Preface
In this book I investigate the impact of an adversarial, exploitative, and predatory
business environment on the survivability of sound but funding-limited small
firms. My emphasis is on bank-induced risks. My analysis makes use of
an expert
system with Monte Carlo simulation capabilities.1 I
use two kinds of input evidences: firm-related (e.g., the firm is sound, funding-limited,
unable to secure funding on short notice, etc.) and environment-related (e.g., financial
and commercial powers are concentrated in a few banks, loans are misdirected, judicial
procedures favor Big Banks over small business owners, etc.). And I calculate the
subjective probabilities of three possible conclusions as a function of the strength of
the evidences:
- The bank suddenly freezes, reduces, or calls the firm's loan.
- The firm is destabilized.
- The firm is destroyed or cannibalized by economic predators.
I use Monte Carlo simulation for three reasons:
- Subjectivity. The truth of all evidences (e.g., the truth of the
proposition "loans are misdirected at banks") cannot be certified absolutely.
However, a subjective range of probabilities for evidences can be corroborated from
empirical data. For example, there is substantial corroborative evidence of past
speculative overinvestments by financial institutions in commercial real estate�in the United States, in Canada, in Germany, in Japan, etc. The
oversupply of commercial buildings in the United States and Canada over the 1980s and the
link between the resulting "glut" and the recession in 1990 has received
wide coverage.2
Overinvestments have resulted in a
"credit crunch" at many banks and in a general
credit
slowdown.3 The occurrence of the credit crunch is
easily substantiated with historical data from annual reports of banks and trust
companies. Past bank debt exposure has included syndicated loans to Less Developed
Countries, leveraged buyouts, and loans to the energy sector.4
Credit exposure has also included exposure from derivatives. The potential for
catastrophic market risks from sudden declines (unexpected or expected) in equity prices
cannot be ignored. But money is not the only concern.
There is considerable empirical
data indicating that the judicial systems in the United
States, Canada, and England have been manipulated to give, apparently, not slight, but substantial "net advantages" to Big Business and Big Government
over citizens and small business owners.5-12
Judicial Bias. The empirical evidence from U.S. and
Canadian courts corroborates substantial judicial biases.
In a study of the performance of U.S. State Supreme Courts, covering the period
1870-1970, Stanton Wheeler et al., found as follows: the "net advantage" of
Government (City and State) was +11.8%, and that of Business Organizations was +3.1%
(larger businesses include railroads, banks, manufacturers, and insurance companies); by
contrast, the "net advantage" of Business Proprietors was -5.4%, and that of
Individuals was -1.5%.6 The "net advantage" of Business Organizations
over Business Proprietors was +16.3%.7 As percent difference, the success of
"Haves" over "Have Nots" was 9.3%. The success rate of Landlords over
Tenants was 19.2%, and that of Creditors over Debtors was 9.4%.8
In a study of Canadian Provincial Appeal Court Decisions, covering 1920-1990,
Peter McCormick found as follows: the "net advantage" of Big Business (banks,
insurance companies, and major corporations) was +21.1%; by contrast, the "net
advantage" of Other Businesses (including small and medium enterprises) was -4.8%,
and that of Individuals was -7.2%.9
According to McCormick, "[t]he reported decisions of the
Supreme Court of Canada since 1949, and of the provincial courts of appeal over an even
longer period, show patterns of advantage so strong and so internally consistent that we
can statistically 'predict' the probability of appellate success from a knowledge of the
relative status of the two parties" [my emphasis].10
- Uncertainty. Scientists have known for a long time
that correlation is no proof of causality. In politics and economics, the relationships
between "causes" and "effects" are often indirect, concealed,
dissimulated, or veiled. Whose policies should we blame for the vicissitudes of the
Business Cycle? Central banker policies for increasing the money stock? Banker policies
for favoring highly collateralized commercial real estate loans? Or borrower policies for
engaging in speculative investments?
