All of this is of great concern to Canadians. In spite of polyanna propaganda from our government and business leaders, we all know how deeply we are tied to the United States. Under the so-called "free trade agreements," Canada has become the northern colony in Fortress North America, even more dependent on trade with one country. Foreign ownership and control of our largest corporations has increased. We have become more dependent on exporting unprocessed raw commodities. By boosting our reliance on trade, our business and government leaders have made us more vulnerable to global financial and economic shocks.

Financial euphoria is a recurring phenomenon
    The present world financial and economic crisis is generally blamed on the development of bubbles in the U.S. financial markets, housing, and natural resource commodities. But this is nothing new.
    John Kenneth Galbraith, the renowned Canadian economist and Harvard professor, warned us that speculation in commodities, land, other property, markets and get-rich-quick schemes have been with us since the earliest formation of the modern stock market in Amsterdam. In the early 17th century there was tulipomania in1630, John Law’s Banque Royale bubble in France which collapsed in 1720, and the pyramid scheme associated with London’s South Sea Company, which also collapsed in 1720.
    In all the bubble schemes there is the formation of some new financial innovation which is used to create a mountain of debt backed by limited real assets. Galbraith wrote extensively on the Florida land bubble in the 1920s and the U.S. housing bubble in 1923-26. The stock market bubble which broke in 1929 was built on leverage, where investors could purchase stocks on a 10% margin while paying an interest rate of around 12 percent. Goldman Sachs was there as a key promoter.

Bubbles in recent history
    The collapse of the stock market in 1987 was the result of the introduction of the junk bond used for leveraged buyouts of other corporations. The New Economy stock market crash in 2000 was the result of the wild speculation in the fabulous new dot com companies. The crash of 2007-8 was due to the shift in speculation from the stock market into the North American housing market and the development of the new mortgage-based securities and credit default swaps. These derivatives were all based on heavily leveraged debt.

The common pattern
    As Galbraith points out, there are common characteristics of all of these flights of irrational financial euphoria. There is first of all a promise that investors will be able to make money without having to do any work in the real economy. They are also promised  a rate of return which exceeds the normal return on investment in productive enterprises. It is quite normal for these pyramid-type investments to be promoted by prominent businessmen, financial institutions, the mass media, and respected economics professors.
    There are always warnings from a few quarters. But these are not welcomed; they are denounced, and ignored. Galbraith, writing in 1990, concluded that it took about 20 years for the general public and investors to forget the last disaster. But this obviously has not been the case in recent years, with the collapse of the market in 1987, again in 2000, and now in 2007. As with the current housing bubble, it is always assumed that the market for the product will go up and stay up indefinitely. Historically, the financial bubble has not petered out with a whimper but collapsed with a bang.

The desire to hide the real causes
    When the collapse happens, the realities of the capitalist market will be ignored. There is an attempt to blame it all on a few dishonest individuals, bad management of the business institutions in question, or a failure of government to step in and protect the unwary investors.      
   Today, all governments, business leaders and the mass media are trying desperately to maintain the general debt bubble. In this they have all agreed to keep the public from learning just how insolvent the banks are. Indeed, there is even great pressure to change established accounting rules so that financial institutions can carry their trillions of dollars of  “toxic assets” at their face value rather than at the price they could bring in the market.
    What is the real cause of the present financial and economic downturn? Few can find the answer as there is no discussion of the issues of overproduction and excess capacity on a world scale, the impact of the dramatic increase in the inequality of income and wealth both within countries and between countries, the fact that for most workers real wages have not increased over the past fifteen years, and that the increase in household debt is largely due to these factors. A few have pointed to the decline in the real economy of the production of goods and services in North America and the rapid rise of the role of the unproductive sectors of finance, insurance and real estate. But none of our governments or political leaders want to take on the issue. In the world of Anglo-American capitalism, our political leaders warn of the “dangers of a return to over regulation.”
    In the meantime, investors have fled the markets seeking to protect their remaining capital in U.S. government bonds. There is a serious bubble building in this market. At the same time the U.S. government is printing money as fast as they can. If investors, including major Asian countries, lose confidence in the ability of the U.S. government to manage this crisis, the bursting bubble of the U.S. government bond market will certainly bring on a world depression. When this happens  the general public will be demanding new solutions.

John W. Warnock is retired from teaching political economy and sociology at the University of Regina.
   

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