Of Bank Failures and Bailouts.
Just so you know, Canada’s banks are in fine shape. Not the sort of ‘fine shape’ that US banks were in last year, but real, honest to goodness fine shape. But just in case, Ottawa is considering options to aid Canadian banks if the current global economic crisis persists.
And news from around the globe hasn’t been real great lately. A number of large US banks have failed, a record setting US bailout bill has been passed and the US government is now considering taking an ownership stake in banks (because what restores confidence more than government ownership?).
Meanwhile in the UK, they’ve already taken the step of partially nationalizing their banking system. The fallout from the global credit boom is turning bust in a bad way, look at whats happening in Iceland for just one example. The IMF has just announced the activation of an emergency funding scheme that was last used during the 1995 Asian economic crisis.
From previous discussion on this site I know that many of you are sitting on a cushion of cash, some above the $100k CDIC insured limit. Are you worried about the health of the Canadian economy and our banking system? Do you understand the ins and outs of CDIC insurance? Are you making any changes to your banking habits to prepare for possible problems?
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October 12th, 2008 at 7:14 pm
I have total confidence in George Bush, Hank Paulson and Ben Bernanke. They are working feverishly right now to solve this problem and we should not worry our little heads about any of it. All of you should be sleeping soundly, knowing that your interests are being well looked after. Of course Mr. Harper should also be mentioned, along with Mr. Flaherty. People, we are in good hands, just as the old Allstate commercial used to say. This is just a big deal at the top, where a bunch of international banksters and bigwigs have ransacked not only the cookie jar, but everything else in the cupboard as well – therefore it has to be solved by other people at the top, which is being done now. Be happy that we have such marvellous leaders who will see us through these rocky waters!e
October 11th, 2008 at 5:50 pm
Care to expound on why everyone and everything are doing their best to fight deflation? What’s wrong with it?
Like I said, people stop spending because prices are dropping. Would you buy anything non-essential if you knew it would be cheaper next week? It is almost the exact reverse of hyperinflation (where people rush to buy things before price goes up). Since people aren’t buying, business slow production, leading to unemployment, even less demand, lower prices still. And so on.
The whole idea is to keep inflation reasonable, which is not too high, not too low. Too close to zero risks deflationary spiral. Too high is unpopular, and may risk hyperinflation.
As many have pointed out, it is possible to simultaneously have high consumer inflation, but deflating investment assets. That is bad, because your home is going down while food may be going up.
Again, I can’t under emphasize the role of productivity. All the other stuff isn’t nearly as important. Can we as a society influence productivity? Hard to say, but bubbles hurt it by misallocating resources. As do protectionism, strong labour laws, high taxation etc.
October 11th, 2008 at 5:03 pm
Great stuff, thanks Freako. Care to expound on why everyone and everything are doing their best to fight deflation? What’s wrong with it?
October 11th, 2008 at 2:00 pm
Another related point is that high rates aren’t necessarily bad, nor is high inflation bad. Everything is relative.
What is generally thought of as undesirable is UNEXPECTED inflation. Even that isn’t as bad as thought. Contrary to popular belief (and what gold bugs and coin collectors like to tell you), it doesn’t devour wealth. It simply redistributes wealth between long term lenders and long term borrowers. That leads to nervousness and excessive risk premiums, but other than that no big deal.
High inflation does “tax” cash, so one has more incentive to keep as little around as possible (think hot potato). If inflation is TOO high, we do risk an inflationary spiral, but that is fairly extreme and easily remedied. The other danger is of course a deflationary spiral, which I think is a tangible risk at this time. In one of those, nobody buys anything because prices are falling, stalling the economy. Cash literally earns a real return (and tax free to boot).
October 11th, 2008 at 1:24 pm
That said, isn’t one of the major components of our grief right now because of easy credit, ie., low interest rates?
Not necessarily. Our grief is the result of excess liquidity and the related bad lending and excess consumption.