Overinvestments at Banks and the National Economy.13
Many banks increased substantially their commercial real estate loan portfolio
during 1986-1991. Canada's largest bank, for example, increased its domestic commercial
real estate loans from $1,781 million in 1985 to $7,098 million in 199114 �or, as a percentage of the bank's total
domestic loans, from 3.95% to 9.04%. These increases were followed by substantial
increases in domestic non-accrual business loans. Net of allowance for credit losses,
domestic non-accrual business loans at Canada's largest bank swelled from $361 million in
1989 to $2,465 million in 1992. Other categories of net domestic non-accrual loans also
swelled: consumer installment and other personal loans�from $40 million in 1989 to $153 million in 1992; and residential mortgages�from $15 million in 1987 to $225 million in
1993. But Canada's money stock also increased. The year-over-year change in (M2-M1), for
example, increased from $6,480 million in 1983 to $31,480 million in 1989, the largest
increases occurring in 1986 and in 1989.15 Industry-wide increases in
commercial real estate loans were followed by increases in:
- The number of business bankruptcies�from 7,659 in 1987 to 14,317 in 1992.
- The number of consumer bankruptcies�from 19,752 in 1985 to 62,277 in 1991.16
- The unemployment rate�from 7.5% in 1989 to 11.3% in 1992.17
- The debt outstanding of persons and unincorporated business, as
percent of personal disposable income,�from 71% in 1984 to 100.9% in 1994.18
- Government deficits�from $32,499 million in fiscal 1988/89 to about $66,137 million in fiscal 1992/93
(all government levels).
- Government net debt�from $388,359 million in 1988 to about $692,825 million in 1994 (all government
levels).19
- The total Canadian criminal code rate�from 8,356 in 1984 to 10,309 in 1991, on a per 100,000
population basis (traffic infractions excluded), etc., etc.20
While direct economic causality cannot be ascertained, correlations and linkages can be
demonstrated or unconcealed.21 The validity of expert
system rules connecting "causes" (e.g., banks and trust companies have
misdirected loans or have overinvested in commercial real estate) and "effects"
(e.g., the debt outstanding of persons and unincorporated business climbed out of control,
the economy was destabilized, and the number of business and consumer bankruptcies reached
record highs) cannot be certified, but the sensitivity and the specificity
of hypothesized rules can be quantified and analyzed. In other words,
the sensitivity
of the probability of the conclusions can be calculated as a function of the subjective
validity of the rules.
- Complexity. By their very nature, real economic systems are complex. Causal
chains can involve many "causes," and these are not necessarily independent.
For example, powerful economic players can manipulate the Rule of Law to gain
financial, commercial, and judicial "net advantages." The advantages can then be
used to further increase the power of dominant players. Dependencies in input
evidences increase the complexity of the analysis�but are not
beyond the capabilities of Monte Carlo simulations.
I have augmented the Monte Carlo simulation study with a variety of Notes. These deal
with complex and highly controversial subjects: Usury, Darwinistic Manipulations of the
Rule of Law, Madness in Capitalism, and Aggression in Banking. One important matter I
cover is the unhealthy economic soul that seems to characterize well Capitalism in
so-called liberal democracies. I have drawn on Hegel's philosophy in my attempt to develop
A Theory of Economic Madness in Capitalism. I included this theory together with a Model
of the Unhealthy Economic Soul as an intellectual assault on many of the current
assumptions of Capitalist ideology. I have also provided Supplementary Notes on the Overturning
of Capitalism.22 The inspiration for these is
Heidegger's The Metaphysical Foundations of Logic. In these I clarify and summarize
general philosophical ideas on five complex and difficult topics: (1) the characterization
of Capitalism; (2) the basic problematic of Capitalism; (3) the foundations and principles
of Capitalism; (4) the priesthood of Capitalism; and (5) the overturning and dismantling
of Capitalism.
I expect criticism from the Capitalist priesthood�
especially, the rapacious kind. But it would be foolish for it�just
as it was for the Ptolemaic Church�not to heed the forces of
Reason.
E DWARD
E.
AYOUB
TORONTO, ONTARIO
JUNE 20, 1998
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| 1 The combined use of
expert systems for "codifying risk estimates," and of Monte Carlo simulation for
dealing with uncertainty, was suggested by James N. Siddall in Expert Systems for
Engineers, 1990, at 143-186. 2 See, for example, Economic
Report of the President, transmitted to the Congress February 1994, at 61-62
(Oversupply of Commercial Buildings), and 63 (Credit Crunch).
3 See Richard Cantor and John Wenninger, Perspective on the
Credit Slowdown, Federal Reserve Bank of New York Quarterly Review, Spring 1993,
Vol. 18, No. 1, at 3-36.
