When is a bailout not a bailout?

[Jack Weber]

Because that wouldn't do anything to unlock the credit market.

Ah...Creating money out of thin air and then charging interest on it...

I've heared of this....

[Smallc]

Ah...Creating money out of thin air and then charging interest on it...

That's basically how the system operates.

[TimG]

Are suggesting that in the nightmarish scenario you feel was upon us,the banks would have survived all the businesses going belly up and defaults on mortgages

Ah yes. There are over a million businesses in Canada. A few tens of thousand of them going under is not going to hurt the banks a lot but it would hurt the larger economy.

The money was not free either. The banks gave up their best assets in return for that cash. It was more like a home equity loan than a subsidy.

Edited May 1, 2012 by TimG

[Jack Weber]

Ah yes. There are over a million businesses in Canada. A few tens of thousand of them going under is not going to hurt the banks a lot but it would hurt the larger economy.

The money was not free either. The banks gave up their best assets in return for that cash. It was more like a home equity loan than a subsidy.

Interesting

So does your compassion for the economy at large extend to the auto bailouts??

The only difference in the scenario is that the gov't decided not to use the banks as the middle man...

Edited May 1, 2012 by Jack Weber

[Moonlight Graham]

They would have been making money from the mortgage interest anyway.

Huh? But if they had more money to make more loans, that means more profit right?

[TimG]

So does your compassion for the economy at large extend to the auto bailouts?

Propping up failed enterprises is a mistake but in the case of the auto companies there are plenty of suppliers who are not 'failed enterprises'. If I was in charge I would have let GM and Chrysler fail and use the money to encourage the surviving firms to expand their operations in Canada.

[dre]

He's claiming that without the "emergency liquidity",businesses would fail because the system dried up....And with that,the banks...

Undoubtedly,the banks turned a profit on the "free" money they were given to distribute...

But why didn't the government just directly infuse certain companies with cash like they did with the auto companies???

Of course,this brings up a questionable coziness with our elected officials and private/for profit financial institution...

But why didn't the government just directly infuse certain companies with cash like they did with the auto companies???

The government COULD operate that way if they wanted to, but they arent set up well to do that right now. They dont have the infrastructure to provide loans directly to 30 million people although they do have various vehicles to put money directly into businesses.

Basically our system is outdated, and it was designed before the IT age. Banks were necessary back then because someone needed to track the reputation and balance of trade of loan applicants to make sure that the newly created money went to people that actually were going to make good use out of it. When the system was designed (or when it "emerged" I should say) the administration of payment collection was also a manual process that required physical bank branches in each little town so that people could show up and make payments apply for loans.

These activities are obsolete now, and could be done for almost nothing with computers software. Private firms like equifax will track credit worthiness for next to nothing... 30 bux per request or less. And balance of trade is already tracked by the government anyways (the bank gets this information by asking for your last few income tax returns).

So we have antiquated institutions siphoned a huge ammount of money out of the economy that could otherwise be spent producing and consuming goods and services, and they provide almost nothing of value in return.

Theres absolutely no reason why we couldnt do this differently, but as things sit now, the BOC is the most capable vehicle to infuse money into the system, either by dumping cash into it, or by easing rates.

Its a great question though, and something we should definately contemplate.

[Jack Weber]

Propping up failed enterprises is a mistake but in the case of the auto companies there are plenty of suppliers who are not 'failed enterprises'. If I was in charge I would have let GM and Chrysler fail and use the money to encourage the surviving firms to expand their operations in Canada.

"Failed" is debateable...

My point was that you seem to have alot of compassion for the Apocolyptic scenario for businesses in that period but none for the Apocolyptic scenario for the economy if the auto companies had gone under...

Interesting...If not incongruous....

[Jack Weber]

The government COULD operate that way if they wanted to, but they arent set up well to do that right now. They dont have the infrastructure to provide loans directly to 30 million people although they do have various vehicles to put money directly into businesses.

Basically our system is outdated, and it was designed before the IT age. Banks were necessary back then because someone needed to track the reputation and balance of trade of loan applicants to make sure that the newly created money went to people that actually were going to make good use out of it. When the system was designed (or when it "emerged" I should say) the administration of payment collection was also a manual process that required physical bank branches in each little town so that people could show up and make payments apply for loans.

These activities are obsolete now, and could be done for almost nothing with computers software. Private firms like equifax will track credit worthiness for next to nothing... 30 bux per request or less. And balance of trade is already tracked by the government anyways (the bank gets this information by asking for your last few income tax returns).

So we have antiquated institutions siphoned a huge ammount of money out of the economy that could otherwise be spent producing and consuming goods and services, and they provide almost nothing of value in return.

