi scheme has collapsed, and the financial experts in Japan warn that there is little likelihood of any real recovery until the "toxic assets" are purged. In January 2009 the Organization for Economic Co-operation and Developed proclaimed that a world economic recovery would likely be drawn out far longer than necessary because the governments of the industrialized capitalist states, beginning with Great Britain and the United States, failed to clear out the bad assets in the banks before throwing capital from the taxpayers at them. Today, we are told that all this has been resolved. Accounting rules have been changed to allow the U.S. banks to carry mortgage assets at their original value rather than the present market value.
Barrack Obama's economic team
Meanwhile, President Barrack Obama installed his economic and political team. They are overwhelmingly from the old Clinton administration. His 17-member economic advisory group all have a deep involvement in building the financial bubble that has now broken. His Secretary of the Treasury is Timothy Geithner, recently head of the Federal Reserve Bank of NYC. He was intimately involved in all the Bush administration bank bailouts. It was the Clinton administration, and the Labour government of Tony Blair, the "New Democrats", that deregulated the financial markets, refused to provide any regulatory structure for the derivative markets, and brought on the storm. Yet we are told that they know how to fix the problem. Throw trillions of tax payers' dollars at the largest financial institutions and bail out the automotive sector.
A great many Americans are going to be deeply disappointed with the Obama administration. In the economic and financial areas it has been just more of the same. After all, Obama and the Democrats in the Congress strongly supported the original $1 trillion bailout of the U.S. banks in the fall of 2008 while George W. Bush was still president. The $800 billion fiscal stimulous emphasizes tax cuts and spending on building roads and bridges. This approach will be ineffective. History shows that whenever there has been a financial bubble, the highly leveraged debt has to be cleared. Households, well overextended by their debt, and facing rising unemployment, will try to pay down debts and start saving once again. This will further depress the economy.
On the positive side, the financial and economic crisis may force the new Obama administration to cut back on U.S. military adventurism around the world. But it is not encouraging to see that the new president has surrounded himself with a pack of war hawks, beginning with Joe Biden, Hillary Clinton and Robert Gates. The war in Afghanistan is being increased and has been taken into Pakistan. President Obama asked the Congress for the largest military budget in world history. The U.S. will maintain a very large military contengency at their permanent bases in Iraq. It is amazing to me how many people still hope that the new president will bring significant change from the Bush administration.
Understanding the Great Financial Crisis
by John W. Warnock
Act Up in Saskatchewan
December 18, 2009
According to our political and business leaders, as well as the main stream media, the Great Financial Crisis of 2009 is ending. Green shoots of recovery are seen everywhere. But by now we all know that the key to preventing a depression has been the bailout of the large financial institutions by taxpayers. The U.S. government will run a deficit of $1.4 trillion this fiscal year. Stephen Harper’s government will have a deficit of around $55 billion.
But what is going to happen in 2010? How are governments going to pay for all this debt that they have created? Will there be rampant inflation? Governments can’t just print money – except in Zimbabwe.
Economists and other defenders of the status quo insist that the crisis was caused by bad investment decisions by individuals, corporations and financial institutions. This was particularly true in the housing market. They insist that there is nothing really wrong with the free market and free trade economy. But others want to know why the British and American governments were so committed to defending the big banks and doing so little for main street. This requires a deeper look at the cause of the financial and economic crisis.
Deregulation and privatization
How could the financial crisis happen? The usual answer is that since the election of Margaret Thatcher in 1979 and Ronald Reagan in 1980 all governments have been following policies of privatization and deregulation. Tony Blair and Bill Clinton pushed this change of policy. They deregulated the banking industry and refused to introduce any government regulation of the new complex derivative markets. It was these pyramid or Ponzi schemes, built on highly leveraged debt (up to 50 to 1), which brought the system down. Moderate reformers now say we need to re-establish government regulation.
Financial euphoria and bubbles
A number of political economists, like Canada’s John Kenneth Galbraith, have pointing out that “financial euphoria” or “irrational exuberance” by investors has been a consistent theme of capitalism since the founding of the first stock market in The Netherlands and “tulipomania” in 1630. The recent housing bubble in the United States was just one of hundreds of examples. Land speculation has been particularly common in the United States.
