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Globe editorial

The paradoxical peril of thrift

From Thursday's Globe and Mail

Latest comment posted at 5:41 PM EST 22/12/08

Canada's chartered banks need to ask themselves if, by hoarding their capital, they are contributing to an avoidable downward spiral ...Read the full article

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  1. Ruth Walker from Edmonton, Canada writes: The banks should not be confused with philanthropists.

    A lot of folks are in wait-and-see mode right now. I don't blame the banks for wanting to see the next few months play out, before they pick the winners and losers.

    The elephant in the room is corporate paper. Just about everybody upstream of the Big Three is stretched to the limit on receivables, and that has the dominoes lined up like they are caught in a magnetic vortex.

    And that economic dependency structure is why the blackmail game the Big Three are playing south of the border is so effective. America is about to go into paralysis, and it isn't clear that the new administration can do a damn thing to stop it, especially in the long run.

    In terms of every fitness measure, the Big Three deserve to go the way of the dinosaurs. Nobody would shed a tear, except the rest of us are being sucked down the drain with them.

    America can afford to play rich and stupid, much more than we can.

    Economic intervention in our case needs to be surgical. Banks are in no position to assess which moves can save the game for the rest of us. That job will fall to government. (Too bad we elected such idiots. Doh!)

    Here in Canada, it might be best to pay salvage value for any plants that close, and retool for production of green products. Following the American lead in the vain hope that we will get to keep our share of the auto industry, is just hurting ourselves in the long run.
  2. Robert M from Canada writes: The full text of Mr. Carney's December 17th speech is posted on the Bank of Canada website. In his address, he acknowledges that the availability of credit tighened up significantly in September of 2008 in Canada. The credit crunch in Canada is not unique to Canada. Central banks in most major countries have lowered their rates to near zero (the Fed did so on December 16th). This is an indication of a global problem where banks are essentially not willing to lend to one another. Policy makers need to consult with leading economists to explore what the viable options are when faced with a "liquidity trap" which has global causes. Central banks only have a limited number of policy options open to them. In the meantine, viable operating companies are facing the challenge of sourcing funds where banks are only willing to lend to their most solid customers. Governments should consider what prudent actions that they can take to make credit available to businesses on a temporary basis. For example, the Economic Development Minister for Quebec announced a program on December 17th that involves direct loans by the provincial government, and guarantees of bank loans (which will encourage banks to actually make the loan). This looks like a sensible approach which is not simply handing out money. The criteria for eligibility are reasonable; companies with a history of positive cash flow, and which do not benefit from other government financing programs. It will be interesting to hear from the Quebec business community as to how effective this program is in practice. In principle is looks like a well-thought out attempt to really help operating companies which are caught in a credit crunch.
  3. steve allan from Canada writes: ------If any country is financially positioned to survive the world's economic crisis in decent shape, it's Canada.-------

    Another smug statement that has no merit. I wish the people who spread these convictions would back them up with some factual arguments instead of indulging us with their complacent fantasies.

    I don't think Canada is very well placed to weather this serious economic downturn. On the contrary we are one of the most vulnerable economies in the world since we do not control much of our industry and much of our trade is with a nation that is going through a wrenching period of dislocation. At least the Americans control their destiny, we on other hand, do not. The largest economy in the country, Ontario, is nothing more than an American branch plant economy.
  4. Ronald Beer from Peachland, Canada writes: In the 1930s it was thought that by saving one could get out of the slump. This was later shown to be the exact opposite of what should have happened. Dring the mid to late 1930s Hitler started rearming Germany which forced the allies to do likewise. In some part it was this government spending on military forces, weaponry and munitions which helped Canada and the USA get out of the depression.

    Carney is right. The banks have to lend. In an advertisement in the Daily Telegraph [respected UK newspaper] HSBC was advertising they have £15 billion available for consumer loans. Basically the ad said "come and get it".
  5. Canadian in France from Canada writes: Big 5 - don't be shy .... Interesting point from Ronald Beer. The banks can be more aggressive. I live in France and the website of my bank is pushing money like crazy now ... it says it has already loaned out 73 billion euros on consumer and small business loans and that is a 19% rise over 2007 and they have even more available. Here things are working at least on that front.