4 See, for example, Duncan McDowall, Quick to the
Frontier: Canada's Royal Bank, 1993, at 415-417, 424, and 431.
5 S. Wheeler et al., Do the 'Haves' Come Out Ahead? Winning
and Losing in State Supreme Courts, 1870-1970, Law and Society Review, 21
(3), 1987, at 403-445.
6 Ibid., at 418 (Table 2: Success Rates by Nature of
Party, 1870-1970).
7 Ibid., at 420 (Table 3: Net Advantage for Different
Combinations of Parties, 1870-1970).
8 Ibid., at 428 (Table 7: Success Rates of
"Haves" versus "Have Nots" in Specific Legal Roles, 1870-1970).
9 P. McCormick, Party Capability Theory and Appellate Success
in the Supreme Court of Canada, 1949-1992, Canadian Journal of Political Science, 26
(3), September 1993, at 523-540 (Table 1: Reversal Rate, as Appellant and Respondent, by
Type of Litigant: Supreme Court Decisions, 1949-1992, at 532).
10 P. McCormick, Canada's Courts, 1994, at 166-167
(Conclusion: Toward a Better Understanding of Appeal Courts).
11 D.R. Songer and R.S. Sheehan, Who Wins on Appeal?
Upperdogs and Underdogs in the United States Courts of Appeals, Journal of Political
Science, 36, 1992, at 239 and 243-246 (U.S. Court of Appeals decisions, 1986).
12 B.M. Atkins, Party Capability Theory as an Explanation for
Intervention Behavior in the English Court of Appeal, American Journal of Political
Science, 35, 1991, at 881 (English Court of Appeal decisions).
13 This section is expanded from my World War III Against
the Money Trust?, 1997 (Book II, at 6-7).
14 See Royal Bank annual reports (loans by industry, as at
September 30; non-accrual loans, net of allowance for credit losses, as at October 31).
15 Statistics Canada, Canadian Economic Observer,
Historical Statistical Supplement, 1994/95, Catalogue 11-210, June 1995 (Table 34:
Money Supply and Credit, at 88).
16 Consumer and Corporate Affairs Canada, Bankruptcy Branch
(number of business and consumer bankruptcies in Canada, 1966-1996).
17 Economic Report of the President, Together with The
Annual Report of the Council of Economic Advisers, transmitted to the Congress, February
1997 (Table B-107: Civilian Unemployment Rate, 1970-86, at 421).
18 Statistics Canada, Canadian Economic Observer,
Historical Statistical Supplement, 1994/95, Catalogue 11-210, July 1995 (Table 2:
Personal Income�Sources and Disposition�and Spending, at 10-11); Statistics Canada National
Balance Sheet Accounts, Annual Estimates 1984-1993, System of National Accounts,
Catalogue 13-214, March 1995 (Table 2: Credit Market Summary Table, at 4-5); and Robert
Smith, private communication, November 24, 1995 (debt outstanding of persons and
unincorporated business, 1970-1994).
19 Statistics Canada, Public Sector Finance 1995-1996,
Financial Management System, Catalogue 68-212-XPB, March 1996 (Table 1.0: Federal,
Provincial, Territorial and Local Government Net Debt, as at March 31, at 1; Table 1.5:
Federal, Provincial, Territorial and Local Government Deficits, at 5.)
20 Dianne Hendrick, Canadian Crime Statistics, 1994, Juristat,
15 (12), August 1995, Catalogue 85-002, at 1-37 (Table 1: Rates of Criminal Code
Incidents, Canada, 1984-1994, at 5; cited source: Uniform Crime Reporting Survey, Canadian
Centre for Justice Statistics); Statistics Canada, Crime Trends in Canada, 1962-1990,
Juristat, 12 (7), March 1992, Catalogue 85-002, at 1-15 (Table 2: National and
Regional Crime Rates per 100,000 Population, at 15; cited source: Uniform Crime Reporting
Survey, Canadian Centre for Justice Statistics); and Rebecca Kong, CCJS, private
communication, rev. crime statistics, 1980-1987.
21 See Edward E. Ayoub, World War III Against the Money
Trust?, 1997, especially, Book II: The Dark Side of the Business Cycle.
22 The Notes are not against Money, as value in
exchange, or against the Accumulation of Capital -- real, tangible, or intellectual; they
are against Money as value in subjugation and coercion. |
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