During the month of March, the whole world was scrambling to wrap their heads around the scale and impact of the COVID-19 crisis. As the coronavirus was scything its way through Asia and Europe, each successive government seemed to be competing to see who was going to bungle its pandemic response more. Meanwhile a different type of crisis loomed, drawing the attention of the global capitalist class. An economic crisis, already primed in the years before, was triggered by the pandemic and threatened to topple global financial markets.
Governments of the most powerful countries, led by the US, injected over $7 trillion into the global financial system in an attempt to prevent a catastrophe. The abysmal fall of stock markets was checked, and the financial system was saved. But by the middle of April a side effect of that massive intervention started to emerge. Even after industries worldwide came to a halt, and unemployment skyrocketed to levels not seen since the Great Depression, stock markets around the world started to recover and even make gains. In the four weeks between mid-March and mid-May, the net worth of the United State’s 641 billionaires increased by $414 billion.
What kind of a system is this? A system that the public is expected to bail out, with literally unimaginable sums, only to find that the biggest beneficiaries of the arrangement are the already super-rich. Meanwhile, regular working people who have managed to save enough to purchase a home are offered “mortgage deferrals,” for the right to pay the bank more interest over a longer period of time. During the crisis billionaires have increased their wealth by amounts far in excess of the public bailouts; why are we, rather than the ones who profit from it, on the hook to save the system?
The top five Canadian banks, who between 2015 and 2019 made $196.5 billion in profit, have used this opportunity to gouge mortgage holders in trouble through fees and penalties. So really, are we all in this together? Is this the system that is “too big to fail,” that we must save, lest it collapse and bring us all with it? On the contrary, we shouldn’t try to save the system that is used to extract hard-earned money from the working class and give it to the richest layers of society. Instead, we need to take the financial system back from the rich shareholders and restructure it so that it works for the benefit of society as a whole.
Response of the Canadian Government
The Canadian government was not just a bystander, it did its part to prop up the domestic and global financial systems in response to the pandemic. The Canada Mortgage and Housing Corporation (CHMC) purchased $150 billion worth of mortgages from Canadian banks to protect them from a wave of mortgage defaults and putting them in a more secure financial position to continue making profits. The Bank of Canada (Canada’s central bank) has been injecting $5 billion per week into the Canadian financial system since mid-March by purchasing government and corporate bonds through the Quantitative Easing (QE) program.
The Canadian government is eager to provide generous relief to businesses to protect their owners’ profits during the crisis. As part of the COVID-19 Economic Response Plan, the government launched no less than ten programs through which they offer financial support, secured or unsecured loans, and access to credit to a wide range of companies whose operations have been affected by the pandemic. Many businesses receiving these benefits are the same businesses that previously engaged in irresponsible practices such as stock buybacks. By purchasing their own stock back from shareholders, companies sharply increase their stock value. This has the effect of lining the pockets of top corporate managers and directors, who are partially paid in company stocks, while stripping their companies of cash reserves and leaving them vulnerable to economic downturns.
The government aid for Canadian workers has been stingy by comparison. The Canada Emergency Response Benefit (CERB) includes $2,000 per month of (taxable) assistance to people who lost their jobs due to COVID-19 (how much of that goes to landlords in cities like Toronto or Vancouver?). We get extra time to file income tax returns; a temporary wage top-up for low wage “essential workers;” and, one-time tax-free payment for people registered for the Disability Tax Credit. But you better be sure that you really qualify for your CERB payments, because the government threatens to throw you in jail for “cheating” on your applications. Finally, they have magnanimously made a polite suggestion to banks that they should do their darn best not to foreclose on mortgages in the times of pandemic; no threat there.
The government’s response is inadequate in a more fundamental way: it focuses on debt relief and financial aid instead of on investment in productive capacity. By pumping money into privately-owned businesses and financial institutions, the government is giving up all decision-making power on how to invest those funds as part of the recovery effort. This is a misappropriation of public funds into private hands. There is no reason to believe these private institutions will change their behaviour now and increase investment in productive capacity. The government should instead raise funds through increased taxation on big businesses, including a wealth tax, and directly fund new infrastructure and machinery as a part of an economy-wide Green New Deal program. As long as the government focuses exclusively on financial measures, the rate of economic growth will remain anaemic in the long run and this will lead to depressed wage growth and further polarization of income inequality.
The Private Banking System
The linchpin of any financial system is the banks. By extending credit and allocating funds from savers to borrowers, they provide services that are necessary in a functioning market economy. In most capitalist countries these services are provided almost exclusively by private banks that are run for profit. In Canada specifically, the concentration of bank services in “the big five” banks, with the help of friendly legislation from successive federal governments, have allowed these institutions to become the most profitable corporations in the country even as fees rise and quality of service drops.
