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The Progressive Economics Forum

Laughing All the Way to the err…Bank

The Canadian Bankers’ Association must be happy.  They’ve somehow managed to convince pundits south of the border, and even a few here who really ought to know better, that they’ve somehow been able to weather the economic and financial storm with absolutely no help from the federal government.

The most recent evidence for this position is this editorial by Newsweek editor Fareed Zakaria.  Fareed is a fine writer and a lot of what he has to say in this article is sensible but his fact-checking needs a bit of work because it is simply not true that Canada’s banking sector has not faced any calls for bailouts or interventions.  In fact, the federal government has intervened, and aggressively, by exchanging rock-solid highly liquid government debt (a value of zero when measuring risk-weighted assets) for illiquid mortgage assets (counted at full value in risk weighted capital/asset ratios), all in the name of helping grease the wheels of finance.

We  can quibble about whether the feds will come out ahead on this exchange — the Finance Department, the Parliamentary Budget Officer and Mark Carney (by implication — 3.8%? what is that guy smoking?) seem to think so — but the bottom line is that this exchange wasn’t done out of the goodness of anyone’s heart.  It was done simply because the banking sector was and is in trouble (hang onto your dividends – the grim reaper of recession is coming).  The government intervened.

That’s not the only thing the federal government has done to help the banking sector get through this “tough patch”  (can we say “L” shaped folks?).  They’ve also changed accounting rules that essentially allow the banks to delay the kind of dramatic writedowns on loan-losses that would send shudders of fear through the financial sector. And let’s not even get into the Bank of Canada’s willingness to take on a lot of truly dubious assets as collateral (hello ABCP market … feeling limber are you?) or the feds backstopping the whole ABCP rescue effort.

Don’t get me wrong.  I’m not sure any of this is wrongheaded (although all things being equal, I would favour Duncan Cameron’s public utility proposals) but to characterize this as “no bailout and no intervention” is simply wrong and whitewashes history.  Worse yet, while Fareed may be right in praising our vaunted regulatory system, he fails to recognize that the CBA has been using the crisis as an opportunity to push for Canada to align its accounting standards (see above) with the same global “best practices” that got the world into this mess.

And don’t get me started on the budget’s proposal to repeal the infamous (for tax geeks) Section 18(2) of the Income Tax Act, a provision that would have had implications for bank lending to domestic firms investing abroad and which would certainly have added generously to the fed’s tax take).   The subject of another post.

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Comments

Comment from Leigh Thomson
Time: February 14, 2009, 7:40 am

thanks Arun, this is very helpful commentary.

Comment from Paul Tulloch
Time: February 14, 2009, 3:08 pm

We need to have the opposition step up to the plate and demand a whole lot more information on these issues.

Also as stated by Duncan C. we need a hell of a lot more exposure on what is occurring with the bank sector bailouts.

Similar to the US, everyone is now asking, where did all the money go and exactly what was it used for.

We Canadians sure do seem to like the back seat, or at least the business and political elites seemt o think so.

I think this would be an excellent project for the CCPA. We need more disclosure on what is happening with our banks and the public money they have been provided with.

How much is the public purse being raided, funny not once in the Canadian media have you heard executive compensation mentioned!?

The opposition parties need to start mounting a campaign.

paul t

Comment from Eric Pineault
Time: February 15, 2009, 1:26 pm

Just a small comment, concering the use of the letter L. The head of IMF has dropped the D word last week. I know the NBER and other agencies don’t have an official definition for a depression, so we are stuck qualifiying the R word with various letter shapes. Now is there a difference between an L shaped recession and depression ?

Comment from Leigh Thomson
Time: September 20, 2009, 12:18 pm

http://www.thestar.com/business/article/698043

“..Canadian banks have been famously solid throughout the financial crisis – and bonuses are not a contentious issue domestically because banks have not had bailouts..”

v.s., from above,

“In fact, the federal government has intervened, and aggressively, by exchanging rock-solid highly liquid government debt (a value of zero when measuring risk-weighted assets) for illiquid mortgage assets (counted at full value in risk weighted capital/asset ratios)…”

“…They’ve also changed accounting rules that essentially allow the banks to delay the kind of dramatic writedowns on loan-losses that would send shudders of fear through the financial sector. And let’s not even get into the Bank of Canada’s willingness to take on a lot of truly dubious assets as collateral (hello ABCP market…”

“to characterize this as “no bailout and no intervention” is simply wrong and whitewashes history.”

I think its important at this point in 2009 for the public to clearly understand the Canadian ‘bailout’, so that we demand the necessary changes to the financial system materialize, and so that we can demand the public services supports (not cuts) and expanded investment for green employment/ fair transition strategies, etc. which will get the real economy into positive territory.

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