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Rodrigue Tremblay
First Article - Tragedy in the Making in Washington and on Wall Street: The Canadian Solution Sunday, September 28, 2008
Second Article - Anatomy of the American Financial Crisis: How It is Turning into a Worldwide Crisis
Third Article - How U. S. Politicians and Bankers Built a Financial Debt House of Cards (whose Collapse Threatens to Destroy the World Economy).
Rodrigue Tremblay (born October 13, 1939) is a Canadian-born economist, humanist and political figure. He teaches economics at the Université de Montréal. He specializes in macroeconomics, international trade and finance, and public finance. He is a prolific author of books in economics and politics.
Born in Matane, Québec, Canada, he has a B.A. from the Université Laval (1961), a B.Sc. in Economics from the Université de Montréal (1963). Tremblay did his graduate work at Stanford University where he obtained a M.A. in Economics (1965) and a Ph.D. in Economics (1968).
He has been a professor of economics at the Université de Montréal since 1967. He is professor emeritus since 2002.
Tremblay was president of the Association canadienne de science économique (1974-75) and of the North American Economics and Finance Association (1986-87). He was chairman of the Department of Economics of the Université de Montréal (1973-76)), member of the Committee of Dispute Settlements of the North American Free Trade Agreement (NAFTA) (1989-93) and vice-president of the Association internationale des économistes de langue française (AIELF), from 1999 to 2005.
He was invited scholar and economic consultant at the Bank of Canada, the Economic Council of Canada, the Quebec Commission of Inquiry on the Quebec Liquor Trade, the West African Monetary Union, the Royal Commission on the Economic Union and Development Prospects for Canada (MacDonald Commission) and the United Nations. Tremblay presided at the foundation of the North American Review of Economics and Finance and was associate editor of the Review L'Action nationale and the financial weekly Les Affaires.
Rodrigue Tremblay was elected member of the National Assembly of Quebec for the Montreal riding of Gouin on November 15, 1976, as candidate of the Parti Québécois. He served as Minister of Industry and Trade in the Government of Quebec, from 1976 to 1979.
Born in Matane, Québec, Canada, he has a B.A. from the Université Laval (1961), a B.Sc. in Economics from the Université de Montréal (1963). Tremblay did his graduate work at Stanford University where he obtained a M.A. in Economics (1965) and a Ph.D. in Economics (1968).
He has been a professor of economics at the Université de Montréal since 1967. He is professor emeritus since 2002.
Tremblay was president of the Association canadienne de science économique (1974-75) and of the North American Economics and Finance Association (1986-87). He was chairman of the Department of Economics of the Université de Montréal (1973-76)), member of the Committee of Dispute Settlements of the North American Free Trade Agreement (NAFTA) (1989-93) and vice-president of the Association internationale des économistes de langue française (AIELF), from 1999 to 2005.
He was invited scholar and economic consultant at the Bank of Canada, the Economic Council of Canada, the Quebec Commission of Inquiry on the Quebec Liquor Trade, the West African Monetary Union, the Royal Commission on the Economic Union and Development Prospects for Canada (MacDonald Commission) and the United Nations. Tremblay presided at the foundation of the North American Review of Economics and Finance and was associate editor of the Review L'Action nationale and the financial weekly Les Affaires.
Rodrigue Tremblay was elected member of the National Assembly of Quebec for the Montreal riding of Gouin on November 15, 1976, as candidate of the Parti Québécois. He served as Minister of Industry and Trade in the Government of Quebec, from 1976 to 1979.
The Washington gridlock about finding a solution to the subprime financial crisis in the United States is turning into a tragedy, seemingly because of a fundamental lack of understanding and communication about the causes of this financial crisis and the most efficient way to solve it. The nature of the crisis, the economic consequences if it is not solved, and how it could be solved without costing the government and U.S. taxpayers a single penny has not been properly explained to Congress and to the U.S. population.
