Canadian Lenders Assurance Facility — more bank bailouts?
October 23, 2008 · By Charles Anthony
This Canadian Lenders Assurance Facility sounds like one more bailout in disguise. The government is backing loans that nobody else will insure. How is that possible? It is possible because the government can print money and extort taxes.
If what the minister says is true, why are we not seeing insurance companies from “around the world” taking on the risk of these insured mortgages which “provide a reliable backstop for Canadian mortgage-backed securities, which are well accepted around the world” instead of the government? The truth is that these securities are only accepted because the people around the world expect the government will bail them out — at any cost, I might add — when they fail. I say let them fail. The more bitter truth is that the insurance companies and the banks do not have any money to do so even if they wanted to — their money depends on constant inflation of the money supply.
This temporary program will be offered to lenders on commercial terms so there is no expected fiscal cost.
Why is he calling it temporary? It makes no sense to call this temporary when the mechanism and the reliability of these markets hinges on bailouts.
No expected fiscal cost? Yeah, the money will fall from the sky!
Many countries have recently announced new and comprehensive policy initiatives to restore or protect the stability of their financial systems. “I welcome the decisive and far-reaching actions that many countries are taking, which will provide critical support to financial stability,” said Minister Flaherty.
I beg your pardon, Mr. Minister? Countries around the world are just printing money, nationalizing their banks and now you are doing the same.
Ladies and gentleman, friends and neighbors, get ready to enjoy more socialism and price inflation in Canada.
I don’t think you understand what the government and BoC are offering, it is NOT a bailout of any kind.
They are simply offering loan insurance to Canadian banks. Banks that participate BUY the insurance at commercial rates. This is not printing money, it is a government sponsored insurance policy. Its true that if the premiums don’t cover the payouts then the BoC will end up ‘printing’ the money, but then that’s the role of the Bank as lender of last resort. It may even happen that no banks take up the insurance offered.
This is starkly different from other countries that are indeed ‘printing money’ by purchasing shares in banks, issuing T-Bills and performing open market money transactions.
Mr. Zoop,
Shame on you. I do not think you should be able to get away with misleading the public about the inflation of the money supply. There is nothing starkly different between:
1) the government printing money and handing it over to the banks
2) the government blessing the printing of money by the banks themselves.
Purchasing shares, issuing treasury bills and open market operations do not change a thing. They are all just devious ways in which the government conceals how it picks winners and losers in the markets for money.
Here is a new book: The Ethics of Money Production that you might find interesting.
Don’t shame me for challenging your characterization of insurance offer as a “bailout”. Its not a bailout, simple as that. Its basically an offer of commercial insurance on international loans, insurance that so far not one Canadian bank has purchased. No public money has been spent, nor would be spent even in the worst-case scenario. Its not a government bailout.
The loan insurance, if purchased, covers 1/5 of failed intra-bank wholesale debt from abroad, and it acts like a stop-gap should these loans fail. If that happens, the insurance will allow Canadian lenders to continue short-term lending, which lets small businesses meet payroll, etc. The insurance basically insulates the Canadian economy from internationl financial shocks, and puts Canadian financial institutions on equal competitive footing with banks in other countries that already enjoy the benefit of such loan guarantees. Its not a government bailout.
I take your point about there being little difference between the BoC creating money and the BoC ‘blessing’ the creation of money by the chartered banks. But then that is just how the system works, in fact almost all money is created by the chartered banks anyway. But that’s just the mechanics of the monetary system, its not a government bailout.
I even agree the risks of bad debt should be real, and it would be a problem if the loan guarantees removed all risk from the equation. But since the insurance must be purchased at a 1.85% premium and covers only 1/5 of the wholeale loan, there is plenty of risk left in the transaction to scare our banks away from aquiring bad debt.
I acknowledge the BoC will essentially be printing money IF payouts exceed premiums, and I say again that while innovative this approach is congruent with the legitimate role of the BoC as the lender of last resort. Its not a government bailout.
Mr. Zoop,
You most definitely should be ashamed of yourself. This is a bailout because the government is blessing the banks with the printing of money that the banks would not otherwise print.
So, on a pedantic level, you are right, it is not a government bailout but that is not what I called it. I am calling it a bailout. Period.
The banks are bailing themselves out with the blessing of the government. That makes it a bailout and it is paid by the tax-payers pay for it through price inflation.
“That makes it a bailout and it is paid by the tax-payers pay for it through price inflation.”
The jury is still out on this. There are plausible scenarios that suggest that inflation is not going to be a problem. Rather, we will head into a period of deflation.
What do you think should be happening Charles? Let credit freeze up and watch the value of our investments plummet even more than they already have? I don’t like socialized losses, but what other realistic options were available in your opinion?
Ryan,
Yes, the inflation of the money supply should stop. The alternative is socialism. You, yourself, seem to be struggling with that cognitive dissonance. You recognize that artificial wealth is being propped up by printing money but you say you do not like it. No wonder the “jury is still out on this” because the “jury” is generally comprised of people whose wealth thrives on inflationary monetary policy or people whose academic lives would be thrown out the window by free market forces.
I can not think of anything more “realistic” than putting an end to printing money that is backed by nothing but the promise to tax future generations. Encouraging malinvestments by printing new money does not sound like a strategy for success to me. If you think otherwise, take a look around. It clearly does not seem to be working.
Mr. Zoop keeps saying “that is how things work” but eventually you are going to run out of credit-worthy customers. Then what? You can not keep expanding loans to keep your artificial wealth flowing. I think we are there already. The central banks can only delay the inevitable and exacerbate recessions if they actually occur.
[...] the money first into the hands of the bankers seems to be the priority of our [...]
This is not a bailout. The government is not printing money, it is borrowing it. The government makes a 1% profit. It borrows at 3% lends at 4%.
[...] Maybe eventually — after the Fed prolongs the recession and fuels malinvestments — more Americans will wake up to the fact that inflating the money supply is not about stimulating the economy nor about helping the public. It is all about giving new money to the banks first. In Canada, such monetary inflation goes unnoticed or without debate. [...]