to Personal Economic Stability and Catastrophic Miscalculations
Knowledge of causal
links can be most valuable. An understanding of what change inevitably
produces what other change or outcome can be most important for protecting one's
own economic interests. Clearly, people's "life plans"1 can be seriously affected by
unanticipated economic change. Destructive change can lead to distrust, resentment, and
hostility. Miscalculations by families, by individuals, or by entrepreneurs, can be
catastrophic. It is not sufficient for the NSA or the CIA in the U.S., or for the CSE or
CSIS in Canada, etc., to monitor threats to the economic stability of the Nation;-- in a
Capitalist society, each family, each citizen must monitor, continuously, potential
threats to their financial stability and to their economic interests. Every
citizen needs his or her Early Warning System. Every citizen must be equipped with a topographical
map2 that (1) shows the division of
social, economic, political, and litigation advantages, and (2) reveals the purpose and
nature of market arrangements. Most important, every citizen must understand the
purpose and the dynamics of the business cycle.
Small Business Owner. The owner of a small or midsized enterprise (SME)
needs to anticipate and prepare for recessions and depressions. He needs to know when
bankers are more likely to freeze, reduce, or call operating loans. He needs to be
prepared with strategies, plans, countermeasures and counter-countermeasures.
- Many banks have indulged in
overinvestments in commercial real estate (past overinvestments have included energy,
corporate takeover-and-buyout, and sovereign and LDC loans; future overinvestments can
include, in addition, mutual funds). Overinvestments in commercial real estate have led to
increases in non-accrual loans and decreases in liquidity at banks. Recessions have
- Recessions can cause the
small business owner to worry. Would his bank suddenly freeze, reduce, or call his
company's operating loan -- irrespective of the soundness of his business? Would
the bank's action signal to other creditors that a constructive destruction process
could be initiated? Would the actions of creditors destabilize his business? Would these
actions "cause" -- intentionally or not, directly or indirectly -- his financial
distress? Could he become a casualty of "unsound credit," "wildcat
banking," "reckless banking," or "fraudulent schemes"?3
- Would the small business
owner have to downsize his firm? Would the overinvestments or speculative activities of
others (including possibly his bank's), decrease the value of his assets and the value of
his collateral? Would his business suffer what Schumpeter called "Abnormal
Liquidation"?4 Would he have to liquidate assets
at depressed prices? Would his firm survive the recession?
- Would the bank move into a
position of ownership or control of some or all of his firm's assets, following a
technical default? Would his company's Intellectual Property Rights5 be at risk -- even if all the
firm's intangibles were excluded from the Security Agreement. What other property would be
at risk? Would his firm fall victim to moral hazard? Following a "credit
crunch" at the bank, an irresponsible banker may be tempted to destabilize the firm
(by suddenly reducing the firm's line of credit), then claim a much greater payoff:
the firm's R&D tax rebates and the firm's technology, in addition to legal
- Would he be able to contain
conflict-of-interest problems? Would his banker interfere in the client-accountant loop?
His accountant, his lawyer, etc., may simultaneously be company insiders and have
operating loans with the same bank! Cross-ownership of equity in competing
companies by the same bank (the bank's mutual funds arm, the bank's investments arm, the
bank's brokerage arm, the bank's venture capital arm, etc.) can be a conflict-of-interest
minefield -- and a substantial risk for opportunism at some banks.
- Would the creditors' agents
cannibalize his business? Would some of these agents coerce, defile, defame, or harass
- Would the bank's account
manager attempt to entangle him? Would the bank abuse its commercial powers? Would
his banker be tempted to destabilize his mortgage, his insurance, his credit card rights
(and, possibly, those of his wife, as co-applicant), his son's student loan, etc.?
- The "credit
crunch" hit many banks around 1989. A significant drop in per-share cash resources at
the bank can be a source of great concern. Would the bank shift its risks, from
overinvestments, to SMEs? The business environment for SMEs has been most pernicious.
Statistics from Consumer and Corporate Affairs Canada, for example, corroborate this fact:
(1) the number of consumer bankruptcies in Canada skyrocketed to 76,139 in 1991; and (2)
the number of business failures in Canada swelled to 14,317 in 1992.6 Should the business owner rely on
his bank's practices and procedures in tough economic times? Should he trust his bank's
moral and ethical codes, which may be Darwinistic? Should he trust his bank's governance
structure and crisis management capabilities? Could he, as guarantor, suffer personal
financial ruin? What impact could such ruin have on his family?