Indeed, in this election period, there is a clear danger that the financial crisis is not going to be solved properly by the U.S. government and by Congress, and that there will be dire economic consequences in the months and years ahead, not only for the United States but also for the world economy. A similar subprime crisis has been solved in Canada, without costing the government and Canadian taxpayers a single cent. Although such a solution, i.e. transforming most of the subprime mortgage-back securities into medium term debentures, would have to be adapted to the peculiar American situation, this can be done.
The Canadian solution
In August 2007, it was discovered that Canada, just as the U.S., had a subprime mortgage-backed securities problem. Since the Canadian economy is more than ten times smaller than the American economy, the magnitude of the problem was also smaller, but it was nevertheless acute.
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Indeed, in this election period, there is a clear danger that the financial crisis is not going to be solved properly by the U.S. government and by Congress, and that there will be dire economic consequences in the months and years ahead, not only for the United States but also for the world economy. A similar subprime crisis has been solved in Canada, without costing the government and Canadian taxpayers a single cent. Although such a solution, i.e. transforming most of the subprime mortgage-back securities into medium term debentures, would have to be adapted to the peculiar American situation, this can be done.
The Canadian solution
In August 2007, it was discovered that Canada, just as the U.S., had a subprime mortgage-backed securities problem. Since the Canadian economy is more than ten times smaller than the American economy, the magnitude of the problem was also smaller, but it was nevertheless acute.
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The Bush administration's way of dealing with the ongoing financial crisis has been frantic, but probably less than adequate. In fact, tragic errors may have been made that must be remedied as quickly as possible.
The most damaging error may have been to let the global investment bank Lehman Brothers fail ($691 billion of assets at the end of 2007), on Monday September 15. This fateful date may have to be remembered in the future. This was the largest failure of an investment bank since the collapse of Drexel Burnham Lambert in 1990. In contrast, the Fed and the U.S. Treasury moved quickly in mid-March (2008) to save a similar global investment bank in distress (but half the size of Lehman), Bear Stearns, by quickly lending and guaranteeing $29 billion to the large universal J. P. Morgan Chase bank in order to absorb it. —(N.B.: Let us keep in mind that it was the collapse in June 2007 of two internal Bear Stearns hedge funds that had been heavily invested in mortgage securities that kicked off the full-fledged market panic that unfolded in August 2007, and which today has turned into a full-fledged international financial crisis).
Why was the same treatment not offered to Lehman? Possibly because of a personal lack of empathy between Treasury Secretary Henry M. Paulson Jr. (a former chief executive of rival investment bank Goldman Sacks) and Lehman's CEO Mr. Richard S. Fuld Jr., or possibly because the Bush administration wanted to make an example that all investment banks, no matter how large, could not count on being rescued by the government. The Bush administration did not even bother to appoint a trustee to supervise Lehman’s liquidation in order to make it orderly.
Such a liquidation of a large international bank, known for its worldwide interconnections and unsound banking practices, was nearly a repeat of the mistake made in letting the large Vienna-based Creditanstalt bank fail, on May 13, 1931. This was a bank that had borrowed large amount of money in London and in New York to finance its activities. Its failure created a domino effect among other international banks that had lent to each other in the international credit chain. So much so that the failure of the Creditanstalt forced them to severely tighten their lending to absorb their sudden losses.
Seventy-seven years later, in 2008, the Bush administration's decision to let the Lehman Brothers bank fail has produced a similar ripple effect throughout the international financial system. And, perhaps more important politically, it signaled to the markets that the Bush administration was willing to let a dangerous debt deflation and an ominous credit crunch proceed. This may turn out to have been a most tragic mistake.
Indeed, Lehman's bankruptcy forced the global investment bank to quickly write down its huge portfolio of debt, a fair amount of it in derivative products. But since banks are creditors of each other, especially Lehman which dealt with large institutions, this had the consequence of spreading the American financial disease all over the world, and especially in Europe. Why? Because Lehman's London office was a huge center of sale and distribution for its more or less toxic derivative products all over Europe. Indeed, many European banks had invested in Lehman's securitized paper, and when it failed, they were left with large losses. As a consequence, they had to curtail their domestic lending and that's the reason the credit crunch is now moving to Europe.
