Tag Archives: bank of canada

Bank Of England Governor Lends Support For My Theory

1 Mar

Trust-equation

Former Goldman Sachs alumnus, now governor of the central Bank of Canada – and soon to be governor of the central Bank of England – Mark Carney, gave a speech a few days ago on “Rebuilding Trust In Global Banking.”

Reading the speech was somewhat surreal for your humble blogger. It evoked mixed feelings of hope, and dread. For what else is one to think, and feel, when the enemy lends support for the core essence of one’s own proposed solution to what is arguably humankind’s greatest material problem? (emphasis added)

Six years ago, the collapse of the global financial system triggered the worst global recession since the Great Depression.

Losing savings, jobs, and houses has been devastating for many. Something else was lost – trust in major banking systems. This deepened the cost of the crisis and is restraining the pace of the recovery.

The real economy relies on the financial system. And the financial system depends on trust. Indeed, trust is imbedded in the language of finance. The word credit is derived from the Latin, credere, which means “to have trust in.” Too few banks outside of Canada can claim credit today.

Bonds of trust between banks and their depositors, clients, investors and regulators have been shaken by the mismanagement of banks and, on occasion, the malfeasance of their employees.

Over the past year, the questions of competence have been supplanted by questions of conduct. Several major foreign banks and their employees have been charged with criminal activity, including the manipulation of financial benchmarks, such as LIBOR, money laundering, unlawful foreclosure and the unauthorized use of client funds. These abuses have raised fundamental doubts about the core values of financial institutions.

In my remarks today, I will discuss the breakdown of trust and what is required to rebuild it. The G-20’s comprehensive financial reforms will go a long way but will not be sufficient.

Virtue cannot be regulated. Even the strongest supervision cannot guarantee good conduct. Essential will be the re-discovery of core values, and ultimately this is a question of individual responsibility. More than mastering options pricing, company valuation or accounting, living the right values will be the most important challenge for the more than one-third of Ivey students who go into finance every year.

… most fundamentally, there has been a significant loss of trust by the general public in the financial system.

Yes, the financial system depends on Trust.

And yes, ultimately trust is a question of individual responsibility.

Which is where my alternate currency proposal shines, with its “Honour” rating system of self- and peer-regulation.

It is a system that is maximally decentralised.  “Every man his own central banker”.  Able to create and use his or her own “credere” (credit). Thus, it is more than just a currency system. It is a financial system.  One that eliminates banks.  By making every one of us a bank.

A bank built on our own, individual levels of Trust-worth-iness.

Resulting in a financial system comprising billions of individual banks. The actions of each one regulated by the level of public disHonour that each of us is prepared to accept. Firstly, in our selves. Secondly, in those with whom we choose to conduct transactions.

Carney claims that “virtue cannot be regulated”. It logically follows that he is arguing that the financial system  – which depends on trust – cannot be regulated.

However, he goes on to argue for just that:

Rebuilding Trust: The Five Cs

So what to do? A combination of institutional and individual initiatives – the “Five Cs” – is required.

The G-20’s comprehensive financial reforms will go a long way to rebuild trust…

Carney goes on to describe 4 “C’s”, all of which involve top-down regulation and action by the elites and “leaders” in the financial system.

In other words, he argues that “we” (meaning “they”) can solve the problem of broken trust – not by replacing those persons and institutions who broke trust – but by bailing out those who broke that trust (1st “C”), asking them to be more honest in their reporting (2nd “C”), allowing them to change the rules (3rd and 4th “C’s”), and then expecting everyone else to trust them not to break the rules again.

He then outlines his 5th “C” (emphasis added):

Core values

The fifth ‘C’ – core values – is the responsibility of the financial sector and its leaders. Their behaviour during the crisis demonstrated that many were not being guided by sound core values.

Er… as I was saying. Expecting the “financial sector and its leaders” to change their ways and so earn public trust, is like asking the fox with poultry feathers hanging out of its mouth to implement new ways of managing the keys to the hen house. When what is really needed, is to take the keys away from the fox, and instead, entrust each of the hens with keys to their own hen house.

To restore trust in banks and in the broader financial system, global financial institutions need to rediscover their values… But a top-down approach is insufficient… To move to a world that once again values the future, bankers need to see themselves as custodians of their institutions, improving them before passing them along to their successors.

Conclusion

Ultimately, it will be down to individual bankers, including the Ivey grads who will go into finance. Which tradition will you uphold? Will your professional values be distinct from your personal ones? What will you leave those who come after you?

It is all too easy to understand the source of the many internal contradictions in Carney’s arguments.  They are a natural derivative of his personal position.

He is what I call a “vested usurer”.

As an elite banker, it is naturally in his own interests to support a continuation and extension of the centralising, monopolising international financial system. It is that system which gives him his position, his power, his lifestyle, and his opportunities.

He is unable to conceive of a financial system in which the power of “money”  is decentralised, taken away from him and his kind (bankers), and given equally to every individual in the system.

It is your humble blogger’s firm opinion that the only way for humankind to enjoy a financial system that is truly built on Trust, is by building a maximally decentralised “money” system. One that is based on, and automatically regulated by, every individual’s own credere.

