Why is Flaherty promoting credit as an economic solution?
December 23, 2008 · By Charles Anthony
Do Canadians really demand credit? or do they simply want money?
I am getting tired of hearing a lot of economic crap from our government. The repeated dogma seems to be “Canadians want credit.” but I do not believe that one bit. I do not hear Canadians asking for credit and even if I did, I would dismiss that Canadian as being crazy or irresponsible.
People need money. People do not need credit. There is a huge difference.
Canadians work hard enough and should keep their own damn money. Taxes should be reduced and the government has to stop inflating the money supply. People need credit like they need a hole in the head.
I wonder why does Flaherty keep repeating that Canadians are demanding credit when such a demand makes no sense. Extending credit only accentuates economic dependence and is an incentive to irresponsibility.
I think we are being deceived. If anybody benefits from extending credit, it will be the lenders first. Ordinary Canadians simply need money and extending credit is not the only way that Canadians can keep more money in their pockets.
Is he? Or is he merely trying to appease the credit-hungry, good-for-nothings on the left?
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Merry Christmas Politic people!
The government is pursuing an expansionist monetary policy to counter the effects of an economic downturn.
All money is created out of debt, so more credit there is, the larger the money supply. The Bank of Canada encourages lending by lowering interest rates, and the feds find ways to reduce risk for lenders and borrowers. The idea is to shore up domestic demand while devaluing our currency in order to keep our export markets alive. Also more money in circulation means more revenue for the government whenever it is taxed.
We pretty much have to to this to keep pace with expansion seen in the US, Europe and elsewhere, otherwise our dollar would rise and our exports would crash. Its the best thing to do as long as there is a reasonable capital requirement, and the credit is invested in productive economic activities with low chance of default. That’s all true in Canada (unlike the US), so the government is basically trying to stimulate the economy by making credit cheaper and more plentiful.
Mr. Zoop,
Not all money is created out of credit. Money is “created” by virtue of the fact that two people use it as a medium of exchange. Are you being disingenuous by suggesting otherwise? or are you ignorant? I ask so pointedly because I do not believe that Canadians are demanding credit from coast to coast, the way our Minister of Finance is pretending and you seem to be parroting the same nonsense.
However, the money that Canadians are forced to use is inflated by the government and the method of inflation is the credit market.
Not everybody gets the new money first. Some people get it before others.
Thanks for the insults. I’m being neither disingenuous nor ignorant. I was just trying to answer the question you posed.
Money as a ‘medium of exchange’ (or even better money as a ‘price signal’) is an accurate description of the role money plays in the economy, but it doesn’t explain where it comes from or how its created.
In fact all money is created from an initial loan of reserves made by the BoC to a chartered bank, who then creates new money when they lend against those reserve dollars, multiple times (up to 12x in Canada). Credit is the mechanism of money creation, all money is created from debt. The money supply is equal to the accumilated principals of all outstanding loans. This is just how it works.
Its a bizarre truth of capitalism that there is as much money in circulation as people are willing to borrow. I think I agree that Canadians aren’t really demanding credit, if anything most of us are inclined to pay off our debts at times like this. But paying off debts takes money out of circulation, and a shrinking money supply during a recession can easily lead to a depression.
This is exactly the problem the government and BoC are trying to solve by making credit cheaper and more available. In fact all G20 countries are perusing expansionist monetary policies, and such monetary inflation can only be achieved through an expansion of credit.
You are still wrong, Mr. Zoop. Money does not have to be created out of debt and inflating the money supply can be done without expanding credit. Your keep implying that there are no other choices.
At any rate, I do not believe Jim Flaherty is ignorant of what is going on. I believe he is playing favorites. If monetary expansion is the chosen method of dealing with the economy, there is no objective reason why the Bank of Canada should not just give new money directly to all Canadians instead of giving it first to the banks.
The creation of debt is the method chosen by the government and that choice is unfair because it is one of deliberate favoritism in the economy. I also believe it prolongs recessions because it prevents market corrections by fostering malinvestment.
Correction: you mean crony-capitalism here.
However, even if you are correct — i.e., the only way to expand the money supply is through the creation of debt — eventually, there will be a limit to credit-worthy customers. Then what??
Correlation is not causation. You seem to be implying that the depression/recession is caused by the slowing down of credit expansion. I do not believe that to be the case. In fact, I believe that inflation of the money supply prolongs recessions.
Excuse me but I am not wrong about how money is created. Your claim the BoC can inflate the money supply without creating new debt is simply incorrect. Calling it “crony-capitalism” misses the point – I’m not making an ideological claim, just pointing out a fact about how our system works.
Also, the causative link between the great depression and monetary contraction has been made by many others, not by me, although I have no reason to question the consensus around this analysis. The theory says it was a combination of recession, price deflation and monetary contraction that led to the depression. Agree or disagree, my point was the government and the BoC are basing their expansionist monetary policy on this perspective.
You are right that there is a limit to the credit-worthiness of borrowers. Canada’s advantage is we have regulations requiring 7% capital reserves on a bank’s loans, whereas the US has dropped these reserve requirements. So in Canada our banks can lend against a reserve dollar 12 times, while US banks have no practical regulatory limit. This is why greed took over in the US, but not in Canada. The situation was made worse when the US government bailed out the bad loans, effectively ‘socializing the losses’. In the US there is basically no down-side to lending money to borrowers who otherwise shouldn’t qualify since banks can basically lend as much as they want, and the bad loans are covered by government bailouts anyway.
By contrast Canada’s financial regulations motivate banks to lend to credit-worthy borrowers because they must maintain a 7% asset requirement overall. Since there is a limit to how much money banks can lend and there is no expectation of a government bailout, they are motivated to lend to credit-worthy borrowers and avoid the rest. This helps ensure the loans go into productive investments, which is really the secret to our success.
Your ‘maladjustment theory’ has merit of course but I would say monetary expansion is beside the point. What matters is whether the mechanisms of expansion (credit) impede or accelerate market corrections. They can do either. Market corrections are impeded if a government runs a deficit (new debt, new money) to bail out a failed business. But market corrections can be accelerated if the government backs a commercial loan that is invested in new technologies and restructuring.
Unfortunately there are credit-worthy borrowers (individuals and businesses) that cannot get loans due to the international liquidity shortage. In this case a lack of credit can impede the market corrections, which is why the government is looking for ways to make credit more available.
No, Mr. Zoop, you are wrong. The creation of debt is not the only method. The Bank of Canada or any central bank for that matter, can simply print money and hand it over to consumers. The Bank chooses to inflate the money by creating debt instead — translation: the Bank gives cheap money to the lenders.
That is a distinct choice and the direct beneficiaries are the lenders.
You are right that there are a lot of economists who advocate a causative link between the great depression and monetary contraction. [So what? Karl Marx was also an economist.]
Hold on a minute! Did you know that there are economists who advocate the opposite?
You might find these interesting: The Federal Reserve Caused The Great Depression
Did Capitalism Cause the Great Depression?
The shortened version is that loose credit prolongs recessions by subsidizing malinvestments and delaying normal market corrections.
How can you possibly distinguish a failed business from a successful one if cheap new money is constantly being injected into the economy by the central bank?
Well, it sounds like you are using the term “market correction” as a catch-all that includes government subsidies, favoritism, corporate welfare and possibly social engineering. Sorry, I guess we disagree on what is correct behavior for the government.