As Canada takes its vociferous opposition to a global bank tax back to the world stage next week, it can count on NAFTA partner Mexico as a staunch ally.
Calling such a levy a moral hazard and a “punishment” for those countries with healthy financial systems, Mexican President Felipe Calderon said his country wants no part of such a measure, designed to create a global fund to pay for future bank bailouts.
“If the global economy builds a fund in order to bail out banks, you can be sure that there will be bailouts in the future,” President Calderon said in an exclusive interview with The Globe and Mail’s editorial board on Friday. His message puts him firmly in the camp occupied by Prime Minister Stephen Harper; both men argue that banks would be more likely to engage in reckless behaviour again, knowing government would always be there to rescue them.
The battle lines are now becoming clearer as a growing number of emerging countries in the G20, including Mexico and Russia, line up on Canada’s side against the fund’s main proponents in the European Union.
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We do not have free or even healthy markets, overstretched taxpayers are already our banking system’s backstops through the Canada Mortgage and Housing Corporation, the Canada Deposit Insurance Corporation, and our fiat currency, which remove all risk from our banks and place the burden of risk squarely on taxpayers, acting to guarantee that future bank bailouts are a certainty. The Harper government bailed out our banks before they even needed it by purchasing $75 billion worth of mortgages. Our banks were never in much trouble because the 35 and 40 year mortgages that the Canada Mortgage and Housing Corporation had been guaranteeing, are so much more favorable to and profitable for the banks, than they are for new housing consumers, who should not themselves ever count on making a long term profit on their homes when they choose such longer term amortization options because the interest costs are so very much more, especially after they drive up the housing prices and costs that all consumers must pay. At some point overstretched consumers will reach their credit ceilings.
Whenever our governments manipulate our markets to their own ends, which they all do, less is preferable to more, so being as these longer term amortization options are so very profitable for banks, especially in the initial years of a mortgage where almost everything consumers pay is interest, $10 billion from taxpayers should have been more than enough to keep our banking systems liquid (if our bankers are really such geniuses why would they even need that?), the Harper government should definitely have stopped at the first $25 billion worth of mortgages it purchased, and since our banking system and housing markets were showing no signs of even being in much trouble, $75 billion is huge overkill which makes it a housing market manipulation. Relative to the size of our housing market, $75 billion is twice as much as G. W. Bush’s original TARP bailout expenditure, and enough to allow Canadian banks to sit on many hundreds of thousands of shaky mortgages for a decade or so waiting for markets to recover, rather than foreclosing on them at a loss that would, under normal market circumstances, act to push down prices. For free markets to work properly they must be allowed to correct themselves, and banks must carry some risk for the decisions they make that affect us all.
Such corporatism is nothing new in the world and over the long run such real estate market manipulations by governments always work out badly. Since the Second World War, corporatism has been the way of all things in Japan. When the Japanese used such methods they worked to mitigate a few real estate market cycle downturns until Japan appeared poised to purchase the USA, but it all came crashing down in the early 1990s when Japanese real estate lost up to 80% of its value just as consumer prices shot up dramatically due to very high inflation from near zero interest rate policies. Japan has been cycling rapidly in and out of recession ever since, has by far the biggest public debt in the developed world at over 200% of annual GDP, which is still more than twice the size of the USA’s debt, and Japan will never fully recover. How far do we really want to go down that road?
Just because another tax may not be the answer, doesn’t mean that an answer doesn’t still need to be found.
Who cares whether Mexico approves of anything Canada does? After that country’s President’s performance before Congress they can go take a flyin leap for all I care.
You’re not thinking this topic through BTDT. I said the other day that while the costs of the G8 and G20 appear exorbitant in “foresight” we don’t know what value we are going to get in return. I’m no Calderon admirer but apparently from what he has said Harper has worked his magic on him and that bodes well for many other countries which will be attending and which Harper may be able to influence.