    PS And people even get car loans to buy the Ford products (like Fiesta) that are popular in Europe now ... made and assembled here with efficient production streams ...
  6. WS Toronto from Toronto, Canada writes: The upper two-thirds of the Canadian households, in good times, spend a lot of money on things we don't really need. In a tough period like this, we cut way back on discretionary spending and pay down debt. This is a wise and prudent course for households, but for the economy as a whole, it's a disaster.

    For capitalism to recover from this tailspin, we need to spend again on things we don't really need and sink back into debt! Ain't this a wonderful system?
  7. F B from Montreal, Canada writes: To WS Toronto from Toronto, Canada who writes:
    "For capitalism to recover from this tailspin, we need to spend again on things we don't really need and sink back into debt! Ain't this a wonderful system?"

    Very true. For the last decade the planet was on a feeding frenzy, plundering resources. We gave faith to idols that were in fact corrupt individuals in the money system in order to sustain our basic instinct of fear, not having enough, the bigger the better. Now the gods are angry and we implore them to come back. I'm not too good at that but it's like reading the bible in today's paper. We have to rediscover the values you're advocating. This system is unsustainable as we find now and as you write with wisdom.

    Thank You
  8. Doug F. from Hanmer, Canada writes: "The upper two-thirds of the Canadian households, in good times, spend a lot of money on things we don't really need. "

    So essentially in an era of 'money for nothing and chicks for free', the basis for the economy has become " spending on things we don't really need". Wonderful.
    And to complete the picture it's not just that there was 'surplus' money available to purchase all this junk so it was legitimate discretionary income. A LOT (indeed, maybe most) of the mad consumerism was funded by easy credit, so that now in addition to the fear factor involved, most everyone has a debt load that would choke a horse.

    Why this little WORLD miss-step sounds easily correctable to me. Nothing structurally unsound about this state of affairs at all. In no time at all the sun will be shining again, the birds will be singing in the trees, and 11 year olds will be demanding and receiving I-Pods just for giggles.
    But in the meantime ------
    Anyone want a really nice bridge I have just discovered on my property ? I can make you a very fine offer. It's a great deal. Trust me.
  9. Misery No one from Toronto, Canada writes: Let me see ya want me to spend wot I haven't got n can't pay back.
  10. S Rankin from Chatham, Ontario, Canada writes: "If any country is financially positioned to survive the world's economic crisis in decent shape, it's Canada". How does the Globe define decent shape. In comparison to the US we will do better but that is not saying much. Canada is a trading country. Our largest trading partner is the USA. The American economy is on it's knees, on it's way to the floor and then the ICU. Thousands of US banks are insolvent. Loose regulations, dangerous business practices and abuse of leverage on a gigantic scale in the US have built a house of cards not unlike Madoff's creation. Trust and confidence, the life blood of an efficiently running economy is in tatters all around the world. The US in now in a liquidity trap where despite zero interest rate policy consumer loans are becoming harder to come by and progressively more expensive. This is why the D3 are in mortal danger. Some would like to cloud the situation by blaming auto workers for that. The situation in Canada is not as dire but we should not be smug about that. This recession here will be long and deep. Canadian banks cannot be forced to lend any more than consumers can be forced to pry open their wallets and spend. There are no magic wands and brow beating from the BoC will have limited affect. Banks are responsible first and foremost to their shareholders. What has been most illuminating about this crisis is how so many government types on both sides of the border, including our own prime minister have had been in complete denial of reality. Exhibit A was Canada's November economic statement. Responses until recently have been counter productive, dangerous and in addition to all of the other problems that we will face in the coming years we risk igniting class warfare as more people fight over a diminishing economic pie. What is most needed in Canada right now is credible leadership and an economic plan that will chart us through the rapids down steam. Sink or swim is not a plan!
  11. Dan Lowell from Vancouver, Canada writes: Threaten to nationalize the banks as the UK has effectively done. As the step prior to that, remove their top executives without compensation. Break contracts. Expropriate. Remind shareholders and executives that banks exist only because of federal charters and that their existence depends on serving a public good or those charters can, and will,be unilaterally revoked. Set a firm target for all financial institutions of the ratio of cash to loans.
    The worry here is that perfectly good business endeavours get crimped trying to weed out the bad loans. The entire point of banks diligence is to make this distinction. Hoarding infers they are not.
    Give 'em h-e-double hockey sticks.
  12. Dan Green from Palm Beach Gardens FL, United States writes: If Canadian Banks are in effect a monopoly why not just nationalize them, and then force them to lend money. To whom I am not sure, the car folks are going bye bye, and the Oil folks are in a holding pattern. We are not building any houses for the foreseeable future so we don't need 2x4's down here. We still need NB salmon, as Chile is too expensive.
  13. John L Stretlaw from Waterloo, Canada writes: Right. Nationalize the banks. The free enterprise system is being dismantled daily, anyway. Belief in the free enterprise system ended when the big three car companies, hat in hand, went looking for tax payer money, because they don't know how to compete. These are the same guys who designed-in rust pockets on their products through the '50's and 60's (no car got beyond it's third year without a rusting rocker panel) thumbed their noses at Japanese products, pee'd on the public and now hat in hand are looking for tax payer money.