Theres absolutely no reason why we couldnt do this differently, but as things sit now, the BOC is the most capable vehicle to infuse money into the system, either by dumping cash into it, or by easing rates.

Its a great question though, and something we should definately contemplate.

Indeed...

In fact,The Bank of Canada WAS the vehicle to infuse money into the economy unitl the early '70's...

Much of our 2nd World War effort...Major public works projects like the St.Laurence Seaway...Were all funded out of the BoC.This allowed us to be reasonably debt free for a very long time...

[Smallc]

Huh? But if they had more money to make more loans, that means more profit right?

The money was simply replacing other money that would have normally been available through the global credit market.

[Smallc]

Propping up failed enterprises is a mistake but in the case of the auto companies there are plenty of suppliers who are not 'failed enterprises'. If I was in charge I would have let GM and Chrysler fail and use the money to encourage the surviving firms to expand their operations in Canada.

Generally, I'd agree with you, but given the timing, I support what was done.

[Guest Manny]

Once a government reaches this point it is time to throw them out to teach them Canadians wont tolerate a government hides everything it does.

Good idea. We need a mechanism to do that. The opposition party should be allowed to invoke a referendum that can trigger an election, even when the standing government has a majority. They should be allowed to do that at any time, based on certain specific criteria (so that there wouldn't be chaos created by constant referendums and confidence votes).

[dre]

Generally, I'd agree with you, but given the timing, I support what was done.

You have to understand, that no government, be it liberal or conservative would ever do anything BUT what Harper did. It is quite simply the only tool in their shed. Our economic system is most vulnerable to a few different things... one is banking failures, another is forclosures, and the other is savings gluts.

So every institutional player involved in the system is naturally aligned against these things.

If they thought they needed to conjure up a BILLION TRILLION dollars to keep the system stable and operational they would have done just that.

Everyone knows the song can only go on for so long, but nobody wants to be the one holding the bag when the music stops!

[cybercoma]

Sorry. the 'we should let 1000s of business go bankrupt because I'm jealous of CEO pay' argument is not very compelling. What part of 'the banks did not need the cash so the government had no leverage' don't you understand?

Yeah. I'm sure the businesses would just go belly up if their CEOs weren't allowed to accept government assistance without foregoing their bonuses.

How do I go about getting social assistance, but rake in a fat paycheque at the same time? These jerks that run banks have got it figured out.

[cybercoma]

I love the crazy position of conservatives defending welfare and government interference in the markets. F!@# SOCIALISTS!

[TimG]

Yeah. I'm sure the businesses would just go belly up if their CEOs weren't allowed to accept government assistance without foregoing their bonuses.

Are you even reading the responses in this thread? The banks did not need the assistance but the banks were in a situation where they would need to curtail lending to protect the company. The *purchase of assets* by the government gave the banks cash to avoid curtailing lending. This was no subsidy and no bailout. The banks did the government a favour by allowing the government to buy their best assets.

[capricorn]

Are you even reading the responses in this thread?

What you must understand TimG, is that when discussing the economy, raising the issue of CEO bonuses is the flavour du jour for anti-Conservatives/Harper.

[dre]

What you must understand TimG, is that when discussing the economy, raising the issue of CEO bonuses is the flavour du jour for anti-Conservatives/Harper.

Like I said this has nothing to do with any single party. They ease because that all they CAN do. Liberal governments do it, conservative governments do it, labor governments do it, and business governments do it.

The problem is that its short sighted. Yes, we avoided the kind of recession and realestate correction that some other markets experienced but all we really did is push it back a few years. Easy credit now means less consumption later. Less consumption later means either a recession or economic downturn.

[dre]

Are you even reading the responses in this thread? The banks did not need the assistance but the banks were in a situation where they would need to curtail lending to protect the company. The *purchase of assets* by the government gave the banks cash to avoid curtailing lending. This was no subsidy and no bailout. The banks did the government a favour by allowing the government to buy their best assets.

Banks needed the assistance as much as anyone else. This activity was designed to keep liquidity in the market, and prevent foreclosures and price corrections in asset markets. The banks would have been hurt by these things as much as anyone. They would have taken an ass kicking if we saw the kind of price corrections they had in the US.

And if the banks stopped lending then everyone including them would be in for a world of hurt. When existing loans are paid down without new loans being made the principle is annihilated and you get contraction of the money supply. This causes all kinds of negative consequences to everyone in the economy... it can cause deflation, forclosures, bank failures, and so on.

[TimG]

The banks would have been hurt by these things as much as anyone. They would have taken an ass kicking if we saw the kind of price corrections they had in the US.

Sure they would have been hurt if the economy went in the funk and that is probably one of the reasons why they agreed to sell the government their best assets. But the argument in this thread is whether the this purchase of bank assets at market prices constitutes a 'bailout' that leaves the government free to dictate the terms. It was not. It was a scheme to convert the banks assets into cash so they could lend money and keep the economy going. Unfortunately, those facts don't help people intent on bashing banks.

