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Comer vs. Bank of Canada - Need Opinions on this

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Comer vs. Bank of Canada - Need Opinions on this

This has been circulating my Facebook newsfeed for the past week or two. The Canadian Court Case the Mainstream Media will not cover

The premise is as follows.

- Bank of Canada used to issue interest free loans for small business, education, social services, etc.

- After 1977, Canada divested from BoC and started borrowing from private banks

- Current Canadian (federal only) debt is around 676-billion

- Today, 95% of that debt is compound interest owed to private banks

- 37-billion is paid per year by Canadians to service this debt. This costs the average Canadian about $5/day


COMER (Committee for Monetary and Economic Reform) on December 12th, 2011 filed an action in Federal Court, to restore the use of the Bank of Canada to its original purpose , by exercising its public statutory duty and responsibility. That purpose includes making interest free loans to the municipal/provincial/federal governments for “human capital” expenditures (education health, other social services) and / or infrastructure expenditures.

Seems to make good intuitive sense - but I am not a financial expert. There are some smart RFD'ers here. Can someone explain why we are paying so much money to private banks unnecessarily?
In a perfect system, corporations would fear the government and the government would fear the people. - David Wong

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Syne wrote: Can someone explain why we are paying so much money to private banks unnecessarily?
"Unnecessary" for Canadian individuals - totally necessary for an economy composed largely of financial institutions.

The process you have described is designed to deliver Canadians into debt to keep them perpetually in the service of capital. Even if you keep yourself out of personal debt, the government has you working to pay off your government debts - and financial institutions make a profit on this.

It's ideologically driven - private financial concerns (and a large part of the population at large) believe private control of capital is preferable to public control. Not surprising. That's how they make their money. The Bankers' wet dream is everyone in debt to THEM - personally and through each and every level of government.

Governments, such as Canada's Conservative government, also believe in the dream. Politicians tend to mindlessly believe what lobbyists and special interest groups tell them. Government was meant to represent the people and the public interest and maintain a balance with the interests of private corporations. However, private interests many years ago captured our governments and the two now work hand-in-hand to control you for their own gain.

For more light reading, have a look at www.moneyasdebt.net
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Remember a government cannot provide entrepreneurial services with the efficiency that private sector can provide. At best it can be public-private partnership. Governments should and will only do the job they are good at.
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Not looking for tinfoil hat arguments or a lecture in Friedman economics. I just want to know how valid this case is, if it's valid at all. The fact that it seems obvious (if we have capital, or the capacity to create capital, why borrow it privately?) makes me want to believe there's a damn good reason we are borrowing privately.
MehtabS wrote:Remember a government cannot provide entrepreneurial services with the efficiency that private sector can provide.
I don't agree with this, but it isn't really apropos to this discussion either. A population of people acting under a government in the public interest does not necessarily do a worse job than a group of people acting under a corporation in self interest. At best you could argue that the private company will act efficiently because their goal is simple: Gain capital for themselves and their shareholders, while a public service often languishes and is beholdened to everyone (which seems like no none in particular). In that sense, private is efficient - but obviously doesn't act in the public interest either. We simply hope that a bunch of these companies competing with one another, creates a competitive market that benefits consumers. In some cases (TVs, smart phones, lawn chairs) this works wonderfully. In others, (power companies, cable providers, 407ETR, credit reporting agencies, etc.) it's an oligopoly, there is widespread corruption and people get gouged. You can't definitely say one is better than the other, as it is highly dependent on the industry.
In a perfect system, corporations would fear the government and the government would fear the people. - David Wong

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What was default ratio on these loans for the Federal government, anyone know ?
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Syne wrote: The fact that it seems obvious (if we have capital, or the capacity to create capital, why borrow it privately?) makes me want to believe there's a damn good reason we are borrowing privately.
I answered that. Private capture of government.
Syne wrote: ... You can't definitely say one is better than the other, as it is highly dependent on the industry.
It's not about capitalism vs socialism. It's about maintaining a healthy balance between the public and private sectors. Canada has not had that for years. Both sectors are bloated, inefficient, and above-all protected. Call it rigamortis. Canada's economy is far from a healthy competition of interests.