    And that goes for their unions too. Both engaged in killing the golden goose.
    Free enterprise R.I.P.
  14. allen graham from BobcaygeonMazatlan, Canada writes: This ed-op is right on the money. But, will most Canadians understand the principles behind it, not likely.
    Banks have been burned before, usually their own doing, primarily because they must lend money to stay in business, and just depending on high service charges is not enough.
    Here in Mexico the reaction was swift, perhaps predictable. Most of my neighbors (vocinos) own their own homes, outright. Their cars are clean, well maintained. and look new, even if they are 10 years old.
    But no one is running to the bank to borrow money, in an area where many of the people (gente) have businesses or rental properties.
    The great "peso crisis" of 1993 weighs heavily, a strong lesson learned.
    At the same time many of the banks here are owned , partially, or controlled by Canadian banks.
  15. Brian Jones from Vancouver,BC, Canada writes: The people most hurt by this debasement of the value of money are those seniors who saved all their lives so they could have a reasonable retirement. However since early in this decade nobody seems to value money any more and it was and is still being lent out at ridiculously low rates so that consumers could buy things they don’t need and continue this orgy of unabated consumption. This has forced savers to invest in much riskier asset classes to maintain their life style. This is not going to end well.
  16. Art Vandelai from Burlington, Canada writes: Instead of focusing on the paradox of thrift, why not focus on the paradox of spending based on future earnings?

    People who have borrowed in order to consume and need to pay off their borrowings with dollars earned in the future generally feel less secure than those who have saved pruudently and built up a reserve.

    People who feel less secure are less confident. They do not invest.

    Let's encourage thrift, so that confidence can be restored, and investment can begin again. A succssful economy requires a balance between prudent savings and risk taking/borowing. In order to encourage thrift, we need to discourage borrowing above one's means to pay back in future. Higher interest rates will help to restore this equilibrium.
  17. Don Portz from Trochu AB, Canada writes: If anyone took a look at countries that nationalized their Banks and other industries over the past century would see the disastrous results to their economy. Also these same posters claiming we should do just that are also the ones that claim that the Govt is dysfunctional and cannot run what they have.. So that is what you want?? Give your head a shake!!!
  18. Edmond Marc du Rogoff from Ottawa, Canada writes: Some writers are suggesting the nationalization of banks. Other countries have done it. Part of France, Britain and Germany`s banks among others are nationalized for all practical purposes.
    Canada might take a somewhat different tack:
    1. Why not create a national bank, to compete with the Big Five Plus, and to have a leadership effect in a competitive market, perhaps commercial branches for the Bank of Canada?
    2. Make a condition of government help and guarantees to each individual bank that monies advanced would flow through to companies and individuals. The banks themselves put very stern conditions on their loans to their customers, why shouldn`t the government put conditions as stern on the commercial banks?
  19. Mike M from Canada writes: The reason that US banks are tight can be easily explained if one remembers that nominal interest rates are not the same as real interest rates.

