Following up on my previous post, I wanted to include this article by another Libertarian candidate:

Analysis by Jason McNeil, Libertarian Party of Canada Candidate for Calgary Centre — North

Canadian Finance Minister Jim Flaherty stated on Friday (Oct. 10) that the government would buy up $25 billion in CMHC-insured mortgages. He tried to assure Canadians that since they were insured by a Crown Corporation that there was no increase in risk to own the securities. The goal of this action is to free up the banks with an infusion of cash so that they can continue to issue credit.

Q. Where is the government getting the $25 billion?

A. They are borrowing it and counting on the revenue from the securities to be more than the rate they are borrowing at. Overall, this is a likely scenario.

Q. Are these loans ‘low risk’?

A. Not entirely, otherwise they would not require CMHC, but they are not what we would call Toxic or NINJA loans.

Q. Why has credit dried up?

A. Lending institutions have made bad loans and a more than usual number of people are not paying them back. This has caused a loss of confidence and so loans are being called in, with fewer new loans being issued. The larger issue is inter-bank lending, or an institutional bank run. This is what the
Government is trying to avoid.

Q. What caused the problems in the derivatives?

A. Derivatives involve buying up credit risk. If you buy up too many high risk derivatives and they default, you will experience a loss and may go bankrupt. The problem in the US occurred, in part, because a few large companies had taken on the risk for a very large number of loans; loan default rates went up and the risk holders were about to go under.

Q. Who caused this?

A. The government. They artificially lower interest rates through the central bank and this causes excessive lending and a boom. When the market finally realizes that it can not maintain the number of loans that it has issued, credit will contract and the market will experience a bust.

If the rate of lending was determined by the market, these cycles would be shorter and would differ between lenders.

Q. So if excessive lending caused the problems how is the government trying to fix the issue?

A. They are trying to free up credit. They have bought loans from banks to take them off their books and they have lowered the Central Bank’s lending rate (to other banks) by 0.5% to 2.5%. This may sound like it will add to the problem, and it will. The problem however, is systemic in that without credit and confidence in our paper money, the system fails. The principles of sound finance do not apply in our FIAT monetary system. What happens is that new money must be created at a rate greater than the rate it was created in the previous loan- repayment cycle. Thus we must inflate our money supply. The result of inflation is that people with savings or fixed incomes lose purchasing power. This is like a hidden tax on the middle class and the poor.

Q. How do we avoid this going forward?

A. By moving to a 100% reserve banking system and a currency that is redeemable in gold. In this system we can easily allow bad lenders to go out of business without the worries of bank runs or a loss of confidence in our money. The loss of confidence would be vested in those who made bad investment decisions.

Q. How do we transition?

A. Over a period of time (years) we would exchange FIAT dollars for Gold Dollars. The price of gold would have to go up as we have more dollars than gold at the current rate. This would give gold holders and the gold miners a windfall profit during the transition. This is acceptable.

Transitioning the banking system is harder and would require a shift in our habits as consumers. We would have to do a lot more saving, as loans would be harder to get. The positive is that we would lower inflation so that saving would be beneficial and the total cost to consumers to buy things would go down (no interest).

References

http://ca.news.yahoo.com/s/reuters/cbusiness_us_financial_canada_mortgages (http://ca.news.yahoo.com/s/reuters/cbusiness_us_financial_canada_mortgages)

http://mises.org/story/3146

http://en.wikipedia.org/wiki/Credit_derivative

Contact Information

• Jason McNeil
  http://www.jasonmcneil.ca/

October 13th, 2008