It’s important as he continues his fightback against the nutty ideas originating in the EU this day as they continue to try and bail themselves out of a (in my view) hopeless situation. The latest is this so called “bank tax” which will be coming to a local branch near you if he doesn’t succeed and need I point out that the bank will lose nothing as they reach into your wallet to cover their losses.
We’re talking trillions of dollars here on a worldwide basis as the poor (the EU) try to rob from the rich to cover their own stupidity. Harper does not want to go there and neither do I.
Think Obama magnified by a thousand and what Harper may be able to do to throw a monkey wrench into their plans. You’ll feel better then.
Jack…I guess you hadnt noticed but we are broke and are running a huge deficit. We have got to get our financial house in order and this is not the way to do it.
I thought this was a conservative government that would show financial restraint. Let someone else host the G games.
And I see that a recent poll indicates 73% of respondents feel heads should roll. http://bourque.freepolls.com/cgi-bin/pollresults/157
And more from another right leaning blogger:
G20 budget madness
http://russ-campbell.blogspot.com
Re: 3. As usual you’re right, Jack. I wouldn’t have told him where he could go either, but it felt good to imagine he could be, if only for a moment. LOL
A billion dollars is small potatoes by government standards. McGuinty drives us a billion dollars deeper into debt every couple of weeks, and how often do we host the G8/G20 meetings? Every 8 or 9 years or so, which is not very often, and since every other G8 country took its turn to host and pay for the summits, how exactly could we weasel out of it?
Besides a billion dollars buys a lot of taser batteries, rubber bullets, tear gas canisters, bean bag rounds, pepper spray, vicious dogs, etc… so if the violent lefties bring their best game it should make for a few days of decent local TV for a change, which would be a few more than we get for the billion dollars we waste on the CBC every year. In fact I’m thinking we should divert the CBC’s budget to hosting the summits every year. Toronto’s annual event venues have grown quite stale, and its tourism and hospitality industries could use the boost.
“In fact I’m thinking we should divert the CBC’s budget to hosting the summits every year”
Bingo Brian.
I have no idea what an event like this should cost in a era of global terrorism, But am reminded of when John Manley accused Canadians of being cheap when he conceded that Canada was dining in the best restaurants without paying its way – or, as he put it, “You can’t just sit at the G8 table and then, when the bill comes, go to the washroom.”
“The Harper government bailed out our banks before they even needed it by purchasing $75 billion worth of mortgages.”
Brian, I think you are mixing a liquidly crisis up with a bailout. You are right , our banks did not need a bailout. But since liquidity had dried up at any LIBOR price , funding simply could not be found because the world’s banks did not trust each other. Therefore countries around the world started to guarantee those banks. That left our banks competing for funds against country risk and that was an insurmountable disadvantage, so Canada had to put our banks on a level playing field with global banks. In turn Flaherty took mortgages as security for that funding and I’ve read where Flaherty said it did not cost the taxpayer anything, that Finance Dept actually made money on those deals.
This topic of liquidity is not understood, it is very very complex yet it is critical to the movement and very survival of a global economy. This topic needs more work, more disclosure, the taxpayer is understandably confused. We will have more liquidity crisis, they are inevitable, that’s why the whole ‘too big to fail’ posturing in DC is such a joke. It’s just Politicians faking their ability to control things that are beyond them.
I’m not arguing that there was no liquidity crisis, just that for various reasons including the size of our market, the $75 billion the government threw at it could prove to be huge overkill, which can only affect our markets. As I stated, less is better than more with such things. Within a month or so of receiving that taxpayer money, Canadian banks started eyeballing US acquisitions, which they have since started to make. As a taxpayer, not only do I not need or want $75 billion worth of mortgages, I don’t need or want any failed US banks, and it matters not that the government made money, it shouldn’t be in the mortgage business. Exactly how much of that money has been returned then?
From my vantage point, until I know that all the money has been returned, it appears that the government could be been picking winners and losers, protecting banks and real estate prices on the backs of overstretched consumers. I know a couple of people who have not made a mortgage payment in well over a year and neither has received even the slightest amount of pressure from their banks to get with the program, so I know the banks have been deferring foreclosures, and that is not the way to a healthy market.