    While the nominal interest rate target of the Fed is currently 0-0.25%, since the US is currently experiencing deflation this is actually a higher real interest rate than what the US had during the period following the 2001/2 recession. when inflation was anywhere from 1.5-4% and the Fed rate was 1% (thus a real interest rate of -0.5% - yes, the Fed paid banks to lend money).
  20. Mike M from Canada writes: 1. Why not create a national bank, to compete with the Big Five Plus, and to have a leadership effect in a competitive market, perhaps commercial branches for the Bank of Canada?

    Ever hear of Freddie Mac and Fannie Mae? Why expect anything different in Canada?

    2. Make a condition of government help and guarantees to each individual bank that monies advanced would flow through to companies and individuals. The banks themselves put very stern conditions on their loans to their customers, why shouldn`t the government put conditions as stern on the commercial banks?

    Why have the government loan money to the banks at all? The Canadian banks have had no problems going to the market and getting funding - why is the government getting involved at all?
  21. S Rankin from Chatham, Ontario, Canada writes: Forget about nationalizing the banks. This is not Russia. The BoC should do the same as the US fed reserve is now doing in the States and that is be the lender of both last and first resort. If the BoC competes against the banks then they'll loosen up. Problem solved!
  22. Ed Long from Canada writes: It is illogical to be printing stories of the PM predicting a possible depression and Finance Minister projecting negative growth next year and then have articles and op/ed pieces haranguing the banks to loosen up the credit strings the next day.

    IF Canada is in relatively good shape for the time when light appears, it is because of our very conservative banking policies and our historical risk aversion.

    Now, we are supposed to loosen the credit qualifications???

    The continual statistics can only tell what has happened behind us. We do not know what lies ahead. We do know all the economic superpowers have announced substantial stimulus packages in the past three weeks and nobody is calling them a final fix. The PM of Japan has said this global situation is one in a 100 year recession.

    And if any country knows how to hunker down and tough it out, it is Canada.

    But the Globe thinks we should let the purse strings loose and let the debt flow???

    What's next? An op/ed piece that the cure for addictions is increase the activity?

    We have moved from acknowledgment of the problem, to anger, and now, panicked stupidity.
  23. Ed Long from Canada writes: With the PMs latest announcement, it looks like we join the club of global major economic powers with a stimulus in the range of 1.5 to 2 times GDP.

    $22-30 Billion.

    We have no choice, and a properly designed stimulus will increase confidence, which is the real inhibition on present investment .... regardless of bank policies.
  24. Andrew P from Canada writes: steve allan from Canada writes:
    "------If any country is financially positioned to survive the world's economic crisis in decent shape, it's Canada.-------

    Another smug statement that has no merit. I wish the people who spread these convictions would back them up with some factual arguments instead of indulging us with their complacent fantasies."

    Sure. Canada's reserve requirements are about 40%, compared to the States' ~3% (personally I think we should just go for 100%), our culture is far thriftier so our economy is -not- built on consumer debt, the comments on this and many other news sites show an incredible depth of economic knowledge in the masses, we have an immense amount of national resources per capita, we've got a government that -isn't- printing money out of helicopters all willy-nilly, and our taxation levels are very low compared to other G20 nations.

    As for the idea that the US tanking is a -bad- thing (it is in the short term, don't get me wrong, if it vanished we'd be far better off in a year or two), Peter Schiff has a neat illustration of this idea in the introduction to this video:
    http://www.youtube.com/watch?v=8PIEGK0IbA4
  25. Fake Name from Canada writes: It was excessive lending that started this crisis in the first place. Try not to repeat it, guys.
  26. M. M. Pavan from Vancouver, Canada writes: "hoarding their capital"
    Uh, you meant "our capital", correct ? to the tune of 75 billion of OUR captial.
  27. Richard Hnatuk from Canada writes: MM Pavan, could you explain? It's your capital, only if you own bank shares. Shareholders expect the banks to be prudent with the money they invest. The economy is in free fall, would you take a chance on investing additional or new capital when we still can't see the bottom? Bank share prices have dropped, which means capital ratios have as well. Banks are required to maintain certain capital ratio targets. Institutional investors put pressure on the banks to maintain good capital cushions, so the banks are forced to issue shares AND maintain their dividends when these capital cushions go down. So yes, they are hoarding capital. Shareholders take their capital out if bank management takes too much risk.
  28. John Doucette from Manotick, Canada writes: Hoarding someone else's money, isn't that still theft?

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