Bailing out Alberta? ATB could do it

If I were king of Alberta, I’d instruct ATB to use its credit reserves to start buying up Alberta debt on the bond markets

Robert McGarvey“It keeps getting worse, buddy,” proclaimed Chuck from across the garden fence. “Four years of socialist rule and we’re heading for debtor’s prison. Thank God the PCs are back in.”

“They’re not Progressive Conservatives anymore,” I retorted, “they’re UCPs – United Conservatives – and exaggerating the debt is what conservative Conservatives do, it’s called austerity Chuck; I blame the Brits.”

“But you can’t deny the facts,” he snarled. “We’re in hawk for over $100 billion, and that’s with a ‘b’.”

“I know, I’ve seen the numbers, the provincial debt is growing and it’s largely down to uncontrolled health care costs, which seems to be everybody’s problem these days.”

“Hey man,” Chuck jumped in, “we spent an extra $93 million on interest alone last year. We’ve got to live within our means … that’s obvious, at least to me. I suppose, knowing you, you’ve got a better plan?”

I hesitated to respond, knowing Chuck – he’d think I was a flaming lefty, which I’m not.

“Yeah, I can think of a few ideas that wouldn’t involve the pain and heartbreak of forced austerity, yeah, I do.”

“You’re not going to suggest that crazy ATB Financial (Alberta Treasury Branch) idea are you?” he said, referring to the Alberta Treasury Branch. “You can’t just go around printing money, that’s insane.”

“Well,” I said, “the province of Alberta is uniquely privileged: we the people, through our government, own a bank and, yes, it has the legal authority to print money should it choose to do so.”

“I don’t get it,” said Chuck, “I thought banks lend out our savings, you know, the money that’s deposited in the bank, to individuals and companies that want to borrow it. Are you saying they don’t?”

“Yes, that old banking myth is completely false. Banks do something called fractional reserve. It means they get to create new money out of thin air.

“Here’s how it works: Banks have a reserve of financial resources in the form of equity on their balance sheets. These resources include your personal savings, the ones that are on deposit. What they do next is amazing; they’re allowed to create a multiple of that reserve as a credit facility to lend to borrowers.

“Chuck, let’s say you needed $400,000 to buy a house. You go to the bank and they qualify you for a mortgage. When you’re finished filling out all the forms, they’d credit your bank account with the funds you need, secured against the property.”

“Yeah, yeah I get that,” said Chuck, “that’s what I just said.”

“With one exception, they don’t draw the money from existing funds on deposit, they create new money out of thin air, with a simple accounting entry.

“So yeah,” I smiled, “basically banks get to print money.”

“Sounds crazy to me,” said Chuck, “but how’s this supposed to help Alberta’s debt problem?”

“Well, as you know, governments raise funds taxing citizens, that’s you and me Chuck, but they also raise money in the bond markets.

“Most of Alberta’s government bonds are held by large financial institutions, like Goldman Sachs. And this debt trades regularly on bond markets, where vendors can buy or sell it.”

“OK, so where does ATB come into the picture?”

“Let’s speculate a bit, Chuck. Say the government of Alberta reversed the semi-privatization of ATB, brought it back into the government treasury. That would instantly expand ATB’s balance sheet. ATB would technically be supported by all the assets under governmental control – it’s huge.”

“I’ve heard of that one,” smiled Chuck, “we used to call that social credit. But didn’t that fail in the 1930s?”

“Yes,” I admitted, “but it failed because the government of the day was trying to introduce an unauthorized script currency, and not just issue credit in Canadian dollars.

“If I were king of Alberta, I’d instruct this new ATB to use its credit reserves to start buying up Alberta debt on the bond markets. Then we’d basically own our own debt and if we wanted to reduce interest charges or cancel the debt altogether, we could do it anytime we wanted.”

“So you’re saying we could bail ourselves out?”

“Exactly – it’s using the financial system in a socially positive way. This sort of strategy is a variation on quantitative easing; it’s how the U.S. government bailed out the big banks after the 2008 financial crisis, and how the European Central Bank saved Greece from its debt crisis.

“Chuck, it happens all the time, so, yes, we should use our very own bank, ATB, to bail us out.”

Robert McGarvey is an economic historian and former managing director of Merlin Consulting, a London, U.K.-based consulting firm. Robert’s most recent book is Futuromics: A Guide to Thriving in Capitalism’s Third Wave.

Robert is a Troy Media Thought Leader. Why aren’t you?

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Robert McGarvey

Robert McGarvey

Robert has developed a unique perspective on modern capitalism and the deep forces impacting our economy and our lives. Robert’s rare combination of business acumen and historical insight brings a fresh viewpoint to the many problems facing Canadians as they grapple with globalization and the birth of a new and radically different economy.

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