This week Canadian Prime Minister Stephen Harper referred the question of whether the federal government has the power to create a national securities regulator to the Supreme Court of Canada. Three provinces (Quebec, Alberta, and Manitoba) oppose the creation of a federal regulator.
Talk about being trapped in a dysfunctional political discourse. For more than 140 years we have been wrangling over the question ofprovincial/federal jurisdiction. What gets lost in this debate is whether the members of the public are sufficiently protected from the unscrupulous trading practices of the financial industry.
It seems to me that the more pertinent question is would it be in the best interest of the public to create a pan-Canadian regulatory agency given that Parliament is ruled by successive political oligarchies. Political power in this country is largely determined by the ability to appeal and solicit donations from the investor class. Within this framework, we would expect that such a regulatory body would be more favourable to the interests of the financial industry at the expense of the general public.
Look at the recent US experience. Effective lobbying by the financial industry led to the repeal of the Glass-Steagall Act. The repeal enabled commercial lenders such as Citigroup, which was in 1999 the largest US bank by assets, to underwrite and trade instruments such as mortgage-backed securities and collateralized debt obligations. A year later, the Commodity Futures Modernization Act of 2000 was adopted, which exempted the exchange of financial derivatives from federal regulation.
Everything was then in place to produce an economic meltdown that enriched those in the financial industry beyond belief and produced unimaginable collateral economic damage for the bulk of the population: 8 million lost jobs, almost 1 million home foreclosures in the third quarter of 2009 alone, pension plans reduced by 30% and more, and untold trillions in accumulated public debt foisted on the present and future generations.
Here in Canada, our democratic institutions are not sufficiently democratic to prevent a similar rewriting of the financial regulatory practices that would enrich an extremely small but extremely powerful elite at the expense of the vast majority of Canadians. Neither the Conservatives nor the Liberals can muster the support of more than 25% of the electorate. Yet, the power of the majority can be exercised under the threat of sending the electorate back into a general election, something that the Economist referred to as Canada's perpetual electoral campaign.
In principle, the creation of a federal regulator could be very beneficial if it exercised its power so that the wealth generated from the real economy was distributed in a more equitable fashion and prevented the buccaneers of high finance from siphoning off this wealth through the churn of dubious financial transactions.
If there is one lesson that we should draw from the US experience is that the finance industry can capture the regulatory function. Evidently, the counterbalance to unacceptable levels of systemic risk engendered by the greed of a few is the effective representation of the many. However, the British parliamentary system substitutes the effective representation of the majority with the over-representation ofa well-heeled minority through the systemic distortion of the electoral results. Without qualitative change to our electoral system, there remains a distinct possibility that any pan-Canadian regulator would escape democratic censure.
To move forward with the proposal, democratic reform must precede the creation of the new financial institution. Questions of provincial jurisdiction are anachronistic because of the way the exchange of financial securities no longer respects territorial limits. Securities are now traded 24 hours a day in a global market.
Finally, as a resident of Quebec I can quite comfortably say that the claim that the creation of a federal regulator is an affront to Quebec sovereignty is laughable given the recent scandals in Quebec involving Vincent Lacroix and Earl Jones, two financiers that bilked their clients of millions, and the recent performance of the Caisse de dépôt et placement du Québec, the fiduciary responsible for the management of many of the province's pension plans, which saw a reduction in value of 24% of its investment portfolio (approximately $40 billion) in 2008 and a failure to generate any returns for the first six months of 2009. Having failed miserably to meet even the most modest of performance requirements, the Quebec government has little in the way of legitimacy in the eyes of its citizens as the a priori regulator of the financial industry within Quebec.