The private banking system, like any other private enterprise under capitalism, is driven not by quality of service, but by profit. A CBC Go Public investigation from 2017 found that management of the major banks are pressuring their tellers to up sell customers on products and services that they don’t need and aren’t requesting, such as overdraft protection, or chequing accounts with unnecessary features and exorbitant monthly fees. One teller reported that they were forced to choose between putting food on the table for their families and doing what is in the best interest of the customer. Other tellers reported being encouraged to take advantage of elderly customers who have built up trust in them.
It’s not widely known that the banking system in Canada has not always been fully privatized. For one hundred years between 1868 and 1968, the Post Office Banking System allowed post offices to accept deposits for savings accounts and paid out interest. This system was available to anyone who could access a post office, which were much more common in smaller and isolated communities than private bank branches.
The Post Office Banking System did not end because it was performing poorly or didn’t function. Rather, after persistent lobbying by the private banks, who wanted to expand their markets to include small depositors, the government lowered interest rates paid out by the public system until finally cancelling it entirely. It was cancelled because the private banks decided they wanted to be able to profit off of the savings of the working class, and the government accommodated them. The private banks in this system are thus nothing but profiteering middlemen, and we have direct historical experience that they can be easily cut out.
A class analysis is crucial to understand why Canadian governments have been so friendly to the private banking system. Aside from the direct profit motive of wealthy shareholders, the capitalist class generally has an interest in keeping the banking system privatized. Money saved in the banking system is the surplus from production, both in the form of business profits and the wages of workers not needed for immediate consumption. Banks play a central role, through their policies and discretion, in deciding what kinds of corporations get started and what kinds of projects get built by having control of this social surplus. Since private banks are responsible to the interests of their major shareholders, their dominance in the financial system ensures that the social surplus is invested in a way that benefits the small ruling class of capital.
In the age of neoliberal capitalism, the prevailing economic ideology promotes the importance of “shareholder value” above all else, including employees, customers, or even the long-term health of the firm. This means that the social surplus generated by the labour of the working class in high-wage countries is increasingly invested in speculative financial products that boost short-term share value, rather than in productive investment such as machines, equipment, and infrastructure. These kinds of speculative activities exacerbate the instability of the whole economy.
When we talk about shareholders and shareholder value, we have to distinguish between small and major shareholders. In Canada, the majority of bank shareholders own bank stocks through mutual funds, usually part of their retirement saving plans. Those are small shareholders. Major bank shareholders are institutional investors that control hundreds of millions of dollars worth of bank shares. Some of the major shareholders of the biggest five Canadian banks are other big Canadian banks, a situation which is unique to Canada among the most advanced capitalist countries. For example, 24% of the shares (worth $10.3 billion as of 2020/06/08) of Canadian Imperial Bank of Commerce (CIBC) are owned or controlled by Royal Bank of Canada (RBC), Bank of Nova Scotia, Toronto Dominion, and Bank of Montreal. For other four big Canadian banks this percentage ranges from 17.8% (RBC) and 26.6% (CIBC).
These financial institutions control stocks on behalf of a relatively small number of individuals, the thin top layer of the Canadian society, the ruling class or the bourgeoisie. Such tremendous concentration of economic and social power makes sure that the doctrine of “shareholder value” works primarily in favour of the 1%.
Banks in Crisis
Since banks lend more than they hold in assets, they are by definition unstable. Bank runs (situations when depositors try to withdraw all their funds from a bank because they suspect the bank’s insolvency) are one of the symptoms of a financial crisis. Financial crises tend to trigger economic downturns which are characterized by inadequate availability of consumer and commercial credit. Firms that do not have cash to keep running or are not able to renegotiate their debts go bankrupt; workers who lose their jobs default on their mortgages, credit cards, and car loans.
Recessions triggered by financial crises tend to be deeper and last longer than recessions that occur in the non-financial sector. This is made worse since banks (along with other financial institutions) are active participants in global financial markets and therefore are conduits for global movement of capital. A bank or financial system failure in one country always has the potential to spread like a virus through the global financial system and infect the entire global economy. The bigger the financial centre where the crisis originates, the bigger the chance of global contamination. Thus, the 2008-2009 global financial crisis that originated in the market for subprime mortgages, a relatively small part of the US financial market, infected the entire global economy.
While the private banking system is extremely profitable for the shareholding class when times are good, the state consistently steps in to shield big shareholders from losses in times of crisis. So, the system that is designed to funnel money from the public to a tiny minority is in turn maintained at great public expense.
The prevailing narrative in the aftermath of the 2008-2009 financial crisis was that the Canadian banking system was less reckless than in other countries, more sheltered from the effects, and did not require public bailouts; this narrative is false. According to a 2012 report from the Canadian Centre for Policy Alternatives, private banks received $114 billion from public sources, including the Bank of Canada and the US Federal Reserve. The CMHC, the largest Canadian crown corporation, purchased $69 billion worth of mortgages from private banks, effectively injecting $69 billion of cash in order to keep them afloat. Three out of the five largest Canadian banks would have faced serious difficulties and possible bankruptcy without direct help from the Canadian state.
