The president of a major bank in Canada reportedly told the House of Commons committee
on August 1, 1995: "We need to move from past anecdotes and impressions to
a focus that's based on facts and on actions"1
[my emphasis and italics].
A review of the facts unconceals the following. Many financial institutions
grossly misdirected their loans, favoring commercial real estate over manufacturing and
high-technology. Loan misdirections and excessive overinvestments in commercial real
estate had many serious consequences: the National economy was destabilized, many
funding-limited high-tech companies were weakened or destroyed, the safety net was put at
risk, etc. Losses from overinvestments and speculations resulted from a real-estate fiasco
of gargantuan proportions. Starting around 1989, a "credit crunch" developed at
many banks. Statistics derived from annual reports of Canada's two largest banks, for
example, indicate that cash resources per share, in constant 1986 dollars, fell
- At Royal Bank, by about 80.5%--from $128.47 in 1981 to $25.05
- At CIBC, by about 82.8%--from $178.18 in 1980 to $30.71 in
With less cash, some banks froze, reduced, or called the loans of many funding-limited
firms. In other words, many viable and strategic funding-limited firms were destabilized,
directly or indirectly, by actions of banks. Shielded by net litigation advantages
over small borrowers, and by agents, some banks, creditors, or their agents used predatory
techniques to recover funds. A large number of firms were either weakened or ruined, with
potentially catastrophic consequences for the Nation. In Canada, many weakened high-tech
firms were acquired by American firms.
THE MONTE CARLO SIMULATIONS IN THIS BOOK DEMONSTRATE VIVIDLY
POLICIES AND ACTIONS CAN INCREASE SUBSTANTIALLY THE PROBABILITY OF BUSINESS FAILURES.
Here are some more facts. Between 1989 and 1994, the total number of business
and consumer bankruptcies reached a staggering 311,185.2
How many bankruptcies could have been avoided had policies or actions of
banks been different? In 1994, the per-capita number of business failures in Canada was
about 46.9% higher than in the U.S.!3 Between 1966
and 1993, there were an incredible 89,791 more business failures than would have
been expected had the business environment in Canada been identical to that in the United
FOR BUSINESS OWNERS, THEIR FAMILIES, AND EMPLOYEES, THESE
89,791 EXTRA BANKRUPTCIES COULD NEVER BE "ANECDOTES"! IF THE STRUCTURAL PROBLEMS
OF CAPITALIST ECONOMIES BECAME CHRONIC, AND, IF AS A RESULT, PEOPLE DECIDED TO SUDDENLY
WITHDRAW ALL THEIR MATURED DEPOSITS AND SAVINGS FROM BANKS, THEN, WOULD BANK EXECUTIVES
REFER TO ENSUING BANK FAILURES, IF ANY, AS "ANECDOTES"?
Many in banks and in government may want people to "turn the page on the
past." But this is not easy. If bank actions or inactions increased, directly or
indirectly, the number of business failures, then shouldn't the implicated banks be made
responsible for their share of the resulting losses and liabilities? Clearly,
borrowers must meet their obligations. But so must banks.
Government and bank ombudsmen can help deal with errors and with exploitative or
predatory practices in the marketplace. But people need much much more. Governments must
give assent to laws that stop:
- Gross misdirection of loans and excessive speculation.
- Substantial concentration of financial and commercial powers.
- Excessive "conscious parallelism" or "tacit collusion" in the
- Systematic manipulation of the Rule of Law. "Net advantages" for Big
Business and Big Government at the expense of citizens must be eliminated.
If items 1 through 3 cannot be stopped, offenders should be penalized or taxed--retroactively, if necessary. As for item 4:
LEGISLATION AND JUDICIAL PROCEDURES MUST NEVER FAVOR LENDERS OVER BORROWERS. WE NEED
LAWS THAT GUARANTEE THE SAFETY AND STABILITY OF LOANS FOR BOTH LENDERS AND
BORROWERS. WE NEED A BANK LOAN SAFETY ACT. ONLY THEN CAN PEOPLE BEGIN TO TURN THE
PAGE ON THE PAST.
|1 See R. Haliechuck, MPs Grill
Bankers on Small Business, The Toronto Star, August 2, 1995, at C1 and C2.
2 Consumer and Corporate Affairs Canada, Bankruptcy Branch (number of
business and consumer bankruptcies in Canada).
