I always have to cringe when commentators, particularly in business columns, praise our country's banking system. The claim is that somehow it possesses some kind of maturity and sophistication that puts it above and safe from the irresponsible behaviour we see and have seen down South. The fact is that we tolerate limited competition under our banking act. And we do so under the assumption that in return bankers will uphold the most strict business standards. In case you did not know but suspected as much, chartered banks enjoy phenomenal profit margins and, in effect, a virtually unlimited ability to tax our banking transactions to generate revenue.
Ignoring for the moment the remarkably poor services they provide, today's announced $50 billion in additional bailout money for these same banks has not raised much alarm, concern or indignation. Perhaps it is a matter of scale. The news media are swamped with numbers out of the US, a much large economy. So large, in fact, that a general rule of thumb is to multiply by 10 any number out of Canada before comparing it to actions South of the border.
So what happens to our little $50 billion package? A whopping $500 billion!!! Add to that another $25 billion doled out earlier this fall (again, multiply this by 10) and we have committed, just hold it, $750 billion to our strong, stable banking system. If that number sounds suspiciously familiar to you, remember the controversy just a month ago in the US over a similar large sum of money destined to the financial sector. In the American case, however, it was always clear that the money was destined to bailing out an irresponsible financial sector that would, in due course, be held accountable for its actions and the people's money.
So if the size of the bailout is any indication, the health of our banking sector is at least as bad as in the unregulated South. Despite enjoying large cash flows from a protected market, these banks made poor investment decisions, did not proceed to do the proper risk assessments of investment vehicles and no longer deserve the protection afforded under the Banking Act.
One last troublesome note. Given the vast amounts of public money involved, where has the opposition been hiding? who will defend tax payers and ensure governmental aid is accompanied by strings and reforms? Which is safest to assume: the opposition is asleep at the switch or is comfortable with maintaining the status quo? Oh, and by the way, no one has mentioned how the purchased bad mortgages from banks will be priced.....
12 years ago
If my understanding is correct, the government is saying everywhere that he knows how to handle a budget, and is using our tax surplus to save banks in the same way as in the US... but without stress ! Because we have enough money in our peggy bank doesn't mean we have nothing to worry about. Are we going to react when it will be too late ? The IMF predicts for 2009 recession everywhere in the western world but Canada. But these are previsions. And we don't know what will come on us on 2010 and years after that.
ReplyDeleteConsidering the fact that housing prices in Canada start to slightly decline, the bailout of this scale is not that bad in terms of timing. It is a kind of disguised bailout because the government buys up the insured mortgages that will otherwise be covered by taxpayers money if housing market deteriorates further. What has surprised me is the naive belief that it is up to banks to continue to lend to credit-worthy persons. It should have been imposed as a kind of precondition to be bailed out.
ReplyDeleteHey Nic,
ReplyDeleteGreat post. I hadn't thought about the rule of ten in respect to the canadian bailout and how it compared to the US bailout. Please keep posting.
Alex