'Fleeced. Canada versus their banks.'
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Summary
Corey Spence is the author of The Mother of invention: How Canada's Banking System Failed Us and How We Can Fix It. In this episode, Corey talks about his new book, "The Mother of Idiot's Bank" and why Canada should have a free market in banking.
Transcript
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Thank you very much for joining me today to discuss your book, Mr. Spence. I appreciate it.
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Thank you, Corey. It's a pleasure to be here with you today.
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Thanks. So I guess I'll just kind of begin at the beginning, you know, because people,
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even when you travel, you don't think going to another country to look into their banking
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systems or see differences. So it never really occurs to us to compare for other comparable
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markets such as the UK or Australia or areas like that, you know, their banking systems,
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which might be similar to ours, but looking that they're certainly not paying nearly as
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much to bank as we are, are they? No, they're not. And there's a very good reason for that.
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And I don't want to get too wonkish from the very beginning here, but in those jurisdictions
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here in Canada, we pride ourselves on good and close regulation of the banking system
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because safety matters, right? The matter is stability isn't everything, but without stability,
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everything is nothing. Well, in the UK, they have tight regulation too, but the regulator also has
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competition mandate, which means that they not only keep their banking system safe, but they also make
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sure they're fair. And in Canada, we don't have until recently a well-empowered competition bureau
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to ensure that we're getting good value for our money.
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Yes. And so, I mean, a lot of it, and you kind of cover at the start and you cover more at the end
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of the book, though, that the, I mean, the high horse Canada got on was in 2008 when the bank runs
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happened in the States, things were, you know, went badly. And that's where a lot of people said,
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well, we've got our hyper-regulated market. We didn't suffer through those things. Thus,
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it justifies having such strict controls on our banking system. So, I mean, there's some degree of
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rationale behind protecting, but if you overprotect, then your consumers are going to lose.
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Yeah, there's no question. But I mean, I think there's a degree of misunderstanding here,
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right? We can have, and we should have, tightly regulated banks. Banks are unlike any other
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industry we have, right? But it's not just the choice between hyper-safety and a casino and a
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free-for-all. With the advent of financial technology, we can now make our banking market what we call
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contestable, right? We can contest it. And that means that these fintechs or financial technology
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companies are able to come in if they were given access to the payment system in Canada,
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which they're not, not across the board and not in the sense that really creates a degree of
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competition that would give the banks a run for their money. So if you go to Europe, for instance,
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everybody wanders around Europe with an app called Revolut. And then Revolut, you can figure out,
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if you want to do a foreign exchange transaction, you just look at your phone and you see the best rate
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at the lowest possible cost. And the transaction is done instantaneously. We don't have that option
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in Canada, and we should have that option in Canada. And the banks know that this is coming,
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but they're dragging their feet. They're slowing the process down with the complicit
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shelter of the federal government, which means we don't see open banking in this country until 20,
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20, 2026 at the earliest. And we don't even have an instantaneous real time transactions payment
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system. And over 50 countries have this in place. And we don't even have a beta testing
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instantaneous payment system ready until 2026. It's shameful.
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It is ridiculous. I'll throw an anecdote that just recently happened in our household. Actually,
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we've done some changes in our finances and things and we had a loan combined. And then one major bank
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was to pay off a loan with another major bank. But apparently the only way they would accept it is
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with a bank draft. A physical bank draft had to be sent from one major bank to the next major bank.
