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Of Bank Failures and Bailouts.

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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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Frank

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… Read more »

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freako

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… Read more »

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ReductiMat

Great stuff, thanks Freako. Care to expound on why everyone and everything are doing their best to fight deflation? What's wrong with it?

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freako

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… Read more »

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freako

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… Read more »

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ReductiMat

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?

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freako

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%?

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Partisan Spectator

Dan in Calgary,

My message was about sharing few observations with readers of this blog. Everyone is free to interpret them.

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no-lympics

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… Read more »

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[…] Comment on Of Bank Failures and Bailouts. by The Van Man […]

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Dan in Calgary

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.

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The Van Man

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… Read more »

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John

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.

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Anonymous

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.

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Raincouver

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.

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patriotz

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/scripts/story.html?i…

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.

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Anonymous

"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.

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Partisan Spectator

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…

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Ed

Oil $82.00

Hey cool, so gas should be about $0.82 per liter real soon now, right? Right?

Anyone? Bueller?

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Brittanny

9:58 PM :

Nikkei (-862.48)

Oil $82.00

Canucks/Flames 4-0

Gonna be an interesting day in the makets tommorrow.

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jesse

Ottawa admits it must act on the economy

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.

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Brittanny

9:46 PM :

Nikkei (-888.48)

Oil $82.49

Canucks/Flames 3-0

Gonna be an interesting day in the makets tommorrow.

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patriotz

MOVE ALONG FOLKS, NOTHING TO SEE HERE!

http://www.reportonbusiness.com/servlet/story/RTG…

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.

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patriotz

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?

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Anonymous

"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.

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