The second mistake was to address the “liquidity problem” of American investment and mortgage banks without tackling at the same time their underlying “solvency problem”.
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The most damaging error may have been to let the global investment bank Lehman Brothers fail ($691 billion of assets at the end of 2007), on Monday September 15. This fateful date may have to be remembered in the future. This was the largest failure of an investment bank since the collapse of Drexel Burnham Lambert in 1990. In contrast, the Fed and the U.S. Treasury moved quickly in mid-March (2008) to save a similar global investment bank in distress (but half the size of Lehman), Bear Stearns, by quickly lending and guaranteeing $29 billion to the large universal J. P. Morgan Chase bank in order to absorb it. —(N.B.: Let us keep in mind that it was the collapse in June 2007 of two internal Bear Stearns hedge funds that had been heavily invested in mortgage securities that kicked off the full-fledged market panic that unfolded in August 2007, and which today has turned into a full-fledged international financial crisis).
Why was the same treatment not offered to Lehman? Possibly because of a personal lack of empathy between Treasury Secretary Henry M. Paulson Jr. (a former chief executive of rival investment bank Goldman Sacks) and Lehman's CEO Mr. Richard S. Fuld Jr., or possibly because the Bush administration wanted to make an example that all investment banks, no matter how large, could not count on being rescued by the government. The Bush administration did not even bother to appoint a trustee to supervise Lehman’s liquidation in order to make it orderly.
Such a liquidation of a large international bank, known for its worldwide interconnections and unsound banking practices, was nearly a repeat of the mistake made in letting the large Vienna-based Creditanstalt bank fail, on May 13, 1931. This was a bank that had borrowed large amount of money in London and in New York to finance its activities. Its failure created a domino effect among other international banks that had lent to each other in the international credit chain. So much so that the failure of the Creditanstalt forced them to severely tighten their lending to absorb their sudden losses.
Seventy-seven years later, in 2008, the Bush administration's decision to let the Lehman Brothers bank fail has produced a similar ripple effect throughout the international financial system. And, perhaps more important politically, it signaled to the markets that the Bush administration was willing to let a dangerous debt deflation and an ominous credit crunch proceed. This may turn out to have been a most tragic mistake.
Indeed, Lehman's bankruptcy forced the global investment bank to quickly write down its huge portfolio of debt, a fair amount of it in derivative products. But since banks are creditors of each other, especially Lehman which dealt with large institutions, this had the consequence of spreading the American financial disease all over the world, and especially in Europe. Why? Because Lehman's London office was a huge center of sale and distribution for its more or less toxic derivative products all over Europe. Indeed, many European banks had invested in Lehman's securitized paper, and when it failed, they were left with large losses. As a consequence, they had to curtail their domestic lending and that's the reason the credit crunch is now moving to Europe.
The second mistake was to address the “liquidity problem” of American investment and mortgage banks without tackling at the same time their underlying “solvency problem”.
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Why does the world economy seem to be caught every 60 some years in a financial and banking turmoil that threatens to collapse the real economy? The answer has to be sought in human greed and political corruption that seem to collaborate in pushing to the extreme all types of speculative and parasitic practices.
Between 2002 and 2007, we have witnessed the culmination of such an example of greed and corruption on a very high scale, as an unstable pyramid of artificial financial debt instruments was built to higher and higher unsustainable levels, to the benefit of unregulated financial operators who raked in hundreds of billions in excessive profits, juicy fees and obscenely high year-end bonuses. Similarly, parasitic speculators took advantage of the situation that regulators had allowed to develop, and they made billions (not millions) speculating against the shaky house of cards of mortgage-backed securities. —These are the winners: bankers and speculators. —The losers in that charade are about everybody else: homeowners, investors, taxpayers, retirees, and workers who are poised to lose their jobs and incomes, as a consequence of the failure of government to prevent these financial excesses.