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And of course they sent it to the wrong branch and now it's stuck in limbo. But why on earth, when I
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could tap to make a payment in seconds, anywhere I go, can two major banks not do a transaction on my behalf
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without charging a fortune and getting it wrong? Because they don't have to, because there's no
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competition, right? So necessity is the mother of invention. So if we had a degree of competition in
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the Canadian banking system, and I can assure you that the performance of the banks and the price at
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which we transact would improve very, very quickly. We've seen this in the past when in the mortgage
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market 20 odd years ago, 25 years ago, you know, you'd go and apply for a mortgage at the bank. It would
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take you two weeks to know whether or not you were given the mortgage. And it was kind of a painful
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nail-biting exercise for many, many aspiring homeowners. And there was a degree of competition at the
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time from non-bank providers of mortgages. And once that group began to get a decent critical mass,
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all of a sudden banks could process your mortgage overnight. And so we know that if they're given the
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incentive to respond, they will. The key question we have to ask ourselves, I think, as citizens and
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as electors is, why is the federal government sheltering the banks to persist with these practices
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that keep competition at bay? And the answer is they can, because for some reason, the federal
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government does not want to take it on. Now, we brought up the financial crisis, right? Sure,
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the banks didn't go under here. And we should all be extremely grateful for that. And regulation was a big
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part of that. But that doesn't mean to say that the banks should be free of competition because of
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it. What people don't understand is that the banks did receive substantial help in terms of liquidity
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provision from the Bank of Canada. The federal finance department freed up a lot of liquidity in
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the system by buying mortgages from the bank's balance sheets. And if the financial crisis that had
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happened another 12 months later, I think you would have found that some of the Canadian banks would have
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got themselves into some similar trouble. It's just that because more than or about half of their
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income comes from fees rather than from providing financial transactions, they didn't have to reach
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out into the risky stuff to retain high profitability targets because they didn't have to.
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Yeah. So when the government's reticence in going into this, and it's funny because, I mean,
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they really dedicated a lot of time and energy going after the retail grocer oligopoly that we're
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dealing with and dragging the CEOs in front of committees and demanding that they explain their
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4% profit margins, you know, and demonizing these guys. And I don't think they should drag bank heads
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in and demonize them. But boy, if you really want to show an area where Canadians are kind of being
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taken to the cleaners, look at the margins on financial institutions right now. And it makes the
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the grocers look like pikers in comparison. I think this is fair comment, Corey. If you look at
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the performance of the domestic commercial and personal lending and payments provision within the
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domestic market itself, the bank's return on equity until recently was in the high 30%, which is
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absolutely staggeringly high. And luckily for us, both TD Bank and Bank of Montreal have similar businesses
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in parts of the US banking market that are much more competitive. And what you find is that their return
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on equity in those markets is about half of what it is at home. So, you know, you can see that they're
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extremely well protected. And whenever you bring this up with cabinet ministers and others in the
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federal bureaucracy, they say, oh, but the crisis, you know, we did so well. Well, the banks are
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expensive, but we say they're safe. But we've had a couple of recent scandals where we can begin to
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question that narrative. Are they as safe as they say they are? And are they as safe as we have been led
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to believe? I'm not entirely convinced. So another area, I mean, the banks have really spread out into
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all sorts of side industries, I guess you could say, you sort of speak a bit to that, like areas where
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if we were going to sort of break up some of the areas that banks get into and allow some more
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competition, financial advising, investment products, things like that, where the banks really try to suck,
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you know, customers into further, I guess, being entrenched into their financial lives. Those are areas that
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other businesses can set up and provide those services without putting your banking structure at
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risk. Yeah, I think that's right. I mean, I'm often asked, okay, so FinTechs would be good, let's get on
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and get that done. And, you know, we sit and whistle in the wind and wait for that to happen. I think one of
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the things that we could do with the stroke of the ministerial pen, if we were so inclined, or our political
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leaders were so inclined, is to demand transparency from the banking system, right? I mean, if I have
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a stock trading account at a discount brokerage at the arms of one of the banks, they will probably
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charge me about $10 to do a transaction, right? Buy a stock, sell a stock, buy a mutual fund, sell a
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mutual fund, buy an ETF, sell an ETF. I'd like to know what the cost of them is of facilitating that
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transaction. I'm willing to bet you, Corey, and your listeners and your viewers that it's a couple
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of cents. So why am I charging being charged $9.99 or $10 for it? It's the same with credit cards,
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right? I mean, the interest rate on credit cards has barely budged over the foremost 40 years, and yet
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inflation is significantly lower. The funding rates, the deposit rates that fund those things are
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very much lower. We're told that there's a lot of fraud in credit cards and that there is, you know,
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potentially high losses because borrowers are more marginal, and yet when banks securitize those
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credit card receivables into trusts, S&P have to rate them. And they say, well, you know,
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a third of all the borrowers are super prime, so you're going to lose money on them. The charge-off
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rates are 3%, and fraud may well be high. But again, we don't know because we can't see it, right? So I think
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there is a general sense amongst the population that it's expensive, they're dissatisfied,
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the lack of choice, the frictions that are put in the way to just do simple payments,
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five-day holds on checks. I mean, seriously, in a world where countries like Brazil have instantaneous
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payment systems available for people, why don't we have it here? Let's see,
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see. And then we can see whether or not you're justified in charging what you do for access to
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the banking system. My guess is we'd be pretty shocked.