In February and March 2009, Bank of Montreal, Scotiabank and CIBC received more government help then their outstanding shares were worth, that is, it would have been cheaper for the government to buy them then to bail them out. For this remarkable performance, CEOs of the three banks were awarded multi-million dollar raises that year. It took three years for this information to come to light thanks to lies and cover ups by the Harper Government.
Meanwhile, the big five banks are consistently listed in the top ten most profitable companies in Canada. Indeed, the most profitable company in Canada in 2019 was the Royal Bank of Canada (RBC), which made $9.8 billion profit. To put this in perspective, if we estimate an average social housing unit costs $250,000 to build, the profits from RBC could build just under 40,000 housing units a year. Conservative estimates put the total number of Canadians that experience homelessness in a year at less than 300,000, which means that the profits of RBC alone could effectively end homelessness in Canada in just a few years.
It is insulting that such fabulously profitable companies should be bailed out with public funds, which then go on to be used to pay out millions of dollars in executive bonuses and to cut hundreds of jobs. To say that this is not exactly a socially desirable use of public funds is an understatement. If any bank is deemed “too big to fail” due to its crucial position in the economy, then it must simply be taken into public ownership so that we can ensure that in the future it will act sustainably and in the interests of society.
From the point of view of the bourgeoisie and the capitalist economy, drastic actions by world governments will be required to survive COVID-19 and the ensuing world economic depression. From the point of view of the working class, these actions and their outcomes point to important contradictions of the capitalist system. In order to save the economy from implosion and utter ruin, the governments are forced to shower the wealthiest and most powerful people and corporations with money while hoping that some of these benefits will trickle down to people who actually create value in capitalism – the working class.
Abuses of the current bailout program are well known and could have been predicted because similar shenanigans occurred during the last major crisis of capitalism, less than ten years ago. Directors and top management of companies who put “their” companies in a dangerous financial position before the recession paid themselves bonuses; workers faced layoffs and inadequate financial assistance from “their” governments. When the time comes to repay the debts, governments will try to put the working class on the hook by imposing austerity.
A Public Banking System
If the private banking system is obsessed with shareholder value at the expense of everything and everyone else, how could a public banking system be different? Fundamentally, a public banking system would be unconstrained by the class interests of the wealthy shareholders and could focus on providing better services for the working class and those living in rural or remote areas.
A publicly-owned banking system could reverse the trend of closing small bank branches and could bring fees down, even eliminating them entirely. Customer service would be a service not a hard sell of un-needed products with high fees. In a public banking system, the deposits, i.e., the social surplus, could be invested in productive projects for socially desirable purposes. This could include housing, public transit or telecommunications infrastructure, or developing new productive capacity and union jobs as part of a Green New Deal-style transition away from fossil fuel extraction.
A small first step in the direction of a public financial system could be the reintroduction of postal banking in Canada. This is a regular proposal of left-wing politicians and commentators and is actively supported and called for by the Canadian Union of Postal Workers.
A fully nationalized financial system would perform the following functions:
- Access to financial services (deposits, short- and long-term credit) must be available to all people provided through postal banking.
- Short- and long-term credit must be available to commercial enterprises, thus breaking their dependence on private capital markets.
- Capital flow controls should be reintroduced in order to prevent speculative and fraudulent outflow of capital (e.g., to tax havens).
- Private for-profit pension funds should be replaced with care for retired workers provided by surpluses currently created in the economy. This would save the pensions millions squandered in profits and exorbitant executive pay; instead, this would go to improving living standards. Public pensions would stop investing in stock market speculation with risks of major losses.
- Public housing should replace the for-profit market system so that mortgages stop being millstones hanging around the neck of the working class.
Banks are a powerful tool that the capitalist class uses to direct investment of the social surplus into products and corporations that serve its interest. Control of the financial system is a prerequisite to an effective system of economic planning. Any attempt by the working class to take control of the economy and direct it for social purposes will be met with determined resistance as long as the banks remain in private hands.
In the recent period of the ascendency of neoliberalism, the ruling class has taken action to weaken and divide the forces of labour. This has come in the form of the state directly fighting against striking unions, or indirectly in the form of amending labour laws in favour of employers, as well as encouraging the rise of increasingly precarious forms of employment.
These inroads by the ruling class can only be reversed through working class struggle and solidarity. One way that we can shift the balance back in our favour is to struggle for greater control of the financial system, by demanding public postal banking, by demanding private banks seeking bailouts are brought into public ownership, and by demanding public control over the whole financial system. It is clear that these proposed changes will encounter a strong opposition from the bourgeoisie. To this we say, “Capitalism has been on the brink of ruin twice in the last ten years, only to be saved by taxpayers. It is time to be bold.”