In fact, some of the capital could be spent into existence by Canada's federal government and some could be borrowed from the private banks. But the current situation is so out of balance much more than this might be required to regain control. Governments globally could default on some/all of their debts. Or they could temporarily nationalize some banks. They will likely do neither and the rot will continue.

But no problem! Canadians still report being happy. They love their banks. Shareholders love this racket. It's all business as usual.

Why be concerned.
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Syne wrote: This has been circulating my Facebook newsfeed for the past week or two.
You must have some interesting friends on facebook.
Syne wrote: I am not a financial expert.
That is very clear.
Syne wrote: Can someone explain why we are paying so much money to private banks unnecessarily?
Yes, the govt can create money at will, and do whatever it wants with it. And if we create lots of money, we can pay off all our debts and live happily ever after.

It doesn't work that way. If a govt starts printing untold billions (trillions?), that devalues the currency. Ask Zimbabwe how that worked out - they were printing banknotes with a face value of 100 trillion dollars: http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe. Eventually they gave up and started using foreign currency instead.

So if the Canadian govt wants to spend more than it brings in with tax revenue, the govt could create it, or borrow it. When you create too much, it leads to hyperinflation that destroys your economy.
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When we borrow it, isn't it also created? I fail to see the distinction. Why does one lead to hyperinflation and not the other?

I am not suggesting we create any more money than has already been created. I am simply saying that instead of creating it, giving it to someone else who then turns around and lends it back to us with interest, we skip the middle man and save the people of Canada some money.

You skipped the part where you explain why it doesn't work, and simply said - Because: hyperinflation. See: Zimbabwe

It seems to me that Zimbabwe's problems stemmed from issues far deeper than who owned their federal debt. I am not saying that domestic ownership of debt is a license to create money. We obviously need austerity measures in place. I am saying, paying interest to a private 3rd party is not an austerity measure, it just seems stupid, and stinks like cronyism.

If I'm wrong, I am entirely open to being told why.
In a perfect system, corporations would fear the government and the government would fear the people. - David Wong

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Syne wrote: When we borrow it, isn't it also created?
No, it isn't.

Say that I have laboured long & hard working for the man and I have managed to scrimp & save $100k which I keep under my mattress.

Being a dull investor, I am looking for something with a govt guarantee of repayment. The govt, as it has done for many years, listens to the whining of its citizens and it wants to spend $100k more than it has in tax revenue. So I lend my $100k to the govt by buying a 10-year bond that pays 3% interest. I no longer have the $100k - in return I have a promise to be paid 3% annually, and the full $100k in 10 years. The govt spends the $100k by hiring a useless bureaucrat. In this scenario, no money was created or destroyed.

Or, the govt could just print $100k of new cash and spend it by hiring the useless bureaucrat. But by printing the $100k, the govt has devalued the currency slightly - the value of every other dollar in circulation declines slightly.

Money has value based on supply & demand - increase the supply and its value declines.
Syne wrote: I am not suggesting we create any more money than has already been created. I am simply saying that instead of creating it, and giving it to someone else to lend back to us, we skip the middle man.
Where did that come from? Are you saying that the Canadian govt gives money to the banks for free so that the banks can lend it back to the govt? It doesn't happen that way.

Instead, banks raise money by issuing shares, by borrowing themselves, and by taking deposits. Banks turn around and loan that money to people, companies, and yes, the govt. But banks don't create money by issuing shares, borrowing or taking deposits - that just moves money.
Syne wrote: You skipped the part where you explain why it doesn't work, and simply said - Because: hyperinflation. See: Zimbabwe
Because Zimbabwe listened to people like you and kept creating money. Eventually the population realized that their money was worth less & less.
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Syne wrote: When we borrow it, isn't it also created? I fail to see the distinction. Why does one lead to hyperinflation and not the other?

I am not suggesting we create any more money than has already been created. I am simply saying that instead of creating it, giving it to someone else who then turns around and lends it back to us with interest, we skip the middle man and save the people of Canada some money.

You skipped the part where you explain why it doesn't work, and simply said - Because: hyperinflation. See: Zimbabwe

It seems to me that Zimbabwe's problems stemmed from issues far deeper than who owned their federal debt. I am not saying that domestic ownership of debt is a license to create money. We obviously need austerity measures in place. I am saying, paying interest to a private 3rd party is not an austerity measure, it just seems stupid, and stinks like cronyism.