Actually, reading up on it to see how much if any has been payed back, it becomes even worse than I thought, since the amount was increased to $125 billion when the 2009 Budget was tabled. Relative to the size of our housing market, $125 billion is almost four times as much as G. W. Bush’s original and much more necessary TARP bailout expenditure which thankfully saved us all from a global financial catastrophe, and enough to allow Canadian banks to sit on many hundreds of thousands of shaky mortgages for as long as they might possibly care to. To put these activities into perspective, consider that at the end of November 2008, the estimated value of outstanding residential mortgages in Canada was $900 billion, so the government was holding 15% of all outstanding mortgages in the country. Temporary liquidity measure my ass, to me it still looks like a housing market manipulation to rival anything the Japanese ever tried. It doesn’t even seem possible to avoid accidentally picking winners and losers considering its scale.
.
I should add that everything I have found to read on the Insured Mortgage Purchase Program states that the purchase of these mortgages (actually securities, comprised of pools of insured residential mortgages) was meant to provide long-term stable funding to lenders, and had no restrictions on how or when the money from their sale could be used, which makes it a bailout. Also I have found no info on how many of these securities the CMHC might still be holding, if it has indeed resold some of them at a profit.
Thanks for an excellent series of posts Brian.
“Within a month or so of receiving that taxpayer money, Canadian banks started eyeballing US acquisitions, which they have since started to make.”
Brian you are neglecting to mention the taxpayer got HEALTHY mortgages in return for the liquification and those mortgages pay more than the cost of liquefying the market with the cost of government T-bills. The taxpayer made money on this.
Also the acquisitions that were done recently were paid for by banks issuing new equity over and above that required. The level of tier 1 capital required by the regulator is only 7% and the banks exceed that level by almost 2 to 1. Voluntarily exceeded it I might add, simply conservative management driven by the fact Bay St stock analysts essentially called for these high levels, not the regulator.
Paradoxically I would argue the next problem the Canadian banks are going to have is too much tier 1capital to justify the necessary returns to attract investors.
There is a night and day difference between bailouts and liquification.
Freddie Mac recorded a whopping first-quarter loss of US$6.7-billion and said it would need another US$10.6-billion to stay afloat. Fannie Mae announced an even more horrendous quarterly shortfall of US$11.5-billion, but claimed it would need “only” another US$8.4-billion in government aid.
This comes on top of the US$130-billion or so that the too-big-to-fail government interventionist entities have received from Washington so far.
The Wall Street Journal noted “Reforming the financial system without fixing Fannie and Freddie is like declaring a war on terror and ignoring al-Qaeda.”
Thankfully we do not have this problem in Canada but No Bank is an island. Again the Canadian banks were and continue to be in fine shape but without a 10 page thesis on liquidity versus a bailout it is hard to describe the liquidity contagion going on in the world markets. This is bailout data:
738 banks and other lending institutions in the U.S. have received direct
Government capital injections totaling almost $250 billion. The government of the United Kingdom has put more than $125 billion into its banks. The Netherlands: almost $53 billion. France $26 billion. Ireland $29 billion. Germany has set aside $107 billion for capital injections.
And the total amount of taxpayer dollars used to bailout Canadian banks? Zero.
We’ll get enough Dipper bank bashing, so I would caution Conservatives that Canadian banks are among the few healthy banks on the planet and represent one of the few export related industries we have in a knowledge based economy. When a Canadian bank buys a US bank it ends up processing a lot of the US customer service back here in Canada with well paying jobs. It is certainly fair to hold the Banks accountable IF taxpayer involvement is required to support them but let’s get the facts straight and not turn this into another ClimateGate tax redistribution game which is what the anti-capitalist EU and Obama want.