In the “Trust Equation” depicted in the picture above, and in considering Mark Carney’s own argument, we can easily see why it is necessary to replace centralised banking, with individual decentralised banking.

The present financial system – and the bankers who rule it – scores very little, if not in the negative, for “C” (Credibility), “R” (Reliability), and “I” (Intimacy). And a big fat positive for “S” (SELF-Orientation). Result? By their own admission, they have earned a negative “T” (Trust-worth-iness) score.

The individuals, and businesses, with whom each one of us generally choose to buy and sell each day, typically have positive scores for Credibility, Reliability, and Intimacy. And although they may also have a positive score for Self-Orientation, we perceive that their C + R + I adds up to more than their S. We would not choose to buy and sell with them, if we felt that their T score was not a positive number.

The elites who make (and break) the rules of the global financial system, and the lower level bankers who operate it day-to-day, can never achieve a better T score than individuals. Even setting aside all other factors – an impossibility – it must be remembered that the financial system’s rulers such as Mark Carney are completely disconnected from 99.99% of those whose lives are affected by their decisions and actions. They score a massive negative for Intimacy. In the absence of Intimacy with each and every one of us who are impacted by their actions, they must always earn a negative Trust-worth-iness score.

The solution to this is crystal clear to this blogger.

Direct control of the financial system must be given to, and shared equally by, each of the individuals in the system.

Because it is only the individual interacting with another individual, who has a positive quantum of Intimacy. And that is fundamentally necessary to earn each others’ Trust.

UPDATE:

Oliver Marc Hartwich in Business Spectator:

Brutal data on Western debt march

Talk about the looming global currency war obscures an unpleasant reality: monetary policy remains the West’s only weapon to prevent imminent insolvency. Unfortunately, the medicine may kill the patient, rather than the disease.

Since the beginning of the global financial crisis, we have witnessed symptoms of the West’s economic malaise in over-indebted and over-committed governments. But if you thought that the eurozone crisis was bad and that the US fiscal cliff was a nightmare, you ain’t seen nothing yet. The fiscal problems of the Western world are so deep that they cannot be solved by some last-minute deals struck in the early morning hours.

The only way in which bankrupt governments like the US can keep living in the manner to which they are accustomed is by printing money. And although they may not do this directly, central banks are making it possible. Soaking up government debt through unorthodox monetary policy, ie. quantitative easing, they allow governments to continue spending as if nothing had happened.

There are two basic problems with these policies, however. The first is the most obvious. Historically, printing money on such large scales has always been the surest way to debase a currency. It may not happen immediately, and it may not even be visible for a while, but it is a matter of logic that a vastly inflated monetary base will sooner or later result in the destruction of a currency’s value.

The second problem is for the global economy. As most developed world central banks (with a few notable exceptions) are engaged in saving their governments from default, they are fuelling a global currency war – whether they intend to achieve competitive devaluations of their currencies or not. It may not even be a central bank’s primary goal to subdue its currency’s external value, but by providing support to its government on a scale like the US Fed, which has tripled its monetary base since the start of the global financial crisis, a weakening of the exchange rate is inevitable.

Unfortunately, for as long as the underlying fiscal problems of Western governments are not addressed and corrected, there is no escape from this march towards economic Armageddon.

In order to keep over-spending governments’ fiscal heartbeats going, monetary policy will come to the rescue – simply because there is no other way out. In the medium term, this will trigger both a debasement of currencies and increase tensions between trading partners. Currency wars and retaliatory trade policies will be the result. Both could bring globalisation as we took it for granted over the past two decades to its knees.

At the moment, monetary policy presents itself as part of the solution to the West’s sovereign debt crisis. If current policies continue much longer, it will become clear that it is part of the problem.

Central banks and governments are complicit in upholding the illusion of an all-caring, omnipotent and omni-responsible state. The longer they pretend this is viable, the more complete the destruction of the West’s economies and societies will be in the end.

What the West desperately needs is an exit strategy from this road to ruin. It needs to shrink its governments and social services to a level that can be financed out of taxes when its population ages. It needs to wean itself off the sweet poison of fresh central bank money.

It needs a new “money” system. Because the one we have known, is doomed. Hartwich’s “exit strategy” is no exit strategy at all – bloated government and social services are now a major sector of Western economies; shrinking them (“austerity”) is proven to make the situation worse.

The only question remaining, is whether the next “money” / financial system will free humanity from the power of the bankers, or, more comprehensively entrench humanity’s slavery.

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Australia’s And Canada’s House Price Fate Entwined?

22 Jan

Ever since I first experienced the chilling majesty of the landscape and the warm conviviality of the people in that other former British colony, I have informed aspiring travellers that Canadians are just like us, but with an American accent.

Today, I offer you a little proof of the truth of my assertion.

Following my last post ( “The Easy Way To Know Where House Prices Will Go” ), a Canadian retweeted my article, along with the comment, “Coming to Canada”.

Perhaps understandably for a Northern Hemispherian, he got it downside up.

What’s happening with house prices now in Canada, is Coming to Australia.