If I'm wrong, I am entirely open to being told why.
When the government borrows money, that means there is the same amount of money circulating. If anything, the money is outside of a consumer's pocket, so the money doesn't flow as quickly

eg. Person A buys a $100 Canada Savings Bond (please don't, the rates suck!). There is $100 lent to the government for the government to use, but $100 less for Person A to use. So no money is created when the government borrows.

If a central bank were to lend money to the government to use, it creates those dollars because they don't exist in the first place.The central bank doesn't produce income. it serves to control the money supply. They really don't print money. So if the central bank has full reign to print money for the government for it to spend, there is no control mechanism for the government to spend wisely. That is what people are saying with Zimbabwe.

If debt sales are dependent on investors to fund, they control how much and at what rate bonds are priced at. If people are not convinced the government is responsible (likelier chance of not paying back the bonds), the interest rate the bonds have to be offered must be higher, or the government has to demonstrate fiscal control and promote stability of the money supply. You lose this form of control when government borrows from the central bank solely.

A private bond market also promotes a form of savings for individuals as it is a means for individuals to earn income on their money for future use. This stabilizes consumption over the long term as money supply is set aside for future use. This acts as a stability mechanism
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So you're saying that if BOC were to directly lend money to Canada, that investors would lose confidence in the Canadian dollar because there is no interest rate tied to the debt?

What if BOC charged the same interest that banks do, and tracked it identically? That's what I meant by austerity measures. I get what you're saying about no control mechanism, but what we are doing now seems to me like an alcoholic moving to the North Pole to get away from the liquor stores in his vicinity. Couldn't we just show restraint as a country?

At the very least, shouldn't there be a healthy mix of BOC lending and private lending?
In a perfect system, corporations would fear the government and the government would fear the people. - David Wong

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Syne wrote: So you're saying that if BOC were to directly lend money to Canada, that investors would lose confidence in the Canadian dollar because there is no interest rate tied to the debt?
No, the BoC does NOT have money to lend to Canada, except by creating money. And if you create too much money, that leads to massive inflation. In fact, during the high-inflation 1970s, the govt realized this was happening, and started covering their deficits by borrowing from the markets instead of creating money. Eventually (1980s) inflation came down to a reasonable level.
Syne wrote: Couldn't we just show restraint as a country?
Absolutely. We should stop stupid govt spending.
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OK, thanks everyone for that. It seems like the difference is that banks use existing wealth to lend to Canada, whereas the Bank of Canada would have to print new money in order to lend it. Is that correct? Is there a counter-argument to this?

If that's the case, then the money created through banks is brought about by creating value or wealth. I was worried that banks were a racket where money was unnecessarily filtered through them.
In a perfect system, corporations would fear the government and the government would fear the people. - David Wong

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Syne wrote: So you're saying that if BOC were to directly lend money to Canada, that investors would lose confidence in the Canadian dollar because there is no interest rate tied to the debt?

What if BOC charged the same interest that banks do, and tracked it identically? That's what I meant by austerity measures. I get what you're saying about no control mechanism, but what we are doing now seems to me like an alcoholic moving to the North Pole to get away from the liquor stores in his vicinity. Couldn't we just show restraint as a country?

At the very least, shouldn't there be a healthy mix of BOC lending and private lending?
If central banks did that, they would create money in the system which still increases inflation and more dollars available for private borrowing in your example. That means that you would have higher inflation and larger pressure on the system to lower rates. This can lead to overleverage among private lenders. The reality is you can't mix the two without running into difficulties. Remember, when the government borrows in the current system, it decreases the amount that private borrowers can use. This is a natural form of capital control. If you start mixing the two as you suggest, at what point does it become that the central bank will push cash into the system? Even in our private system, this still happens... look at the 2008 financial crisis. That's what central banks did, and in some cases cause problems that we are seeing today.

Either way, even with private control, have you seen how little interest the government is paying on bonds these days? The German government can sell 10 year bonds at negative rates at the moment (-0.20%) meaning they can borrow money and pay back less.

