Tuesday, March 11, 2008

Another bailout

For the second time in about three months the central banks of Canada, the United States, the UK, Switzerland and the Eurozone are bailing out banks having liquidity issues thanks to the sub-prime mortgage crisis. This time, another $300 billion in credit and debt swaps are being offered; with credit terms over 28 days instead of overnight as is usually the case. The US which is in the most trouble has extended $200 billion to its banks. Canada, which hasn't been hit as hard relatively, is releasing $4 billion.

In a sense, that is the role of a central bank; to be the banks' bank and to assist financial institutions for short-term crises. The current downturn has many more structural issues than just the sub-prime scandal, however, and taxpayers are going to balk at some point if it is they and not institutional investors that have to pick up the cost of paying off bad loans. This is not a short term issue and if the banks have had to have been bailed out twice in only 90 days it could be the sign of worse things to come.

It also points to another issue: Many people have wondered for years, why can't we just pay off our debts by printing off more money? The answer of course is that our creditworthy status would be seriously downgraded and our currency devalued. Yet by unleashing that much cash on the markets, it really is the equivalent printing off $300 billion of cash that didn't exist before 1230 GMT today -- or to be fair, money that's been hoarded in reserves. It's a monster that feeds itself.

Others have suggested central banks should be serving its shareholders -- i.e. its citizens -- rather than the banks, by loaning money to the government rather than having banks do so. That too would upset the balance.

If this really is another stopgap measure, as was the bailout in December, fine -- as long as we see results in terms of lower food and commodity prices as well as a return to solvency of the banks. But enough is enough. We shouldn't be held responsible for the bad debts of others. If you borrow money, you have to pay it back at some point. Nor should we be held responsible for rogue traders like the one at the SG bank.

One has to wonder who's upset the apple cart this time, that made the centrals move so fast.

Someone at the Caisse de dépôt, perhaps? That would make recipients of RRQ and Québec worker's comp payments very happy.

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