- The asymmetries in
the powers and advantages of Big Banks vs. Small Business have been systematic and
overwhelming. The evidence corroborates substantial legal and judicial biases --
against individuals and against small enterprises in Canada. Peter McCormick provided the
following statistics: the net litigation advantage of Big Business (banks,
insurance companies, and major corporations) was +21.1%; by contrast, the net litigation
advantage of Other Businesses (including SMEs) was -4.8%, and that of Individuals
was -7.2%.7 Would the Judicial System favor the
economic interests of a rich, powerful, and dominant bank over his own interests? Could he
afford the legal costs of a prolonged defense of his interests? Could he afford the
frustrations, the delays? Would the payoffs from litigation be worth the effort? etc.
Home Owner. The mortgagor needs to know if mortgage rates are likely to
move up or down, and whether banks are lending short or long. The value of his property
may be impaired, following overinvestment and speculative activities in real estate.
- An increase in the mortgage
rate can have devastating effects on a young family. Consider the case of a 25-year
Canadian mortgage: a hike of 300 basis points (3%) in the mortgage rate can translate into
an increase in monthly payments of 2,770.8 basis points (27.7%)!8 Could the mortgagor afford to
"own" his property?
Employee. The employee needs to know when employers are more likely to
downsize. His family's future economic security depends on his job.
- Overinvestments in
commercial real estate were followed by substantial increases in the unemployment rate.
The Canadian unemployment rate peaked at 11.3% in 1992, up from 7.9% in 1989. Could flaws
in the economic policies of Big Business -- including overinvestments or flaws in the
distribution of bank loans -- threaten his job security? Would his company
downsize? Could he lose his job? Would he have to join the ranks of the underemployed?
- Many people are only a few
paychecks away from poverty -- and the safety net is being threatened. What would
happen to his family if he ran out of cash? Would he be forced to increase his debt? Would
he exhaust his Employment Insurance benefits? Would he have to draw on his Registered
Retirement Savings Plan?
- Could he default on his
student loan, if he has one?
- Canada Mortgage and Housing
Corporation statistics for 1995 indicate as follows: claims paid on foreclosures for NHA
Mortgage Insurance in Canada swelled to about $546 million, up from about $98 million in
1990; the loss on claims was about $305 million, up from about $24 million in 1990; and
the number of units foreclosed was 12,489, up from 3,456 in 1990.9 Would the bank foreclose his
mortgage, if he runs out of money? Or, if he does not "own" a home, would he be
evicted by his landlord?
- The number of Canadian
consumer bankruptcies during the 1983-1992 cycle was 336,645. Could he go bankrupt?
Could his family suffer ill effects? etc.
Nation. The economic security and stability of families can
be threatened by flawed policies. The future economic security of the Nation depends on
sound policies and on a sound legal system. If the policies and practices of Big
Government, of Big Business, or of Big Banks are flawed, and if these flaws are allowed to
spread contagiously, then the Nation can be ruined. Canada, one of the richest
countries in the world -- and the world's "best" place to live --, came within a fraction of a percent from breaking up.
- In the October 1995
provincial referendum: 48.5% of Quebecers voted for the separation of
Québec; 49.7% voted against; the turnout was 92%.10 Apparently, Canada was not the best
of all possible worlds in 1995 -- why would anyone want to separate from the
"best" place in the world?
The concept of "life plan" is discussed in John Rawls, A Theory of Justice,
1971, at 93, and 407-416 (The Definition of Good for Plans of Life).
2 For the three factors of
Freud's 'economic' points of view (economic, topographical, and dynamic), see Sigmund
Freud, On Metapsychology, Vol. 11, compiled and edited by Angela Richards, 1955,
1957, 1958, 1961, 1962, 1964, 1984, at 275.
expressions; see Joseph A. Schumpeter, Business Cycles (1939), 1964, at 91 (wildcat
banking), 125-126 (destruction of sound firms), 126 (fraudulent schemes and "unsound
credit"), 187 and 197 ("reckless banking").
expressions; see Joseph A. Schumpeter, Business Cycles (1939), 1964, at 125 and 430
copyrights, neighboring rights, trademarks, service marks, trade names, trade secrets,
industrial designs, etc.
6 Consumer and
Corporate Affairs Canada, Bankruptcy Branch (number of business and consumer bankruptcies
7 Peter McCormick, Canada's
Courts, 1994, at 157 (Table 10.1: Success Rates, by Litigant Category; Reported
Canadian Provincial Appeal Court Decisions, 1920-1990).
8 See David
Crane, Effect of Interest Rate Hikes Could Hit the Young Hardest, The Toronto Star,
January 21, 1995, at D2.
communication, CMHC, 1996; and CMHC annual reports.
10 See C.
Valcke, Quebec Civil Law and Canadian Federalism, The Yale Journal of International
Law, Winter 1996, Vol. 21, No. 1, at 67-121; cited source of referendum statistics: The
Globe and Mail, October 31, 1995, at A1.