Galbraith and his followers stress that the bubbles all have a common root, speculators trying to capture windfall profits. In recent years the process has often been accompanied by some new financial instrument, like the junk bond used for leveraged buyouts, hedge funds or the inscrutable derivatives of the most recent bubble. The key is that they are all highly leveraged. In 1929 anyone could gamble in the stock market casino with 10% down and the rest borrowed, paying 7 to 12 percent interest.
The housing bubble
The recent bubble in the U.S. housing market is a classic example. Robert Shiller, the Yale economist whose name is attached to the Case-Shiller Index on housing, points out that the 85% increase in the average price of a U.S. house over the boom period from 1997 to 2006 was far out of line with historic prices and well beyond the ability of mainstream Americans to finance. As with all financial bubbles, this balloon has to deflate back to the real world of affordable prices. In December 2009 the U.S. market was about half way there.
This adjustment has yet to happen in Canada. Historic low interest policies pursued by the Canadian government, and the decision by the Central Mortgage and Housing Corporation to guarantee all mortgages, and to sell mortgage bonds with 100% taxpayer backing, have helped keep the Canadian housing market at a high bubble status. Is it possible for Canada to be the only industrialized country where the housing bubble does not burst?
The broader picture of Monthly Review
But this crisis is not just a result of human greed, lack of government regulation, or the corruption of the people in the system. It is not just another business cycle.
During the recent boom the financial institutions made enormous profits. The financial system as a whole has grown significantly in relationship to the real or productive economy. As Paul Sweezy of Monthly Review projected in Monopoly Capital (1966), mature capitalism sees a dramatic increase in the role of finance, insurance and real estate (FIRE), a process called “financialization.”
The mature capitalist economy
John Bellamy Foster and Fred Magdoff, in The Great Financial Crisis (2009), provide us with the analysis of the Monthly Review school of political economy. When capitalist economies reach a mature stage, stagnation sets in. Capital accumulation is further accelerated as taxes on corporations and the rich are reduced. But at the same time profitable investment outlets for this capital are diminished.
In the expansion phase of capitalist economies, industry and urban economies are rapidly developed. But once modern industrialization has occurred, the economy is left with only the need to basically replace what has been built.
Mature capitalist societies are characterized by large corporations, monopoly and oligopoly, and the concentration and centralization of capital. Competition is not in the area of price but in the sales effort, the creation of the throw away economy, conspicuous consumption. Karl Marx called this “commodity fetishism.”
Since the end of World War II the United States has to a large degree been able to offset this tendency towards stagnation by massive government spending in the military area, financed by large government deficits. But this has also reached a peak. The push since the 1980s for international free markets and free trade has been an attempt by big capital to find new investment opportunities in less developed countries.
Foster and Magdoff argue that the current bubbles could have been deflated by the U.S. Federal Reserve Board. But both Alan Greenspan and and his colleague Ben Bernanke were against doing this as it could have brought down the whole U.S. system. Following the New Economy (or dot com) bubble and collapse in 2000, interest rates were steadily reduced and the bubble was transferred to the housing market. For the defenders of monopoly capitalism, there did not appear to be any acceptable alternative.
Where are we going now?
One of the central arguments of Foster and Magdoff is that the crisis of mature capitalism cannot be contained by new systems of regulation. Indeed, they point out that in all the economic and financial crisis over the last thirty years, the response of governments was further deregulation. The last hope for saving the present system has been the use of the central banks as the lenders of last resort, pouring taxpayers’ money into the system to try to prevent a depression.
The Great Recession is a turning point. Despite the hope of the U.S. and Canadian political and economic establishments, we cannot go back to 2007 with its highly leveraged corporate, financial and household debt. For many basic industries, like steel and automobiles, there is world overcapacity. Thus the future for the mature capitalist economies is most likely to follow that of Japan after the collapse of their financial and real estate bubbles in 1989: long term deflation if not depression. As this trend develops on a world wide basis, it will be time for people to once again mobilize, as they did in the 1930s, to create a different political economy.