Low rates need not be bad. If productivity is high, we can have low rates AND a strong economy. This is the missing link that all the talking heads are oblivious of.
Productivity growth is THE true reason why we have had a rising standard of living, and is truly the fruit we’ve been picking. But how many times do we hear it in debates? Never. Instead it is about consumers driving the economy, RE going up up and up just because. Tragic really.
Our problem stems from Greenspan’s miscalculation. He felt that he could keep rates lower than what previously was thought prudent because he felt that productivity would increase sufficiently to provide goods to absorb all the liquidity. He though this because of:
a) The IT revolution finally bearing fruit.
b) The fall of communist Soviet Union.
He calculated WRONG and we are all paying the price.
October 10th, 2008 at 11:31 pm
Freako, I’m not an economist, nor do I play one on TV.
That said, isn’t one of the major components of our grief right now because of easy credit, ie., low interest rates?
October 10th, 2008 at 6:48 pm
I am old enough to recall the days (not that long ago)when one received double digit interest for a basic savings rate.
When the interests rate became laughable ie 1/2 to 1/3 of what they one were….many people shifted their investment focus.
You are forgetting that it is real interest rates that matter, not nominal. What good is 13% savings rate when inflation is 12%?
October 10th, 2008 at 9:27 am
Dan in Calgary,
My message was about sharing few observations with readers of this blog. Everyone is free to interpret them.
October 10th, 2008 at 7:49 am
Hmmmm:
I am old enough to recall the days (not that long ago)when one received double digit interest for a basic savings rate.
When the interests rate became laughable ie 1/2 to 1/3 of what they one were….many people shifted their investment focus.
Many were literally forced to enter the stock market, and later the real estate market, in order to attempt to acquire returns on par with what they once had with “safe” bank deposits.
In my view, this forced rampant speculation, ie we saw this over the past 20 years is based on (i) phoney money with the ink still wet “off the presses” that is also ( ii )lent out cheap. This is the equivalent of a loaded gun to a drunk.
The only ones that gained were the ones who pimp it…ie Gov’ts with bogus economies to placate the masses,and stock brokers and realtors, whose vested interests is to sell this fantasy and walk away like this was an economic equivalent of a one night stand.
When I see the CEO of Lehman brothers before Congress and admitting they will walk home with $400 Million for running a 100 + year old company that is now , finito…history…thats pretty much sums it up.
Solution is to raise the interst rates and keep the speculation D-O-W-N !!!!
Tokyo - Other information | Worlds Biggest Cities Says:
October 10th, 2008 at 4:52 am
[...] Comment on Of Bank Failures and Bailouts. by The Van Man [...]
October 9th, 2008 at 10:59 pm
I recall it was freako betting few years ago (on VHB?) that oil would be back to $50. Once it tipped the mark and bounced back. Today it looks like $50 is not the limit. All good and bad news are now considered bad. Not so long ago all good and bad news were deemed good…
Partisan Spectator, What do you mean? I’m admittedly old, and … well I just don’t get what your message is here.
October 9th, 2008 at 10:51 pm
This banking crisis had happened before! In fact, if you google Japan ten years recession, you will read an explanation as to why the economy faltered and went into a serious decade long depression and asset deflation. But if you read the cause and effect, you will notice that it is “VERY SIMILAR” to what our central bankers around the world are doing!!
1, Nationalizing banks
2, Buying up toxic loans
3, Propping up dead businesses and faulty banks instead of letting them go
4, Preventing the housing bust and the asset price deflation by keeping people in homes that they can’t afford
All of that Japan had done so for 10 long years! That’s 10 years and still they couldn’t fix it. We were laughing on the tube when we heard Japan said they were cutting interest rates with the rest of the banks. Yeah, from 0.1% to what?!?
We are saddened to see that all the central bankers had done were to try and inflate the money supply again in the desperate attempt to jump start the economy. But if there is anything to learn from Japan is that, banks weren’t afraid to lend money. It is the borrowers who the lenders believed have no credibility whatsoever to lend to. This is happening now. We just recently came back from our vacation and visited our bank and spoke with our bank manager. She had this to say..
