Labour voices lay blame for crisis

Adam Desaulniers

While conventional wisdom blames a momentary lapse of reason for the subprime mortgage debacle, Canadian labour is taking aim squarely at the banking system as a whole, characterizing the crisis as simply the latest speculative bubble created by a financial sector run amok.

Canadian Auto Workers economist and Globe and Mail regular Jim Stanford’s latest book launch at the Atwater Library drove the point home with a lighthearted slideshow and Q&A, and no shortage of solutions for the politically brave. The big idea of his new tome Economics for Everyone – bringing banks under state control – may not be new, but it is newly popular.

“The myth is that the profit motive always leads people to do things that are efficient and useful,” Stanford insists. “But it leads people to do things that are profitable, and that’s an entirely different question. We’ve outsourced credit creation to the private banking system, and it’s their aggressive, irresponsible behaviour that created this bubble and previous bubbles.”

“All the regulations that limited how much credit could be created, and what it could be used for, were dismantled over the past 20 years,” he laments. “That allowed banks to securitize debt, which is this very creative process of inventing new forms of assets, like bundled subprime mortgages, where the banker only wants to sign up the borrower, then turn around and sell the debt to someone else. Then globalization spreads each end of the transaction even further apart.”

“It’s mass psychology that drives the whole thing forward,” he contends. “When the banks are too optimistic, we risk having them create too much credit, and when they’re too pessimistic we risk them creating too little.” These factors, he says, and not so-called business cycles, are behind the “speculative bubbles” that have been popped time and again in the past two decades. “The current one was rooted in US real estate, the previous one in dotcom startups – it can be anything. In the 1620s it was Dutch tulip bulbs. Same reason – people simply assumed they could sell them for more than they bought them for. Then when the bubble pops, the whole thing shifts into reverse: all the people who came in to make money because the price was rising, they panic and run for the exits.”

In both cases private lending institutions are prone to irrational overreaction, doing greater and greater economic damage over time due to their inexorably expanding share of economic “activity” – something Stanford and other left economists call “financialization,” referring to the spread of speculative activity (flipping the same assets over and over) at the expense of productive activity (such as issuing a corporate bond to finance new infrastructure).

So is Canada ready for state-owned banks? Stanford offers an unequivocal yes: “The government’s already taking an equity stake in the banks, so it should exercise its rights as a shareholder, for starters.”

Buzz Hargrove, retired CAW head and newly minted part-time professor at Ryerson University’s Ted Rogers School of Management, agrees. As with the auto sector, he observes, the Tory government is in the habit of handing over cash to big business with no strings attached. “I’ve been around bargaining a long while and if you give up everything to start out, there’s no pressure to agree to anything. They’ve already got the money.”

Once outside the pale of polite political debate, a state takeover of the banks now sees mainstream media coverage on a regular basis compared to just a few years ago, when right-wing think tank commentators seemed to dominate the airwaves. “You see people like Jim on media panels now, and people from the Center for Policy Alternatives, which definitely wasn’t the case before, so that’s a change,” says Hargrove. But he sees little chance of that shift transferring to Parliament as long as the left remains split.

“If we educate ourselves and organize ourselves,” asserts Stanford, “and we demand change from the system when the system is broken, like previous generations did, we’ll have the means to socialize at least some of the process of credit creation, so we’re not held hostage to the mood swings of the banks.” If it seems like a tall order, he stands unfazed. “I’m a labour economist,” he jokes, “so I’m perpetually optimistic that the right graph can start the revolution.”