John W. Warnock is a Regina political economist.
Bailing Out the Banksters: How Much Is Enough?
By John W. Warnock
Act Up in Saskatchewan
March 13, 2009
According to the Wall Street Journal we are now in an Obama Bear Market, as the equity markets have fallen by 20% since the new president took office. Bloomberg, the source of all real news for investors, recently calculated that since last October the Bush and Obama administrations and the U.S. Federal Reserve have pledged $8.5 trillion in various bailout programs for banks and corporations as well as the commitments to government economic stimulus. Yet there is no sign yet of any bottom to the decline in markets nor is there any indication that investors and the public have any confidence in the state of the banks. The market price for homes continues to fall. The news in the real economy continues to be uniformly bad. The Great Recession marches on.
All of this is of great concern to Canadians. In spite of polyanna propaganda from our government and business leaders, we all know how deeply we are tied to the United States. Under the so-called “free trade agreements,” Canada has become the northern colony in Fortress North America, even more dependent on trade with one country. Foreign ownership and control of our largest corporations has increased. We have become more dependent on exporting unprocessed raw commodities. By boosting our reliance on trade, our business and government leaders have made us more vulnerable to global financial and economic shocks.
Financial euphoria is a recurring phenomenon
The present world financial and economic crisis is generally blamed on the development of bubbles in the U.S. financial markets, housing, and natural resource commodities. But this is nothing new.
John Kenneth Galbraith, the renowned Canadian economist and Harvard professor, warned us that speculation in commodities, land, other property, markets and get-rich-quick schemes have been with us since the earliest formation of the modern stock market in Amsterdam. In the early 17th century there was tulipomania in1630, John Law’s Banque Royale bubble in France which collapsed in 1720, and the pyramid scheme associated with London’s South Sea Company, which also collapsed in 1720.
In all the bubble schemes there is the formation of some new financial innovation which is used to create a mountain of debt backed by limited real assets. Galbraith wrote extensively on the Florida land bubble in the 1920s and the U.S. housing bubble in 1923-26. The stock market bubble which broke in 1929 was built on leverage, where investors could purchase stocks on a 10% margin while paying an interest rate of around 12 percent. Goldman Sachs was there as a key promoter.
Bubbles in recent history
The collapse of the stock market in 1987 was the result of the introduction of the junk bond used for leveraged buyouts of other corporations. The New Economy stock market crash in 2000 was the result of the wild speculation in the fabulous new dot com companies. The crash of 2007-8 was due to the shift in speculation from the stock market into the North American housing market and the development of the new mortgage-based securities and credit default swaps. These derivatives were all based on heavily leveraged debt.
The common pattern
As Galbraith points out, there are common characteristics of all of these flights of irrational financial euphoria. There is first of all a promise that investors will be able to make money without having to do any work in the real economy. They are also promised a rate of return which exceeds the normal return on investment in productive enterprises. It is quite normal for these pyramid-type investments to be promoted by prominent businessmen, financial institutions, the mass media, and respected economics professors.
There are always warnings from a few quarters. But these are not welcomed; they are denounced, and ignored. Galbraith, writing in 1990, concluded that it took about 20 years for the general public and investors to forget the last disaster. But this obviously has not been the case in recent years, with the collapse of the market in 1987, again in 2000, and now in 2007. As with the current housing bubble, it is always assumed that the market for the product will go up and stay up indefinitely. Historically, the financial bubble has not petered out with a whimper but collapsed with a bang.
The desire to hide the real causes
When the collapse happens, the realities of the capitalist market will be ignored. There is an attempt to blame it all on a few dishonest individuals, bad management of the business institutions in question, or a failure of government to step in and protect the unwary investors.
Today, all governments, business leaders and the mass media are trying desperately to maintain the general debt bubble. In this they have all agreed to keep the public from learning just how insolvent the banks are. Indeed, there is even great pressure to change established accounting rules so that financial institutions can carry their trillions of dollars of “toxic assets” at their face value rather than at the price they could bring in the market.