While people talk about banks earning this interest, the interest then goes to depositors, investors, pensioners that have their funds held in the bank. So already you can see that facebook post doesn't know what it is talking about. Yes, I do believe banks charge too much fees though, but there are alternatives... but Canadians are too complacent about moving from their bank.
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Syne wrote: OK, thanks everyone for that. It seems like the difference is that banks use existing wealth to lend to Canada, whereas the Bank of Canada would have to print new money in order to lend it. Is that correct? Is there a counter-argument to this?

If that's the case, then the money created through banks is brought about by creating value or wealth. I was worried that banks were a racket where money was unnecessarily filtered through them.
While I believe in private lending, I still believe banks are rackets and a lot of unneccesary money (bank fees, high management ratio fees on investment funds etc.) are unneccesarily put into them. This though is the consumer's fault. Especially today with so many low cost options, the internet and a way for looking for these options, it boggles my mind why some people put up with the offerings of large banks. While I have had good service with my bank (Scotiabank), I do my own investments and save a lot of my cash with my self-directed brokerage and my credit union savings accounts.
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Syne wrote: OK, thanks everyone for that. It seems like the difference is that banks use existing wealth to lend to Canada, whereas the Bank of Canada would have to print new money in order to lend it. Is that correct? Is there a counter-argument to this?
About a thousand of them.

If you are serious about trying to understand this issue, which you certainly appear not to be, close this RFD thread and watch this video and, more like it.
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So the consensus is that private banks create money legitimately through their business, while the central bank has no legitimate business through which to fund the creation of new currency.

It seems like the opposition has taken issue with how new money is created in the system and how it is distributed by private institutions. This leads me to question what private banks do to create new wealth, that an institution like BOC can not do under similar conditions. Ignore the public vs. private debate for a moment. Is there anything a central bank lacks, in theory, that a private bank has access to?

Meaning, if BOC had existing capital, or leveraged the country's existing resources, could it not exist like a private bank, using similar leverage?

I find the whole, "What is currency backed by?" discussion extremely difficult to comprehend, so I realize this is treading into murky waters. Still, bear with me.
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Check out caRpetbomBer's picks in this thread.
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^Yes, it lacks the manpower and resources. It can however create a separate bank that deals with general public but it would be similar to private banks in its product offerings because it itself has to make revenue from somewhere and central bank can't just print money for it like other posters said.
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Syne wrote: Still, bear with me.
Why? You are discussing your confusion with people who know little when there are many excellent resources available to you that you neither acknowledge nor consult.

You're just wasting everyone's time. Or trolling.
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Syne wrote: So the consensus is that private banks create money legitimately through their business,
Banks do not create money. They earn money, they charge too much, they sell overpriced investments, they rip off consumers & clients, but banks do not create money. Only the govt creates money.

People who don't understand fractional reserve banking sometimes claim that banks create money, but that isn't the case.
Syne wrote: while the central bank has no legitimate business through which to fund the creation of new currency.
Well, now things get a little more complicated, and sometimes the govt has good reasons to create money.

One of the big problems with the gold standard (when the currency is pegged to gold) is that the lack of physical gold impedes economic growth: http://en.wikipedia.org/wiki/Gold_stand ... advantages.

With a fiat currency like we have today, the govt can increase/decrease the money supply at will when needed. When done in reasonable amounts, creation of new money by the govt isn't an issue.
Syne wrote: This leads me to question what private banks do to create new wealth, that an institution like BOC can not do under similar conditions.
Being a central bank is quite different from being a retail or investment bank.

However, in many countries, it is common for the govt (or a govt entity, like the post office) to offer consumer banking services to the public.
Syne wrote: I find the whole, "What is currency backed by?" discussion extremely difficult to comprehend
Here is the quick answer: currency is backed by nothing. Currency is valuable because people think it's valuable, and therefore I can take currency and exchange it with someone else to purchase something I want.

And the same can be said for gold (many people think we should return to the gold standard). Why is gold valuable? Gold has intrinsic value: it doesn't tarnish, gold is used in many industrial processes, and people think it's pretty. But all that doesn't account for the current price of gold (about USD $1260 per oz). Gold is valuable because people think it's valuable.

Same as a fiat currency.

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