Lee Friday – September 2, 2019
On June 18, in reference to Canada’s housing market, Bank of Montreal (BMO) CEO Darryl White said: “We’re going to have movements in different markets over time, but the fundamental of supply and demand that should drive a stable market and a rational outcome is much more present today than it was a year and a half ago when we had intervention to stabilize a market.”
White seems to support stable markets, and a stable market is defined as a market that can handle a large volume of trades without causing large shifts in price. In contrast, the word unstable has negative connotations. This serves the interest of bankers, politicians, and bureaucrats, who assure us that instability is a bad thing, but fear not, government intervention is the cure.
This line of reasoning is economically flawed.
First, there is nothing inherently wrong with large price swings in a particular market. This simply reflects the disparity between ‘supply and demand,’ which is best left to market participants to sort out.
Second, those who call for government intervention to fix a particular problem often fail to acknowledge that the problem was created by previous government intervention, not by market participants. The housing market is a textbook example.
White says government intervention was the correct remedy for what he describes as an unstable Canadian housing market a year and a half ago (prices had increased significantly over the previous few years). This remedy was required, according to White, because “the fundamental of supply and demand” was not sufficiently present at that time. Intervention came in the form of rising interest rates and more regulations.
Prices are established in the marketplace through the forces of ‘supply and demand,’ a process that is always sufficiently present, despite White’s claim to the contrary. The problem he neglects to mention is that the market, for many decades, has been severely hampered by onerous government housing regulations as well as a government-sanctioned monopoly for the banking industry.
Economist Walter Block wrote: “Zoning laws usually limit the number of people who may occupy, or the amount of housing which may be built on, a given piece of land. The effect is that the poor, who could compete with the rich for prime land by pooling their money and living in higher densities, are precluded from doing so.”
When governments impose rent control, this reduces the incentive of entrepreneurs to construct new rental units.
Builders must ask municipal governments for permission – and pay for their permission – to construct new housing. In many municipalities, builders wait several years before permission is granted.
Those are just some of the ways that governments intervene in the market. Thus, an insufficient supply of housing is not the fault of market participants. The economic forces of supply and demand are working just fine, and rising prices are a clear signal from the market that governments have outlawed affordable housing.
The Bank Monopoly
The banking system enjoys a monopoly over the creation of money, courtesy of the federal government. Rising prosperity, according to them, depends on the production of more goods, and new production must be financed with the creation of new money, managed by them of course.
While it is true that rising prosperity depends on the production of more goods, it is NOT true that new production must be financed with newly created money. If the total supply of money remains fixed, this does not prohibit new production. In an unhampered market, those wishing to borrow money will be able to do so if they are prepared to pay a rate of interest demanded by savers of money. In this market, as it was long ago, the banker acts as a broker. And savers of money forego the use of their money – which is now a ‘term deposit’ – for the term of the loan, which they will do if they feel the interest rate is sufficient compensation for the risk of loan default.
A wise banker with a keen understanding of the business world would experience very few loan defaults, thereby enabling him to repay all ‘term depositors’, plus interest, while still making a decent profit. The banker is engaged in a legitimate occupation which helps to redirect the savings of some people into the productive activities of other people.
In contrast, today’s monopolist bankers are not skilled brokers. They simply make loans by creating new money. Think about it. Have you or anyone you know ever been denied a loan because there is not enough money available? Has a bank ever said, “You qualify for the loan and we would like to give you the loan, but we do not have the money because we have not received enough customer deposits.” No one alive today has ever heard a bank loan officer give this explanation for the refusal of a loan. If you qualify for the loan, the bank will create the money out of thin air. When you repay the loan, the principal vanishes back into thin air, but the bank keeps the interest as profit, which supports the salaries and bonuses of monopolist bankers.
Notice the difference between the honest banker and the monopolist banker.
The honest banker keeps a small portion of loan interest as compensation for a valuable service. If he is good at his job, he remains in business, providing benefits to savers and borrowers. And he is incentivized to be a good broker because there is no one to bail him out. He is responsible for his own mistakes, as he should be. This accountability encourages the development of genuine expertise which facilitates increased societal prosperity.
In contrast, the monopolist banker does not keep a small portion of loan interest. He keeps all of it! He does not share the interest with savers because the money was created out of thin air. He is not a broker at all, let alone a skilled one. And he has little incentive to be a judicious lender because he is not responsible for his own mistakes. When loan defaults threaten bank profits, commercial banks receive bailouts from governments and central bankers. Thus, taxpayers’ prosperity is sacrificed to ensure the prosperity of bankers.
Monetary Inflation Leads to Price Inflation
We want the purchasing power of our money to either increase or remain constant between the time we receive it until the time we are ready to spend it, which may be several years if we decide to save the money. When the production of new goods outpaces the production of new money, the purchasing power of money increases i.e. consumer prices fall. This was often the prevailing state of affairs in the nineteenth century before the bank monopoly.
In contrast, in their quest to extract as much loan interest as possible from an unsuspecting public, monopolist bankers habitually inflate the money supply, which is the major cause of consumer price inflation, including abnormally inflated prices for specific assets. Housing is a good example. For many years, banks have enticed Canadian consumers with ultra-low interest rates for home mortgages. And White seems to be trying to sell us the fable that rapidly increasing prices for houses are a result of insufficient housing supply to meet consumer demand. But this is only partially true, and only to the extent that government regulations have restricted the supply of housing.
The inescapable fact is that the inflationary policies of the banking system are a major contributing factor to rising home prices. Thus, White himself, and his cronies at the other banks bear a great deal of responsibility for the “unstable housing market.” In this context, the problem has nothing to do with the supply and demand for housing, but rather the supply and demand for money.
The whole point of the monopoly is to excuse banks from the fundamentals of supply and demand. The demand for loans is always limited, but the power to create money out of thin air means that the supply of money is theoretically infinite. As such, banks can arbitrarily establish interest rates below the level at which the market would have set them i.e. below the level demanded by savers.
Thus, savers are denied a market-based-interest-rate, and many consumers make purchases they would not have made at a market-based-mortgage-interest-rate.
Historically, hyperinflation has destroyed numerous money systems. To avoid this, bankers have learned to raise interest rates when inflation threatens their monopoly. In our case, as mortgages come up for renewal, many homeowners will find higher rates unaffordable, as will new buyers, just as happened in the U.S. a few years ago. If and when this happens, house prices will drop considerably, putting many mortgages underwater, and turning many owners into renters. Most mortgages in Canada are full-recourse, but you can’t get blood out of a stone, so bank losses would be socialized through bailouts.
When an ordinary citizen creates new money, he is prosecuted for counterfeiting because this privilege is reserved for monopolist bankers, who are card-carrying members of the 1%. This includes White, who sits atop the BMO, which recorded a profit of $5.45 Billion in their most recent fiscal year.
When he blames the free market for an unstable housing market, White is simply attempting to deflect attention away from the activities of the banks.
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