What is the real cause of the present financial and economic downturn? Few can find the answer as there is no discussion of the issues of overproduction and excess capacity on a world scale, the impact of the dramatic increase in the inequality of income and wealth both within countries and between countries, the fact that for most workers real wages have not increased over the past fifteen years, and that the increase in household debt is largely due to these factors. A few have pointed to the decline in the real economy of the production of goods and services in North America and the rapid rise of the role of the unproductive sectors of finance, insurance and real estate. But none of our governments or political leaders want to take on the issue. In the world of Anglo-American capitalism, our political leaders warn of the “dangers of a return to over regulation.”
In the meantime, investors have fled the markets seeking to protect their remaining capital in U.S. government bonds. There is a serious bubble building in this market. At the same time the U.S. government is printing money as fast as they can. If investors, including major Asian countries, lose confidence in the ability of the U.S. government to manage this crisis, the bursting bubble of the U.S. government bond market will certainly bring on a world depression. When this happens the general public will be demanding new solutions.
John W. Warnock is retired from teaching political economy and sociology at the University of Regina.
NOTE: The following is an extract from John W. Warnock, Saskatchewan: The Roots of Discontent and Protest. Montreal: Black Rose Books, 2004.
Political economy and economics
The limitations of mainstream economics
The discipline of economics assumes that our economy is a “market economy” of individuals competing with each other for goods, services and employment. But there is no indication whatsoever that there are any differences between these individuals, between men and women, whites and Aboriginal people, those who come from poor families and those from well off families, people born and raised in Canada and immigrants, those who are physically fit and those who are disabled, etc. There is no indication that the structure of our society gives some people advantages that others do not have. Women work very hard on Saskatchewan farms, so why is farm ownership overwhelmingly in the hands of men? How is this dictated by the free market?
Economics today makes no mention of wealth and power. Indeed, William Scarth’s text, Economics: the Essentials, used widely at the University of Regina, does not once use the terms “wealth” or “power.” Mark Lovewell’s text, Understanding Economics, also used at the University of Regina, does not mention “power” and uses “wealth” only to point out that different households have different amounts of accumulated savings. When you compare these two books to John Porter’s Vertical Mosaic; an Analysis of Social Class and Power in Canada you would think they were describing different planets. Porter’s book is soundly based on empirical data. It clearly demonstrates that some people have wealth and power and others do not. Canada is a very unequal society. (Scarth, 2000; Lovewell, 2002; Porter, 1965)
Economics as it is taught today has no history. Its time frame is limited to the present. There is no discussion of the Great Depression or how Canada was organized during World War II. There is no discussion of colonialism and imperialism. For example, in 1530 the Aztecs, Maya and other peoples of Mesoamerica were among the most advanced civilizations in the world. Their standard of living was well above that of the average European. Today what remains of these indigenous nations are among the poorest people in the Western hemisphere. In Mexico today the gross income and wealth inequalities are also reflected in an informal but dominant pigmentocracy: the descendants of the Spanish with their white skin are people of privilege and power. Those at the bottom of the social and economic hierarchy are the indigenous populations with their dark skin. How did this happen? What did it have to do with the free market economy?
All the economic texts start with a given: we have limited resources and endless wants. Douglas Dowd opened his latest book with the following observation:
“As the twentieth century ended, two sets of economic facts stood in stark and disturbing contrast. First, for the first time in history, existing resources and technology taken together had made it possible for all 6 billion of the earth’s inhabitants -- now or within a generation -- to be at least adequately fed, housed, clothed, educated and their health cared for. And second, instead, well over half of that population was malnourished (with numerless millions starving), ill-housed, ill-clothed, ill-educated, in precarious health, and stricken by infant mortality rates and average life-spans belonging to the era of the early industrial revolution -- when there were no more than 2 billion people.” (Dowd, 2000)
There is, of course, a fundamental problem with the unequal distribution of income and wealth. Many people experience “scarce resources” because they have very low incomes while others do not know what to do with all their money. But Dowd was also pointing out that there is no real scarcity. Scarcity, he argues, is primarily created by the irrational system of capitalism. There is tremendous waste in the system of production and distribution. And it is massive advertising and sales campaigns which create endless “wants.” To survive, capitalism must constantly grow, it cannot exist in a steady state economy. It is a given that capitalism cannot create a society based on equality. It is also a given that it cannot create a society based on sustainable development. (See O’Connor, 1994)
Economics starts with the premise that there is and always has been “Economic Man.” It assumes that the core of our being as humans is the pursuit of self interest. This is what economic theorists today call “rational choice theory.” If so, then this must have existed for all human beings around the world and across time. But is this theory based on empirical knowledge or is it just an ideological supposition?