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Well, they haven't adjusted their rates for the realities of today. I mean, if it was the days
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of, you know, 40 years ago, and if you were going to transfer funds from one account to another,
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you'd have to have conversations between real people, paper documents would be brought up and
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amended and changed. And it's going to be cost, you know, time takes up time and cost. But I mean,
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we're talking a digital transaction, as you said, pennies, if that, and still, though,
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the rates stay the same. Same with credit cards. You point out in the book, I mean, yeah, we suffered
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through double-digit interest rates in the 80s and into the early 90s for even mortgages.
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Those have come down, but the credit card rates haven't changed a bit. And people carrying high
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credit card balances on unsecured debt, that's a lot of actually what's pushing a lot of people to
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some financial distress more than mortgages or other borrowing tools.
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Yeah, there's no question. And I want to come back to the point I made right at the beginning,
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Corey, if you don't mind, which is to, you know, OSFI, OSFI does a good job of regulation, right,
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ensuring safety, no question about that. And I think they're an important agency, and they need to
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be free to do their job. But they don't pay any attention to competition issues, right. So in the
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United Kingdom, for instance, the Financial Conduct Authority actually has responsibility for competition
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as well. And so there are many charges that the people who are financially marginal, usually the
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poor, who find themselves in difficulty, will find themselves overdrawing their accounts, where they
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will be charged a simple fee every time they are overdrawn, will be charged interest on the money that
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they've essentially borrowed from the bank that tolerates that. They'll be charged 50 bucks for an NSF
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check, non-sufficient funds to bounce a check. And this is allowed to go on. So in the UK,
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the Financial Conduct Authority looked at these various charges and said, sorry, you no can do.
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You're not allowed to do that. Moreover, you have a duty of care. If you can program your system to
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assign a charge and a fee every time someone's overdrawn, you can identify, given the profile of the
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customer, whether or not that person is marginal or not, or maybe in some difficulty. And now UK banks
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have a duty of care, they have to find out what's going on in that person's life to ensure that the
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banks don't essentially levy a port act. And meanwhile, there's no agency here in Canada that's charged with
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that responsibility. So we have some gaps in our regulatory structure. If we're not going to allow
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competition, regardless of where you are on the political divide, all of us need a degree of protection,
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if we cannot look to competition to protect us. And the reason we like competition is because
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it prevents the most egregious of these charges emerging, and it also forces incumbents to become more
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efficient. And so to my mind, we've known this in economics, well over 100 years, why aren't we doing
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something about it? Yeah, well, and in Canada, the government pressured actually and, you know,
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they didn't impose, but they really twist the arms hard and brought about a grocer's code of conduct
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that they have to abide by now for depending on how they deal with suppliers and pricing and things
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like that. I guess before I let you go, the main thing is getting the political will because there
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doesn't seem to be interest or will on the parts of our government. But right now we're going into an
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election year now is a good time to get the pressure on the folks running for election saying,
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hey, can you speak up on this? And of course, the best way to do that is to get the public informed
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because they don't realize how they are being fleeced as your book puts it. So I mean, before
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I let you go, you know, where can people find a copy of this to find out for themselves and see how
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well you've broken down, you know, how badly we're kind of getting it in the Canadian system and how we
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can work towards solving this? You can get it on Amazon, you can get it directly from the publisher,
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Sutherland House Books. My wife encouraged me to record it. So you can lull yourself to sleep with my
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voice if you so desire. I think at the end of the day, Corey, with this book, we've deliberately
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written it for a general readership. And we want people to have the ideas, have the knowledge and
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have the language to understand their predicament and to ask for more and to demand better. Democracy
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is not about showing up every four years to cast a vote. It's about engaging with your MPs, engaging with
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your representatives every day. Because if we don't, then we get what we deserve.
00:15:07.660
Well, absolutely. And if we can arm ourselves with information, it makes it harder for them to baffle
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us with B.S. when we try to ask them why things are the way they are. So I really appreciate you
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writing this and coming on today to talk about it. And I hope we can talk again down the road after the
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banking system has been fixed up for us. Well, we will see. Thank you very much, Corey. It's been a pleasure to be here with you.