Montreal, October 15, 2008 • No 260




Harry Valentine is a
free-marketeer living in Eastern Ontario.




by Harry Valentine


          On Friday, October 11, 2008, the Canadian government purchased a percentage of mortgage debt from Canadian banks, allegedly to make more money available for banks to use as loans. On the same day, the Canadian dollar underwent its biggest single-day decline in several years in relation to the weakening American dollar. The decline could be the response of international money traders to the bailout or it could be the result of the Bank of Canada having previously printed excess currency. The bank bailout and subsequent decline of the dollar may have been a political ploy to show the electorate that the federal government is actually doing something to increase Canadian exports to a weakening US market.


          As opposition leader, Stephen Harper once stated, "The government that governs least governs best," a remark meant for a former Liberal Party prime minister and his cabinet. He professed one economic ideology prior to acquiring governmental power, but a very different economic strategy after having acquired it. The timing of the bank bailout suggests that it was intended to win voter support. It may prove to have merit in the short term, but achieve little to increase exports to the problem-ridden American economy.

          The most recent problems in the American economy can be traced back to the economic policies of an influential personality who, in the early 1960s, wrote an article that extolled the virtues of an independent gold standard banking system. He elaborated on how adherence to such a system could have prevented the stock market crash of 1929 and the Great Depression that followed. In later years, Alan Greenspan became chairman of the American Federal Reserve and was expected to be very careful about the rate at which that institution printed money, given his knowledge of the dangers of rapidly increasing the amount of money in circulation. He had identified the artificially low interest rates and easy credit of the "roaring 20s" as having led to a speculative boom that culminated in the Monday, October 29, 1929 stock market crash.

          Under Greenspan though, interest rates dropped to 1% and the Fed provided easy credit for select sectors of the economy. He may have believed that he could stimulate development in very promising sectors of the economy while avoiding the monetary mistakes of the 1920s through the use of monetary regulation. He made low-interest credit available to the high-tech and information sectors of the economy. The problem is that no central banker could have known when easy credit was being given to hordes of entrepreneurs whose high-tech and information-sector business plans had little hope of any commercial success.

          Greenspan's policies gave rise to the high-tech boom and malinvestments that ended up in the high-tech bust and dot-com meltdown. Even before the high-tech meltdown had been liquidated, massive amounts of money moved toward more secure economic areas such as home building, housing markets, and the energy sector. The Clinton administration had initiated super low-interest loans to encourage more Americans to become homeowners. Interest rates were only raised after June 2004. Over a period of several years, that policy essentially compelled banks to make such loans to large numbers of very high-risk clients. The market has begun to correct itself with the mortgage meltdown of recent months.

"Artificially low interest rates ultimately provide flawed and misleading economic information that put businesses at risk, and likely contributed to the failure of Bear Stearns and the bailout of AIG."

          Market-driven interest rates generate important economic information with which banks, industries, and businesses formulate strategy. Artificially low interest rates ultimately provide flawed and misleading economic information that put businesses at risk, and likely contributed to the failure of Bear Stearns and the bailout of AIG. Most American politicians have subsequently called for stringent bank regulation and have blamed laissez-faire banking policies for causing the mortgage meltdown. However, American banks are already heavily regulated and were enacting the policies of previous American administrations.

          Some eminent free market economists have identified political meddling in the banking system and the low interest rate policies of the Federal Reserve as the causes of the stock market crash of 1929. In his treatise entitled America's Greatest Depression, Murray Rothbard reveals how government policies caused the Great Depression that followed the 1929 crash. The government introduced wage and price controls as a means to stabilize prices and the economy while continuing to increase the money supply. In his treatise entitled Free to Choose, economist Milton Friedman theorized that the Federal Reserve's tight money policy had precipitated the Great Depression, and was lauded by US Federal Reserve Chairman Ben Bernanke for this analysis. Rothbard's research revealed, on the contrary, that the Federal Reserve had continued to print money.

          To this day, most state and provincial administrations enforce minimum wage laws while economic regulation prevails in numerous sectors of the economy. The apparatus by which to control wages and prices across much of the economy is already in place across the US and Canada as well as most other G8 nations. The bank bailouts will merely postpone a long overdue mega-correction of the stock market. By the end of 2008, American military expenses in Iraq and Afghanistan are expected to exceed US$1 trillion. The US government is said to be ready to initiate a pre-emptive strike against Iran. Such misallocation of economic resources could prolong the American economic recession.

          Despite showing strong fundamentals at present, Canada's economy is heavily interlinked with the American economy and dependant on it as an export market. A steadily weakening American economy has cost Southern Ontario's manufacturing sector over 400,000 jobs, a trend that will likely continue. The Canadian government mortgage bailout and the resulting decline of the Canadian dollar against its American counterpart appear to offer some hope to Canadian manufacturers. Canadian government investment into troubled industrial sectors may be politically appealing, but it will shift revenue from productive but low profile areas of the Canadian economy into areas that have an uncertain market in the US. Over the long term, such practices will very likely prove detrimental to the Canadian economy.