[dre]

Sure they would have been hurt if the economy went in the funk and that is probably one of the reasons why they agreed to sell the government their best assets. But the argument in this thread is whether the this purchase of bank assets at market prices constitutes a 'bailout' that leaves the government free to dictate the terms. It was not. It was a scheme to convert the banks assets into cash so they could lend money and keep the economy going. Unfortunately, those facts don't help people intent on bashing banks.

Well even if it was a bailout why bash banks anyways? You cant bash private companies for accepting government money.

But I somewhat agree. The term "bailout" as I understand it comes from the idea of using buckets to remove water from a ship so that it doesnt sink. In that context it doesnt fit here. There was no imminent signs that these banks would "sink" without this money. But the word "subsidy" fits, especially if the banks overall position improved as a result of this activity.

Still thats splitting hairs IMO. The entire banking system is subsidized by its very definition. And protecting the banking system, and bailing it out with public money was pretty much the entire point behind the creation of central banks. The owners and investors of banks wanted the tax payer to be the lender of last resort instead of them (JP Morgan to be specific).

The significant issue in play here is that people who go and work their ass of each and every day have the the right to ask if its really a good idea for the government to sieze money from them to spend on this.

To bad we cant focus more on that.

[TimG]

And protecting the banking system, and bailing it out with public money was pretty much the entire point behind the creation of central banks.

A fiat currency system is a house of cards that depends on the confidence of the people using the currency. If this confidence is lost the system collapses. You may not like it but government back stops are essential to maintaining this confidence. The our system cannot afford to allow multiple large banks to fail at once and that means public money will need to "subsidize" private enterprises in times of crisis.

Of course you will want to start arguing about changing the system but monetary systems are pretty fundamental and messing them up leads to disaster. The system we have more or less works provided governments can learn to keep their books balanced.

Edited May 2, 2012 by TimG

[dre]

A fiat currency system is a house of cards that depends on the confidence of the people using the currency. If this confidence is lost the system collapses. You make not like it but government back stops are essential to maintaining this confidence. The our system cannot cannot afford to allow multiple large banks to fail at once and that means public money will need to "subsidize" private enterprises in times of crisis.

Of course you will want to start arguing about changing the system but monetary systems are pretty fundamental and messing them up leads to disaster. The system we have works provided governments can learn to keep their books balanced.

A fiat currency system is a house of cards that depends on the confidence of the people using the currency. If this confidence is lost the system collapses. You make not like it but government back stops are essential to maintaining this confidence. The our system cannot cannot afford to allow multiple large banks to fail at once and that means public money will need to "subsidize" private enterprises in times of crisis.

Ummm... yeah that was pretty much my point. No government is going to sit there and let the economic framework collapse when they have the power to confiscate an unlimited ammount of labor/production from not only people here today but people that arent even born yet, and dump it into the system to keep it going, and push dealing with the real structural issues off onto someone elses watch.

Of course you will want to start arguing about changing the system but monetary systems are pretty fundamental and messing them up leads to disaster. The system we have works provided governments can learn to keep their books balanced.

Nope Im not arguing we should change the system because I think thats fundamentally impossible. It changes on its own. My interest here is not that of an activist that wants to change anything. Im just curious what will come next.

And the present system makes it almost impossible to balance the books and maintain price stability at the same time because the economy cant grow unless the money supply grows and the money supply cant grow unless debt grows.

If the economy grows and the money supply doesnt grow then you have deflation and your currency is no longer a dependable unit of trade (people line up at the banks to take their wealth out and invest it in commodities and then the banks fail). And since 95-99% of the total money in existance is bank credit that is loaned into existance you cant increase the money supply without growing ammount of debt.

This is why they ease. Its to make sure that actors in the economy DONT balance their books. Thats why "Randy" from RBC phoned me this afternoon to ask me to borrow more money.

Edited May 2, 2012 by dre

[TimG]

And the present system makes it almost impossible to balance the books and maintain price stability at the same time because the economy cant grow unless the money supply grows and the money supply cant grow unless debt grows.

The fractional reserve banking system means that every dollar created for a loan is matched by an asset. So if debt grows then so do assets. It is not clear why you insist on ignoring the other side of the balance sheet.

[cybercoma]

I'll tell you one thing, I'm in the wrong business. I need to get into banking. You can make all the worst decisions possible, but the government cannot let you fail. You'll be bailed out with absolutely ZERO repercussions. Hell, even when you're not failing, you just have to pull the purse strings a little bit tighter and the government is throwing money at you. Let's stop pretending that parliament is somehow supreme. The banks say jump and the government asks, "how high?"