I didn’t mention it because it should not matter since the act itself would prop them up and make them appear to be healthy mortgages, when the real estate assets themselves may in fact be way overpriced, since most were purchased at the height of a housing market boom. My whole point is that by doing this we have no real way of knowing how healthy our housing market is right now.
Since our banks did not need a bailout to begin with, let alone one so massive, the Insured Mortgage Purchase Program could only lead to a manipulation of our housing markets, whether intensional or not. Banks invariably have to be under enormous amounts of financial pressure before they ever get on with the business of helping to correct our housing markets through foreclosing on and renegotiating with delinquent customers, because the falling prices inherent in housing market corrections have a negative affect on the amount of business they do, as well as the ease with which they can collect what is owed them, and therefore their bottom line. Also foreclosures are ugly and draw negative publicity for banks. Nonetheless, foreclosures remain an extremely necessary component of free market housing cycles, since market corrections cannot be complete without them, so allowing banks to have what amounts to a free hand in our Treasury during a recession, and thereby avoid having to foreclose on anyone until they are absolutely certain market conditions are in the bank’s own favor, seems just plain wrong if not stupid.
I don’t believe our government should be in the mortgage securities business, and it makes things worse if they turn a profit, since it represents a conflict of interest little different than Freddie Mac or Fannie Mae, except that our banks and the government itself are the beneficiaries.
“Since our banks did not need a bailout to begin with, let alone one so massive”
Brian that’s a contradiction. They didn’t need a bailout and they didn’t get one. What they got is liquidity. There’s a big difference
“My whole point is that by doing this we have no real way of knowing how healthy our housing market is right now”
OK Brian, that’s a very good question. It also ties into what we can probably agree on, that the taxpayer/consumer, the banks, the government are all in this together for better or worse. We need to be concerned about all the unintended consequences of policy arising from these ties. We need to have Parliament discuss these subjects to protect us from crony capitalism and conflicts of interest. But MPs won’t do that because it is hard work and they prefer to have lunch at Hy’s and chase non-scandals.
So let’s shrink the 308 MPs to 100 and get some really good MPs with real entrepreneurial experience instead of a bunch of failed lawyers. Let’s do the same for teachers, fewer teachers and pay them more in a meritocracy. Let’s turn the groupthink around.
The original intention was no doubt to provide needed liquidity, but over many months it kept growing and growing and growing far beyond what should have been needed for the purposes of liquidity, and this is what makes it seem much more of a bailout. First, $125 billion seems far too massive an amount of money to be used for the purposes of temporary cash flow relief. $125 billion is just under 10% of Canada’s entire GDP, or 15% of the total estimated value of Canada’s outstanding residential mortgages. Second, Ministry of Finance documentation indicates the money handed over to the banks from our Treasury was fungible and meant to provide long-term stable funding to lenders, which seems the very definition of a bank bailout, and far removed from any definition of a temporary emergency funding measure. Third, our banks should never have been in much trouble in the first place and they made several US acquisitions in 2008 and 2009, and also opened new branches in South America during that time, which they could not have done had they been suffering from severe liquidity problems. And four, the program does not appear to be for emergency funding purposes, since the original amount targeted for it in 2008 was $25 billion, which was some time later raised to $75 billion, and raised again to $125 billion when the 2009 Budget was tabled.
It is normal and even necessary for banks to have some liquidity problems and financial pressures during an economic downturn. What risks do banks ever actually carry if our government lets them correct their mistakes at their leisure using our Treasury?
Taxpayer/consumer, the banks, the government are all in this together for better or worse, but their interests often conflict, so it is difficult if not impossible for the government to prop up one without raising the possibility of having a negative affect the other, and so it shouldn’t even try, which is why it shouldn’t be in the mortgage securities business. If mortgages arranged by the banks are actually a good deal they should sell on the open market, and in the rare event that our governments have to intervene to save our financial systems, they need to take a very minimalist approach because less is better than more, in that it should pick fewer winners over losers. Corporatism is dangerous, we need to keep business affairs as far separated from state affairs as possible.