1, Loans of all kinds will be more difficult to obtain.
2, Interest on loans will be prime rate + 1% or more
3, Loans will be evaluated via traditional lending terms and determination (the old fashioned way)
4, Credit line will be chopped to high risk borrowers without notice
If many of you think our economy is in good footing, why are banks now so unwilling to loan money easily?!? Isn’t this an omen to possible trouble coming ahead..
What happens to individuals and businesses that rely on line of credit to run their daily operation?!?
Again, this happened in Japan and is ongoing, because all the excessive liquidity sloshing around were used to build up a cash reserve against the mounting bad debt and failing asset bubbles (inflated real estate) that deprive lending capital to other growth businesses around.
When growth businesses are starved of running capital, they will capitulate and wither.
We are in this stage that we rather see the economy stagnate and wither slowly rather than a big chop on the head if the Fed and the US government didn’t approve the rescue package. Either way, we are sinking Canada included. There’s no escaping as our Canadian banks will keep its liquidity in check to hold their own fort. With Canadians saving nothing, it means Canadian banks will have no way to raise extra capital to finance other private capital projects. Which leaves only the government to fund projects, and when they do, they will ALWAYS fund to those of the elected and well connected business associates, which then further distorts the economic reality.
Again, this had happened in Japan..
I suggest that everyone learn from what happened in Japan and prepare yourself for it.
October 9th, 2008 at 10:39 pm
I can’t believe you fools are talking about bank failures in this country. Please please please read up on the CMHC and our Bank Act and you’ll see that a bank failure is next to impossible. I know there’s not much that will convince you but whatever like I’ve said I’m preparing for an early retirement to Mexico.
October 9th, 2008 at 10:37 pm
Strataman, it’s not CAD that is responsible for the recent change in the exchange rate, it is a USD rally against pretty much every other currency out there. CAD is worth less than USD not because oil is down, but oil is down because of the same reasons why USD is up. Hope this makes sense. Basically as long as current wave of market fear continues to feed on itself CAD will keep going down relative to USD.
October 9th, 2008 at 10:34 pm
Jesse quotes #76
A plan originally earmarked for Friday morning would see the government assume some mortgages currently held by the banks by giving them to the Canadian Mortgage and Housing Corp., a Crown corporation. In turn, the banks might receive CMHC paper – possibly bonds – against which they could use as collateral for their own loans from other banks.
Oh, this looks real good. Banks are “giving” mortgages to CMHC. How fabulous is that?
Thanks for the link, man.
October 9th, 2008 at 10:33 pm
A plan originally earmarked for Friday morning would see the government assume some mortgages currently held by the banks by giving them to the Canadian Mortgage and Housing Corp., a Crown corporation.
CMHC has been doing this for years (Canada Housing Trust). So just what is new about this?
http://www.financialpost.com/s.....mp;k=20957
But is that really the right thing to do? I think the last thing Canada needs right now is to supply more cheap capital to an overvalued asset class – housing.
October 9th, 2008 at 10:32 pm
“Can anyone explain why the us dollar is so much higher than the Canadian dollar right now?”
It’s not “so much higher”. To put things in perspective look at AUD- less than three months ago it was almost equal to USD, and now it is trading at 1.51… Don’t be surprised if CAD follows the same trajectory.
October 9th, 2008 at 10:30 pm
I recall it was freako betting few years ago (on VHB?) that oil would be back to $50. Once it tipped the mark and bounced back. Today it looks like $50 is not the limit. All good and bad news are now considered bad. Not so long ago all good and bad news were deemed good…
October 9th, 2008 at 10:19 pm
Oil $82.00
Hey cool, so gas should be about $0.82 per liter real soon now, right? Right?
Anyone? Bueller?
October 9th, 2008 at 9:58 pm
9:58 PM :
Nikkei (-862.48)
Oil $82.00
Canucks/Flames 4-0
Gonna be an interesting day in the makets tommorrow.
