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VIEW: ‘Of bailouts and liquidity shakedowns’, by Jim Stanford

Jim Stanford

CAW economist Jim Stanford recently highlighted in his rabble.ca blog that Bloomberg Markets Magazine in the US lists all of the banks which received financial assistance from the US Federal Reserve during the 2008-09 crisis. He writes, “The Big Five Canadian banks are all on Bloomberg’s list. Together they borrowed (at peak) $28 billion from the US Fed, holding funds for as long as two years. …(But) the $28 billion in assistance from the US Fed received by our big banks pales in comparison, of course, to the line of credit worth up to $200 billion that was provided by our own federal agencies (including the Bank of Canada and CMHC) through Jim Flaherty’s Extraordinary Financing Framework.”

He notes, “The bankers have the gall to deny that this was not a ‘bailout’, but rather constituted normal liquidity smoothing interventions by the central bank. This is historically false, and morally offensive to the taxpayers of Canada who were on the hook if this emergency assistance proved to be insufficient to stabilize the banks. The reality is that our governments (and the US government, too, we now know) provided enormous sums of finance to the Big Five banks, at virtually zero interest, at a moment in time when commercial funding was unavailable.”

“Canadian banks, like any other leveraged private banking institution (lending out their capital 20 times over or more), faced a real risk of collapse if the crisis of confidence worsened. Having a $200 billion line of credit in your pocket, sure helps people have confidence in your future. And confidence is a leveraged bank’s main asset. So the banks were absolutely stabilized, and possibly saved, by these extraordinary government interventions. Whether you call that a bailout or a ‘liquidity injection’ is all in the semantics.”

Stanford concludes, “In response to that bailout, the banks owe the state and its taxpayers an enormous debt of gratitude. They should also be more co-operative when it comes to the taxes and regulations that would help to prevent this kind of crisis from arising again in the future. At a bare minimum, they should lose the arrogance which characterizes their self-righteous, whiny denials that they ever had to turn to the nanny state for their own survival.”

The full article can be read on rabble.ca at http://rabble.ca/columnists/2011/12/bailouts-and-liquidity-shakedowns and at the The Progressive Economics Forum at http://www.progressive-economics.ca/2011/12/01/of-bailouts-and-liquidity-shakedowns/.