“First, $125 billion seems far too massive an amount of money to be used for the purposes of temporary cash flow relief”
Not against aggregate consumer borrowings of about a trillion dollars in the face of zero liquidity to fund them.
“it is difficult if not impossible for the government to prop up one without raising the possibility of having a negative affect the other, and so it shouldn’t even try, which is why it shouldn’t be in the mortgage securities business”
But our government has to provide liquidity if every other government in the world is doing that. It would be brave if not reckless to not do that. And why is it a problem if the taxpayer is actually making money on it?
“If mortgages arranged by the banks are actually a good deal they should sell on the open market”
They indeed do under “normal” circumstances but there was no funding available directly to banks anywhere in the world at any price.
“Corporatism is dangerous; we need to keep business affairs as far separated from state affairs as possible”
I couldn’t agree more. Brian clearly if you are against what happened here and you are economic savvy, I nearly always agree with your posts, then this thing needs to be explained to the taxpayer.
I don’t think Flaherty had any choice but to do what he did in this liquidity crisis. But since it will inevitably happen again, he should spend more effort explaining what he did and why he did it. A liquidity crisis will happen about every decade, always has, always will. This last one was about the worst ever seen, they might get even worse because we are more and more globally intertwined.
Total Canadian already overstretched, built up over all time, consumer debt was over a trillion dollars in 2008, so I still have trouble believing that our banks would need anywhere close to $125 billion or 10% of that high aggregate amount to keep on lending over a less than one year period when consumers should have been wary and borrowing down.
Banks don’t borrow all the funds they need to keep on lending, they also rake in money from fees for services like checking, ATM access, overdraft protection, and from credit cards and loans they have made. US Banks were much harder hit since US consumers, many of whom already had bad credit to begin with, found themselves underwater in their mortgages, and stopped paying their bills altogether. However, that just didn’t happen here in Canada because we were not in much of a housing market correction when the credit crisis hit, so our banks should not have had to borrow anywhere near as much to keep operating.
G.W. Bush only used $350 billion of the TARP money, the rest Obama later used to prop up GM etc.. $350 billion is 2% of US GDP, a minimalists approach but it worked to save the entire global economy. So, when I heard our banks might be having some much less important, and rather normal for a downturn, cash flow difficulties, I figured the Harper government would try 1% of GDP, and if it was certain that wasn’t working, maybe go to 2% after letting the banks sweat a little, raising the amount in small increments so as to stay within the boundaries of the delicate balance required to keep some pressure on the banks so our markets would keep functioning as they should. However, the government’s “liquidity” measures soon grew in leaps and bounds to 10% of GDP, which still seems huge overkill considering the differing circumstances.
As I stated earlier, when the Japanese repeatedly used similar methods they worked to mitigate a few real estate market cycle downturns until Japan appeared wealthy enough to be in a position to purchase the USA, but the truth was the Japanese had only just screwed up their own real estate markets, and it all came crashing down in the 1990s when Japanese real estate lost up to 80% of its value. Also taking into consideration Freddie Mac and Fannie Mae, such corporatism still seems way too dangerous, so I’m going to take a Tea Party stance, and hope our banks are either made to get through these things on their own or allowed to fail if no better option can be found.
“Banks don’t borrow all the funds they need to keep on lending, they also rake in money from fees for services like checking”
Sure and that’s what creates retained earnings or equity. The regulators say our Banks need 7% equity meaning the rest is leveraged, i.e. 93%. As stated before, our banks have a lot more equity than the regulators called for but banking is a leverage game and that’s why there is not much room for error or roiling in the money markets.
Brian, I’m a bit surprised how you keep comparing our ratios to those that blew up. You keep saying why aren’t our ratios like their ratios? Thank God they aren’t. Ours work, theirs don’t.