Human beings have always lived in communities. Contrary to what the early liberals proposed in their defence of capitalism, there was never a time in history when human beings lived like Robinson Caruso. They cannot develop without the support of other human beings. Children who are raised in feral conditions often cannot even learn to speak when placed in a community situation. Our knowledge and values are absorbed from our communities. All human beings as individuals are a product of their community. In fact, individualism as we know it was not possible before the capitalist industrial and urban revolution. Only in a society with a complex division of labour is individualism possible.
Furthermore, it is clear that people put a high priority on values other than pursuing their own self interest at all times. Human beings have a close and primary commitment to their families. Most people seem to place a very high priority on their sexual relationships. Many people make commitments of loyalty and support to friends. The evidence suggests to me that people prefer to live in communities of like people who share as a minimum their mother language. Many flee to other countries out of desperation, but they lament the loss of their homeland. In these important relationships people place values of love, commitment and solidarity above the values of Economic Man.
Economist Karl Polanyi has had considerable influence on Canadian political economists. His research was on economic systems in pre-capitalist societies, and he relied primarily on the work of anthropologists. He reminded us some time ago that “prior to our time no economy has ever existed that, even in principle, was controlled by markets.” Gain and profit made on exchange “never before played an important part in human economy.” The market for goods existed in all pre-capitalist economic systems. But it was quite marginal to the existence of human society. Market mentality did not exist. The primary concern of early peoples was family, kin, community and nation. Value systems stressed security and the preservation of the group. Reciprocity, sharing and redistribution were the norm, and trading was based on barter of roughly equivalent goods, not gain. The “market economy” and its value system did not exist. Nor did Economic Man. (Dalton, 1968)
The concept of economics
The term “economics” has a Greek origin. It was defined as “the art of household management.” Aristotle’s Politics deals with economic questions. For him, economics went from household, to village, to city, and to state. If we move to the modern period, James Steuart wrote in 1761 that “economy is the art of providing for all the wants of a family, with prudence and frugality.” He went on to add that “what economy is in a family, political economy is in a state.” Adam Smith, in The Wealth of Nations, argued that “political economy is a branch of the science of a statesman or legislator.” Following Turgot, Smith argued that political economy was the study of “the nature and causes of the wealth of nations.” From the very beginning of social science in Europe what we now call “economics” was known as “political economy,” a recognition that it was much more than just individuals buying and selling in the private market. Political economy was the process of production and distribution of wealth within the boundaries of national, territorial states, some even with elected governments. (Chattopadhyay, 1974)
James Caporaso and David Levine argue that political economy emerged in the eighteenth century “to help people understand and cope with a dramatic change in the system of want satisfaction, both in the nature of wants and in the manner of production and distribution of goods for satisfying them.” The term “economics,” as used by the Greeks, focused primarily on the household. Political economy emerges as an analysis of “the management of the economic affairs of the state.” In pre-state societies, economic links were to family and kinship. This changed with the development of the modern territorial state. As they note, “the boundaries of want satisfaction are now political,” and responsibility resides in the public authority. (Caporaso and Levine, 1992)
In addition, political economy is identified with the rise of capitalism as the dominant mode of production. Capitalism first replaces feudalism in Europe and then spreads around the world conquering and replacing other ancient modes of production. From the beginning the focus of political economy was on the rise of capitalism. As it is taught in universities in Great Britain and continental Europe, political economy includes economics, politics, history, sociology and anthropology. It is an integrated approach to studying human social problems. Following the British tradition, Canadian universities originally had departments of political economy which included economics, politics, sociology, anthropology and sometimes history. It set forth an alternative approach to social analysis, one that is much more productive.