Here’s why.

Like our RBA, the central Bank of Canada publishes a chart on its website that shows the all-important growth rate in residential mortgage “credit” (debt).  You can find the chart by visiting the Bank of Canada website, and clicking on “Credit Conditions” in the top menu –

BankofCanada

This opens a new window in your browser. Click on “Household Credit” –

HouseholdCredit_BoCanada

… where, if you scroll to the bottom, you will see this chart –

MortgageCredit_Canada

Well, well well.

Quelle surprise! (that’s for French Canadians)

As you can see, the growth rate in Residential Mortgage “Credit” (ie, debt) in Canada topped out at 13% per annum in May 2008.

Amateurs! 

We Aussies peaked out our pre-GFC housing debt annual growth rate at 22%, in March 2004. Here’s how we compare (click to enlarge) –

HousingCreditGrowth_AU_vs_CA

Click to enlarge

What caused that modest (compared to ours) slump in the growth rate of “Residential Mortgage Credit” (debt) in Canada?

That’s right … something called a “Global Financial Crisis”.

The critical growth rate in new “credit” lending did keep growing, mind you.  Just like in Australia, it never actually went negative.  But what is vital to understand is that, as in Australia, the rate of growth decelerated rapidly. 

Australian economist Steve Keen has empirically proven that the rate of change in the change in debt – meaning, the acceleration in growth of debt – is vital to keeping an “asset” price bubble inflated. It takes not just steadily growing debt – say, 5% per annum – but accelerating growth in debt, to keep enough new buyers armed with enough new debt to keep bidding prices ever upward.

The Bank of Canada, aided and abetted by the Canadian government, got the public’s foot rather gingerly back on the borrowing gas, by slashing interest rates to 0.25% (April 2009) .  You can see the result in the blue line of the chart above.  It’s the area of flat / barely accelerating “credit” growth through to 2012.  Since then though, the public’s foot has started to come back off the gas again.

Why?  Because the Bank of Canada started raising interest rates. From June 2010, Canada’s official interest rate has quadrupled to a whole 1% (wow!).

Following the GFC “peak panic” in late 2008 – early 2009, our Reserve Bank began raising interest rates again fully 8 months earlier than Canada. From October 2009 to November 2010, our central bank gradually increased interest rates from a GFC low of 3.25%, up to 4.75%. You can see the result of these interest rate movements as a small hump in the chart above (magenta line).

Thanks to record low interest rates – and unlike Canada, a massive injection of (borrowed) cash home loan deposits as a result of the Rudd Government’s doubling of the First Home Owners Grant – Australia’s long deceleration in housing “credit growth” from the stratospheric heights of 2004 paused, and briefly accelerated again. It reached a mini-peak of 8.3% per annum in May 2010 (when interest rates hit 4.5%), before those rising interest rates once again took the Aussie public’s foot off the housing-debt-growth accelerator. The RBA began cutting rates again in November 2011, hoping to get us back on the borrowing gas, but to no avail. We are now back to 3% interest rates … lower than the GFC low … yet the housing “credit” growth rate is still decelerating. Watch out below?

There are some other similarities between Australia and Canada.  They too, are considered to have a “commodity-based” economy. Just like our own, Canada’s economy relies heavily on exporting stuff they either dig up or grow.  Like Australia, this abundance of natural resources – and gargantuan Chinese “stimulus” spending to stave off the GFC – was a key factor in their economy (and house prices) not following the lead of the rest of the West.

But perhaps the most disturbing similarity between the economies of our two former colonies is this.

Euromoney magazine bestowed Canada’s Minister of Finance with their “World’s Greatest Finance Minister” award in 2009.

Why is this disturbing?

The award is judged by leading European banking and finance magazine Euromoney on advice from global bankers and investors.

Unsurprisingly, Euromoney magazine has a history of picking winners (lest we forget, “global banker” powerhouses like Goldman Sachs were actively betting on a collapse in their own mortgage-backed derivative products prior to the GFC) –

2006 to 2008 were indeed magic years for Euromoney’s awards selectors with “Best Investment Bank” 2006 going to Lehman Brothers who went broke in 2008. They’re blamed for much of the Global Financial Crisis. “Best at Risk Management” went to Bear Stearns who went bust in 2007. “Best Equity House” 2006 named Morgan Stanley and “Best Investor Services” favoured Citigroup. Both were bailed out in 2008.

Just like our own Treasurer Wayne Swan, who received the award in 2011, Canada’s Jim Flaherty supposedly “saved” their economy from recession too.

How?

Exactly the way the “global bankers” wanted, of course. By goosing the public back into supporting their (the bankers’) Great Western Debt-Driven housing bubble –

Interestingly, Canada’s “World’s Greatest Finance Minister” now says he is pleased that Canadian house prices have begun to nosedive –

“I don’t mind prices coming down a bit, too,” he said in an interview, after the latest data showed that home sales fell sharply in December compared with a year ago.

I wonder if The Goose (or the JHockey?) will respond the same way when Australia’s house prices respond similarly to our decelerating growth in housing “credit”.

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