3 Data sources used to calculate this percentage include: Economic
Report of the President, February 1997, at 337 (Table B-32: Population by Age Group,
1929-96; total U.S. population, July 1; cited source: Department of Commerce, Bureau of
the Census), and 407 (Table B-94: Business Formation and Business Failures, 1955-96;
business failures data ending 1983 and beginning 1984 are not strictly comparable; cited
sources: Department of Commerce (Bureau of Economic Analysis) and The Dun & Bradstreet
POWERFUL EVIDENCE OF "CONSCIOUS PARALLELISM" AT CANADA'S TOP THREE
"Conscious Parallelism" at Canada's Top Three BanksThis Plate
provides powerful evidence corroborating "conscious parallelism" at Canada's
largest three banks. Signalling regarding prices (total revenue per branch) and costs
(non-interest expenses per branch) appears to have increased significantly after 1989, the
onset of the "credit crunch" at Canada's top banks (see next Plate). Curves
derived from data in annual reports.
Sources: Bank of Montreal, CIBC, and Royal Bank annual reports
(interest income, other income, non-interest expenses, and total number of branches or
service delivery units, for years ended October 31).
[Copyright -- 1998 by MACROKNOW INC. All rights reserved.]
|CREDIT CRUNCH AT CANADA'S TOP THREE BANKS
THE EMPIRICAL EVIDENCE
Plate 2-2 Evidence
of a "Credit Crunch" at Canada's Top Three Banks: Cash Resources Per Share -- in
Current and in Constant 1986 DollarsThis Plate provides powerful evidence
corroborating the occurrence of a "credit crunch" at Canada's top three banks,
starting around 1989.
The credit crunch was not limited to Canada's top banks. The credit crunch at banks and
trust companies can be linked to a variety of factors, including misdirected loans
(excessive overinvestments in commercial real estate, and underinvestments in
manufacturing and technology). In constant dollars, cash per share remained essentially
flat from 1989 through 1994. The combination of misdirected loans (including
overinvestments in commercial real estate) and the "credit crunch," at banks and
trust companies, played havoc with the National economy. For many
small businesses, the consequences were devastating. The extent of the
devastations -- overinvestments were followed by a recession, excessive unemployment
rates, economic destabilization, excessive bankruptcy rates, excessive cumulative
government and personal debts, etc. -- is depicted in Edward Ayoub's World War III Against The Money Trust?
(Economic Survey in Book II).
Sources: Bank of Montreal,
CIBC, and Royal Bank annual reports (cash resources as at October 31); and Statistics
Canada, Canadian Economic Observer, Historical Statistical Supplement, 1994/1995,
Catalogue 11-210, 1995, and Statistics Canada Inquiry Line (CPI deflator).
[Copyright -- 1998 by MACROKNOW INC. All rights reserved.]
|CREATIVE DESTRUCTION OR PREDATION?
FROM PER-CAPITA MORTALITY OF BUSINESSES IN THE U.S. AND CANADA
Evidence of Substantial Increase in the Perniciousness of the North American Marketplace:
Per-Capita Mortality of Businesses in the U.S. (1966-1996), Canada (1966-1996), and Japan
(1980-1992) -- Compared
and Corporate Affairs Canada, Bankruptcy Branch (Canadian business failures); and
Statistics Canada (Canada's population).
Report of the President, February 1997,
at 337 (Table B-32: Population by Age Group, 1929-96; total U.S. population, July 1; cited
source: Department of Commerce, Bureau of the Census), and 407 (Table B-94: Business
Formation and Business Failures, 1955-96; business failures data ending 1983 and beginning
1984 are not strictly comparable; cited sources: Department of Commerce (Bureau of
Economic Analysis) and The Dun & Bradstreet Corporation).
Monetary Fund, International Financial Statistics Yearbook, XLIV-XLIVII
(1991 through 1994) and International Financial Statistics, XLVI (5)-XLIX
(6) (May 1993 through June 1996), Washington, DC: International Monetary Fund (population
data for Japan 1977-1993); and R.C. Hsu, The MIT Encyclopedia of the Japanese Economy,
Cambridge, MA: Massachusetts Institute of Technology, 1994. (Japanese business failures
for 1980-1992, at 31; cited sources: Teikoku Databank Ltd. and Nikkei Electronic Databank
-- 1998 by MACROKNOW INC. All rights reserved.]
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