“so I’m going to take a Tea Party stance, and hope our banks are either made to get through these things on their own or allowed to fail if no better option can be found”
Well they simply aren’t made to get through a global liquidity crisis because they are highly leveraged. Sure you should let them fail if they lend to much to the Reichmanns but that’s different from a global systemic liquidity crisis from which there is no bank balance sheet strong enough to withstand. If we want our banks to finance our global trade then like it or not Canada, a heavily trading country, is in the global business of liquidity. To paraphrase John Donne: No bank is an island and therefore never send to know for whom the bell tolls; it tolls for thee.”
“You keep saying why aren’t our ratios like their ratios? Thank God they aren’t. Ours work, theirs don’t.”
Well, its because I have trouble seeing how if our ratios work while theirs don’t, our banks could have found themselves in so much difficulty that they needed that much money, because, since I understand that banks need liquidity my problems aren’t so much with the method, as they are with the large scale, and the potential for problems that come with it. It simply isn’t normal for ours or any banks to have that much cash on hand during an economic downturn.
Since $125 billion is a lot of money relative to the total value of our real estate markets, it has the potential to alter those markets in a big way depending on whose hands it happens to be in at any given time. For instance, if the government handed $125 billion back to taxpayers at the beginning of a recession, they would probably pay off their debts, which would have less effect on our real estate markets than would giving taxpayers $125 billion during an economic upturn when they would be much more likely to use it to purchase new homes.
Knowing it is normal and necessary for banks to have some liquidity problems and financial pressures during an economic downturn, otherwise housing market corrections would not occur, I don’t see how too much “liquidity” relief would not cause a problem by taking too much pressure off of banks, allowing them to act in their own interests. If all of the sudden during a recession banks have a lot of cash on hand, which is not normally the case for any bank, just as taxpayers or anyone else would, banks would no doubt use $125 billion in their own interests. Included in the banks’ own interests would be preventing a housing market correction. Therefore, what bothers me is that preventing a housing market correction is not in everyone’s best interests, and that $125 billion is more than enough to do the job.
I guess I should add that Jack posted an article on here some months ago stating that after having received $75 billion from our Treasury, our banks were flush with over $50 billion in cash and looking to make more US acquisitions, and it appears that they have received another $50 billion from our Treasury since. So that means our banks actual need for “liquidity” purposes was probably less than $25 billion or about 2% of GDP, still leaving up to $100 billion or 8% of GDP for spending sprees and market manipulations, etc..
“Since $125 billion is a lot of money relative to the total value of our real estate markets”
But those mortgages happen to be the instrument that the government finds acceptable at it’s discount window ( do they still call it that? Not sure) . It doesn’t necessarily mean the banks are going to relay the proceeds into the real estate market; again they simply needed it for general funding purposes. In other words everything isn’t match funded.
But speaking of not copying their ratios. Here’s neat cut and paste from a US Blog, wish it was original:
Canada 6, USA 3. we’re am not talking about hockey.
Hell, we expect Canada to kick our butts in hockey.
But when it comes to the economy, we are supposed to be the big brother.
Not anymore.
From the Toronto Globe & Mail “The Canadian economy expanded by a stronger-than-expected 6.1 per cent in the first quarter, the biggest increase in a decade, boosted by a hot housing market and consumer spending. The country’s gross domestic product grew at the fastest annualized pace since 1999. It has expanded for seven months in a row and climbed 0.6 per cent in March, Statistics Canada said Monday.”
Canada did this without an $862 billion “stimulus” to an over-stimulated economy. (my note: Ottawa has 16,000 projects underway with stimulus money , Washington shipped most of their money to the States who just used it to mop up their deficits)
The United States?
From Newsday, four days ago: “WASHINGTON — The U.S. economy grew at a slightly slower pace than previously estimated in the first quarter but the recovery still appeared solid, suggesting the economy could withstand fallout from the European debt crisis. Gross domestic product expanded at a 3 percent annual rate, the Commerce Department said Thursday, below its initial estimate of 3.2 percent.”
Hope. Change. Half as good as Canada.(end of quote)
Does this mean we need to keep an eye on the housing market? Absolutely.
