Thursday, November 13, 2008

Why Canada has the "soundest" banking system in the world

The current world-wide economic crisis started with a meltdown in the financial sector which prompted governments to rush in and save banks from collapsing by putting their liabilities on the backs of taxpayers. This was for a time, save and except for Canadian banks, since Canada has the world’s best banking system and our banks were generally immune to the problems plaguing so many other countries.

Several central banks around the globe have been lowering interest rates charged to commercial banks by several points almost every two weeks to stimulate lending and borrowing. The Bank of England is even considering a zero interest rate policy.

All of this government interference has now caused Canadian banks to “appear” to be at a competitive disadvantage in borrowing money from other government-backed banks, according to Canada’s finance minister, so the Canadian government has stepped in to guarantee bank borrowing to the tune of $218 billion dollars. According to the minister, this will have no “fiscal consequence”, which in layman’s parlance means it supposedly will not cost the taxpayers a dime.

Well, maybe, as long as no bank finds itself having to draw down on the guarantee.

Earlier, the Canadian government committed $25 billion to buy up crappy mortgages (of which there are not that many in Canada). Since the vast majority of mortgages are held by Canadian banks, this was yet another taxpayer hand-out to the banking sector. It is noteworthy that although the share prices of many publicly-traded corporations in Canada have sunk to nearly record lows, Canadian bank stocks maintain their full value.

In the ensuing weeks since the credit crisis began, consumer confidence has dropped faster than the Hindenburg fell out of the sky. This means that the world’s economies are in recession. What is needed is a stimulus to consumers to encourage spending.

So what do Canadian banks do as their part in reviving the economy, now that the consumer-taxpayers have made sure that the banks are OK? Well, they screw consumers by raising interest rates and lowering payback thresholds, just as the Christmas shopping period launches. Next they will be advising the governments to give consumers a tax holiday on federal and provincial sales taxes in order that borrowers will have enough cash to pay banks these exorbitant credit card interest rates.

Thus ladies and gentlemen, we come to the end of our lecture on why Canada has the soundest banking system in the world.

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