Using debt for the common good

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Students do society a favour when they pay the full cost of borrowing money to finance their studies. Since it serves all of us to live among knowledgeable citizens: the education they receive is a public good; it works for us all.

Those graduates who educate others, care for us when we are sick, or help us when we are in need of professional assistance are especially valued; we expect to pay decently for their services, and professionals expect to be taxed on earned income throughout their careers. What individual benefits are derived from education are paid for throughout a lifetime of work.

Asking students to pay higher and higher up-front tuition costs, amounts to saying education is a private consumption good, belonging to the individual who pays for it. This perspective is misleading, and false. Education serves all of us -- over our lifetimes -- and should be paid for by all of us, through progressive taxation. Some 200,000 striking Quebec students have been marching in the streets to make this point. Many others wear a small red patch (le carré rouge) to show agreement.

Unlike students with education loans, individuals who buy corporate stocks and bonds with borrowed money can deduct the interest charges (against stock dividends paid, and bond interest earned).

When corporations borrow to buy other corporations, they also get to deduct the interest charges, as a business expenses. Like wealthy individuals, corporations can lower their taxable income tax by an amount equal to the cost of the borrowing.

As public entities, charging the public for the use of debt, corporations should pay a fair share of taxes, be publicly regulated, and accountable. Who else is going to pay for the ecological and social debt corporations create with our money, but not our consent? Instead, our governments lower corporate taxes, and pretend no one is responsible for the future mess corporations are creating.

The tale of how debt works is not well known. Walk into a bank, and deposit $100. Behind you, someone comes in, and borrows $100. A teller could take your $100 in deposits, and give the same bills to the borrower. Is the bank then a simple financial intermediary, taking deposits and lending them out?

No, banks do more than bring borrowers and lenders together. In our example, both you, and the borrower now have $100. You have your deposit, and the borrower has $100 lent by the bank. Banks create money. When a bank makes a loan, the borrower has the amount of the loan added to their bank account. "Loans make deposits" was the way Dennis Robertson (an older Cambridge colleague of John Maynard Keynes) explained it.

Getting a loan is the hard part. You need to be creditworthy. Banks decide who is and who is not eligible for the new money they create. This makes them the most powerful economic actors in Canada, more important than all but the biggest governments. Yet, it is the collective power of the community to create wealth that allows banks and credit unions to make loans.

Lenders are comfortable that people will be able to pay them back, because through wages and salary income -- individuals will earn a share of that wealth-creating capacity we collectively possess.

In good times, banks love to lend to students. Those who plough through their studies have a leg up on getting a well-paying job, so students represent a good credit risk.

When times turn bad, banks still want the loans repaid, and students end up working several lousy jobs to pay them back (or avoid lenders in the first place).

Banks get into trouble when they make bad loans. We insure banks against risk by creating a central bank and mandating it to be the lender of last resort to the banks. Note that in Canada our big banks received charters to operate from parliament. Thus, banks are publicly created, and publicly insured. Why should they not be publicly regulated, and controlled?

Banks pay small amounts in interest to depositors, and then tax it back through outrageous service charges. Banks charge higher rates of interest on loans, and add service charges as well. The spread between the interest rate paid to depositors and the higher rate charged to borrowers adds to bank revenues. In theory, it is how they make their money, though exercising their power to tax through levying service charges represents a growing part of bank revenue.

Our big five chartered banks made total profits of $22.4 billion in 2011.

Trying to earn enough to pay the interest on loans incurred is what ties most individuals to the existing economic system. Corporations and wealthy individuals receive advantages. Regular citizens make up the difference when interest incurred to make a profit reduces what corporations and the wealthy pay in income tax.

Could we have a system where public credit was used for public works, and the common good, rather than to generate private profit, and feed corporate greed? Yes, we could. The power embodied in community action can be used to limit exploitation of the community by corporations, and used instead on behalf of the members of that community, individually and collectively. What we really need is enough people like the striking Quebec students ready to fight for each other, and for a better future for all.

Duncan Cameron is the president of and writes a weekly column on politics and current affairs.

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