October 9th, 2008 at 9:51 pm
Ottawa admits it must act on the economy
October 9th, 2008 at 9:48 pm
9:46 PM :
Nikkei (-888.48)
Oil $82.49
Canucks/Flames 3-0
Gonna be an interesting day in the makets tommorrow.
October 9th, 2008 at 9:29 pm
MOVE ALONG FOLKS, NOTHING TO SEE HERE!
http://www.reportonbusiness.co.....m_mostview
The real estate industry has gone into damage-control mode to try to quell fears Canada’s housing market could enter into a U.S.-style freefall.
Industry representatives held a conference call Thursday to challenge a recent report by Merrill Lynch Canada Inc. that made headlines by suggesting Canada’s housing market could be heading for the same perils as that of the United States.
“We want to draw attention to the fact that despite some recent stories that suggest the Canadian housing market is heading for a crash similar to the States, that just isn’t in the cards,” Gregory Klump, chief economist at the Canadian Real Estate Association (CREA), said on the call.
October 9th, 2008 at 9:24 pm
There was a crowd of men in the bullion exchange and when I asked someone what was up it was explained to me that they were lining-up to buy gold coins.
People lining up to buy gold coins? Hey,just like in 1980. Come to think up it, people were lining up to buy condos around that time as well.
So what happened over the next few years?
October 9th, 2008 at 9:22 pm
“Second, it has been around for a century. If it was total crap, then it probably wouldn’t still be around.”
Lehman Bros was around for 158 years before people figured out it was crap.
October 9th, 2008 at 9:22 pm
First, the Dow Jones was created to be an index based upon his theory. Second, it has been around for a century. If it was total crap, then it probably wouldn’t still be around.
Oh, there is lots of crap that has been around for a century. If there is a sufficient supply of willing fools, nothing goes away. Maybe you can agree with that. Over and out.
October 9th, 2008 at 9:14 pm
I think such theories are total crap. They cannot possible predict the endless stream of random changes in fundamental variables that are the true drivers of the market.
Yes we are getting off topic, so this is my last say on this. First, the Dow Jones was created to be an index based upon his theory. Second, it has been around for a century. If it was total crap, then it probably wouldn’t still be around.
I agree with your point that each stock drives trades on it’s own fundamentals. But, you can’t ignore that there is a huge systemic component to the economy. If manufacturing drops off, then surely, transportation will as well. The principles of his theory are fairly simple and they are reasonable assumptions.
But, let’s agree to disagree on this.
October 9th, 2008 at 9:12 pm
Yes, every recession has been led by an inverted curve, but not every inverted curve has led to a recession. It is right only about 1/2 the time.
Huh? Why would stocks keep setting record highs if one of our most reliable recession indicators suggests that there is a 50% chance of recession? You don’t see a divergence?
October 9th, 2008 at 9:05 pm
why is everyone refusing to discuss the subject du jour which is: cannibalism?
October 9th, 2008 at 9:02 pm
Clearly the inverted yield curve of 2006 was predicting something that the stock markets didn’t. One had to be wrong.
Clearly?
Yes, every recession has been led by an inverted curve, but not every inverted curve has led to a recession. It is right only about 1/2 the time.
October 9th, 2008 at 8:59 pm
Pisses me off. Where have all the blow-hards disappeared to…
No worries, they’re feeling it more than you are…
October 9th, 2008 at 8:58 pm
“Can anyone explain why the us dollar is so much higher than the Canadian dollar right now?” The Canadian dollar is pretty well linked to oil and to a lessor extent gold, and then mineral/metal prices. Where those prices go so does the Loonie. As a commodities dominant economy that makes sense! Industrial and high tech industries make up an in signifigant portion of the Canadian economy.
October 9th, 2008 at 8:58 pm
Who’s ‘we’? I’m not sure about different efficiencies between bonds and equities.
