Social Policy in Ontario

Getting around the bank bottleneck

Posted on December 21, 2008 in Debates, Governance Debates, Inclusion Debates

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TheStar.com – Opinion – Getting around the bank bottleneck
December 21, 2008. Angelo Persichilli

Crisis, recession, depression: These are the code words we use to wrap up the misery afflicting our economy. In this idiomatic container, however, we include many problems that, even if they have been affected by the current mayhem, preceded it and were ready to explode anyway.

A case in point is the crisis in the auto industry. The Big Three in Detroit and their unions had an obsolete industry on their hands that was ready to fail because they were unable to sell cars that were both expensive to build and inconvenient to own.

Unfortunately, what they lacked in marketing their cars, they made up for in promoting their problems. As soon as the economic crisis exploded, they jumped right into it by hijacking the attention of the media and governments by encouraging us to believe that if we solved their problems we would solve the crisis.

This was false for two reasons: First, their problems can be solved only if they learn how to build and sell cars in this new market. Second, the economy is in trouble because the banking system failed us, something it continues to do by refusing to help most of the 1.5 million small and mid-sized enterprises that are the backbone of our economy. According to Statistics Canada, 32 per cent of employed Canadians work for firms with fewer than 50 employees, and 24 per cent are in mid-sized companies employing between 50 and 500 workers.

Furthermore, small firms are leaders in innovation. Most Canadian exporters are small. According to StatsCan, from 1993 to 2002, companies with up to 100 workers represented 85 per cent of Canadian exporters.

A country is like the human body: the heart is the government; the body is the people and thousands of small companies that keep the country alive; and the banks are the arteries that deliver blood to the body. You can have a good heart and a great body, but if the arteries are clogged, you’re dead.

It happened 10 years ago in Japan when the crisis in the banking system almost sank an economy believed to be invincible.

Now it is happening again – on a much bigger scale – in the United States with the collapse of financial institutions crushed by irresponsible lending practices involving subprime mortgages. Their collapse destroyed the construction industry and that failure has spread to many other sectors, including some, like auto, that were already in trouble.

Banks asked for help and got it from governments all over the world, including Canada. Unfortunately, instead of passing that help on to the people, they used the money to replenish revenues depleted by their irresponsible policies. Ottawa pumped in billions of dollars by uploading mortgages through CMHC and the Bank of Canada, and it has dramatically cut interest rates to encourage people to borrow money. Banks have kept part of the cuts for themselves and now they want more – a corporate tax cut. We need tax relief not for the banks, but for the tens of thousands of small companies that risk losing their business because of the credit crunch the banks created.

The Canadian Bankers Association denies that but, according to the quarterly business barometer of the Canadian Federation of Independent Business, problems related to the unavailability of credit have increased from 18 per cent in September this year to 28 per cent in December.

Governments have to make sure the money they funnel into the economy reaches the people and doesn’t get stuck in bank vaults. If banks don’t get the message and start increasing the credit available, Ottawa should pay attention to an idea I heard recently from an economist: the government should suspend payroll deductions for 90 days for small companies.

It might sound radical, but instead of giving money to banks that keep it for themselves, why not give it directly to small enterprises? It might be an idea to think about if we want to avoid the bottleneck the banks have created between Canadians and the money the government is trying to deliver – a bottleneck that can make the difference between depression and economic recovery.

Angelo Persichilli is the political editor of Corriere Canadese. His column appears Sunday.

This entry was posted on Sunday, December 21st, 2008 at 11:03 am and is filed under Debates, Governance Debates, Inclusion Debates. You can follow any responses to this entry through the RSS 2.0 feed. You can skip to the end and leave a response. Pinging is currently not allowed.