And the Bank of Canada is doing that.
I would have left nothing to chance, probably threatened to stop after the banks first started making US acquisitions, and bought not more than a dollar’s worth of mortgage securities than the banks actually needed to sell for liquidity. If the Harper government had taken such a minimalist approach to it, I would have nothing to complain about, and I believe our banks would still be in fine shape.
My inconsistent English bugs me sometimes so I’ll try that again.
I would have left nothing to chance where our markets are concerned, probably would have threatened to stop the program after the banks first started making US acquisitions, and bought not a dollar’s worth more in mortgage securities than the banks actually needed to sell to remain liquid. If the Harper government had taken such a minimalist approach to it, I would have nothing to complain about, and I believe our banks would still be in fine shape.
“I would have left nothing to chance”
In the face of a global , systemic, liquidity crisis, I would leave “nothing to chance” either.
Therefore unlike the rest of the world taking over their banks I would support what Flaherty did; instead of taking over the banks and telling them how to run them like Obamanomics , Flaherty put up plenty of liquidity for our banking system. Why not? Particularly when the taxpayer makes money on it.
Brian we disagree on several fronts here.
- You are still mixing up bailouts with liquidity. If you want to worry about something in that regard worry about the overall Bank of Canada’s money supply policy and interest rate levels versus inflation.
- You also wrongly assume that with Flaherty’s liquidity that the banks are going to rapidly expand their mortgages and distort the real estate market just because they have government liquidity versus normal liquidity. That won’t happen because their risk analysis doesn’t change based on how they fund their liabilities, it’s based on the quality of their assets.
- You also believe $125 billion is a lot of money. It isn’t in the context of about a trillion in consumer loan products and somewhere around 2 trillion in assets of the Big 5 that needed to be funded daily in what was a dried up money market. In that context it is only 6% …you are quibbling over peanuts. It is risky to do that, that’s what happened in 1929.
Again Brian if you are bothered about this then you undoubtedly aren’t alone and Flaherty should clear it up. It’s a bit beyond even the mighty powers of blogdom.
I understand perfectly well that our banks needed liquidity, $25 billion worth so it seems. So I would have stopped there.
Our banks are now flush with $50 billion to $100 billion in cash. It is simply not normal for ours or any banks to be flush with that much cash during an economic downturn.
In order for our markets to work properly there are times when our banks need to be financially stressed. It is normal and necessary for banks to have some liquidity problems and financial stresses on them during an economic downturn, otherwise housing market corrections would not occur.
$125 billion is 10% of our GDP and it takes far less than that to prevent a housing market correction from happening properly. Just having the cash on hand at a time when they normally wouldn’t is probably enough to do it, and our banks probably wouldn’t even need to spend much of it. G. W. Bush needed only 2% of US GDP for TARP. Through a combination of deferral of foreclosures until a later date, a few investments, and keeping their banks flush with cash during a downturn, the Japanese used to mitigate corrections in their markets utilizing only a few percent of GDP, and in the end it worked out very badly for them.
It’s a low night here so I will add this. Housing markets and the potential problems with them aren’t all about sub-prime mortgages, or even numbers, there is also a huge psychological aspect to these markets, which is why they can be manipulated by governments and related industries, especially when they work in concert. Housing market fundamentals have been getting all out of whack on all four corners of the globe since long before anyone had ever heard of sub-prime mortgages, and in the past markets have seemed healthy and robust even though they contained plenty of shaky mortgages. Just because a bank approves and a government insures a mortgage, doesn’t mean the market won’t then be overbuilt, turning that same mortgage into a bad deal. Ireland didn’t build twice as many homes as it needed, and homes in Beijing don’t sell for 16 times annual incomes there because the numbers added up, but people still bought homes in those markets anyway, and the mortgages on those homes still looked good enough to get the approval of some banker, because housing markets are as much about going with the flow, and maintaining the momentum, as they are about numbers.