Indeed, the problem is both political and financial and this has to be understood in order to disentangle the web of causes that produces a financial and economic collapse. It is that combination of political corruption and racketeering financial and banking practices that creates the right environment for a major crisis to develop. Why each 60-some years? Essentially because the lessons learned the hard way by a grandparents' generation, sixty some years ago, are forgotten by a succeeding spoiled brats current generation, and the same past mistakes and fresh ones are made anew.
On that score, the big financial crises of 1873-1880 and 1929-1939 had pretty much the same type of causes as the one we are entering into today: the collapse of public and private basic morality among a very small elite that pushes its exploitation of public institutions to the breaking limit. For such a small elite, there comes a time when all means justify the supreme goal of enriching itself at the expense of the rest of society. All combines, tricks and schemes become acceptable and justified by pious ideological slogans such as “the market always knows best“, the new “wealth (no matter how acquired) will trickle down”, or, for the more delusional ones among them, “God is placing all that money in my hands, therefore, I must be doing good”!
The immediate technical question that must be answered is how a casino-like financial capitalism was allowed to develop? Why were banking practices twisted in such a way as to turn capital into the equivalent of casino chips?
Indeed, banking's primary function is to allow capital to be used in the most productive ways. It is the primary function of financial intermediaries (banks, savings & loans associations, stock exchanges, etc.) to convert savings into productive capital (plants, roads, etc.). Investments are kept tradeable and liquid by secondary capital markets. Properly regulated to avoid combines and scams, capital markets usually function smoothly.
It is when politicians, or regulators themselves, throw out such regulations that things can get ugly. In the U.S., a few disastrous steps were taken in 1999, 2000, 2004 and 2007, which can explain the current financial crisis.
A Decade of Planned Deregulation
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Between 2002 and 2007, we have witnessed the culmination of such an example of greed and corruption on a very high scale, as an unstable pyramid of artificial financial debt instruments was built to higher and higher unsustainable levels, to the benefit of unregulated financial operators who raked in hundreds of billions in excessive profits, juicy fees and obscenely high year-end bonuses. Similarly, parasitic speculators took advantage of the situation that regulators had allowed to develop, and they made billions (not millions) speculating against the shaky house of cards of mortgage-backed securities. —These are the winners: bankers and speculators. —The losers in that charade are about everybody else: homeowners, investors, taxpayers, retirees, and workers who are poised to lose their jobs and incomes, as a consequence of the failure of government to prevent these financial excesses.
Indeed, the problem is both political and financial and this has to be understood in order to disentangle the web of causes that produces a financial and economic collapse. It is that combination of political corruption and racketeering financial and banking practices that creates the right environment for a major crisis to develop. Why each 60-some years? Essentially because the lessons learned the hard way by a grandparents' generation, sixty some years ago, are forgotten by a succeeding spoiled brats current generation, and the same past mistakes and fresh ones are made anew.
On that score, the big financial crises of 1873-1880 and 1929-1939 had pretty much the same type of causes as the one we are entering into today: the collapse of public and private basic morality among a very small elite that pushes its exploitation of public institutions to the breaking limit. For such a small elite, there comes a time when all means justify the supreme goal of enriching itself at the expense of the rest of society. All combines, tricks and schemes become acceptable and justified by pious ideological slogans such as “the market always knows best“, the new “wealth (no matter how acquired) will trickle down”, or, for the more delusional ones among them, “God is placing all that money in my hands, therefore, I must be doing good”!
The immediate technical question that must be answered is how a casino-like financial capitalism was allowed to develop? Why were banking practices twisted in such a way as to turn capital into the equivalent of casino chips?
Indeed, banking's primary function is to allow capital to be used in the most productive ways. It is the primary function of financial intermediaries (banks, savings & loans associations, stock exchanges, etc.) to convert savings into productive capital (plants, roads, etc.). Investments are kept tradeable and liquid by secondary capital markets. Properly regulated to avoid combines and scams, capital markets usually function smoothly.
It is when politicians, or regulators themselves, throw out such regulations that things can get ugly. In the U.S., a few disastrous steps were taken in 1999, 2000, 2004 and 2007, which can explain the current financial crisis.
A Decade of Planned Deregulation
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