The collective group of bears who have endlessly discussed every nook and cranny of this here housing bubble.
Clearly the inverted yield curve of 2006 was predicting something that the stock markets didn’t. One had to be wrong.
October 9th, 2008 at 8:54 pm
But, I do believe the performance of major stocks are interlinked consistent with the ‘Dow Theory’.
I think such theories are total crap. They cannot possible predict the endless stream of random changes in fundamental variables that are the true drivers of the market. Anyhow, that is getting a little OT.
October 9th, 2008 at 8:47 pm
#61- appears the outflows out of canada are greater proportionatly than the u.s. a staggering amount of money must be leaving.
October 9th, 2008 at 8:42 pm
Can anyone explain why the us dollar is so much higher than the Canadian dollar right now?
October 9th, 2008 at 8:37 pm
Stubblenut, good plan actually! You got it all figured out, just remember to stock up on ammo and fish hooks
October 9th, 2008 at 8:35 pm
Dave, let us know how your silver selling and stock buying works out. Thanks
October 9th, 2008 at 8:20 pm
Yes, I do believe in support levels. I don’t think the market looks at the index and makes fundamental decisions above itself. Obviously stocks are traded individually. But, I do believe the performance of major stocks are interlinked consistent with the ‘Dow Theory’.
October 9th, 2008 at 8:15 pm
I think the DOW still has some downside with major support somewhere between 7,600 and 8,200. If it breaks under 7,600, then stick a fork in it because it won’t be heading up anytime soon. If it bounces, then we should be back above 10k in no time. I think some of the dividend staples on the DOW are good buys (e.g. GE, DD, JNJ, WMT).
If we don’t fall into a Depression here, I think the DOW will be back to 14k within a few years and then make another low under 10k two or three years after that. I think the recent downturn confirms that we are in a secular bear market similar to the one in the period of 1966 to 1982.
Put me on record.
Who’s ‘we’? I’m not sure about different efficiencies between bonds and equities.
October 9th, 2008 at 8:09 pm
It’s nearing a major support level of 7,600
Do you really believe such arbitrary bullsh*t? The component stocks are traded based on supply and demand. Do you think this is impacted by some arbitrary support line in the aggregate index?
October 9th, 2008 at 8:07 pm
Topically, Reuters has an article out entitled “Canada rated world’s soundest bank system: survey”.
Dave, so we have you on record as bullish on stocks. You may be right, though don’t think it was all psychology. The drop would have happened anyway, though at a much more measured pace. We long wondered why the bond market seemed to have priced in a recession but the stock market hadn’t. We concluded that the stock market was much less efficient, and I think recent events support that notion. It is just a wake up to reality. Will it overshoot? Probably.
October 9th, 2008 at 8:01 pm
Anon, Border Gold has 100 ounce listed for sale. You can find them on Ebay easily as well.
http://cgi.ebay.ca/Silver-Bull.....286.c0.m14
I think I will head down to VBCE and sell some metal.
October 9th, 2008 at 8:00 pm
“What’s your plan for the month #3? ”
Huntin’ and fishin’. If it actually got bad enough that three months in we still needed supplies we’d pretty much be in Road Warrior territory anyway.
October 9th, 2008 at 7:54 pm
The Nikkei is down 10% already today. It’s nearing a major support level of 7,600. I think everything is now oversold and it’s probably a good time to pick up some bargains.
October 9th, 2008 at 7:51 pm
Dave, no conspiracy theories. Simply difference between paper “markets” and real markets. And no, you can’t buy 100 oz silver, not since a month ago. Not just Vancouver, but anywhere in North America. 100 oz is retail size, and all retail products are long gone.
Yes, i am sure you can sell your silver at VBCE doors at a very healthy premium, except that this premium would be calculated relative to an artificial price.
Look at it from this perspective- the market price is supposed to be the result of a balance found between all sellers and all buyers. So how is this “market” price if there are hundreds of thousands if not millions of willing and able buyers blocked off the market?