As Pierre Trudeau is famously quoted: “Living next to [America] is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt.” (Source: Wikiquote) Well, these days our bunkmate has night terrors, and no one is sleeping very well.
It is with no small measure of pride that we see our banking system ranked as “…the soundest in the world” by the World Economic Forum (the US came in at number 40). Our banks are solvent, profitable, well regulated, and were not permitted to put themselves in the high-risk situations that are taking their tolls on the institutions of the rest of the developed world. Why, then, did our government feel it necessary to extend such dramatic fiscal support to companies that don’t seem to need it?
So why did Ottawa agree to insure the money they routinely borrow from other banks, a practice that keeps their credit operations liquid? Ironically, the troubled non-Canadian institutions that received capital injections and loan guarantees in other countries now carry a government seal of approval that tilts the playing field in their favor when it comes to borrowing. That leaves Canada’s big banks, including Scotiabank, TD Bank Financial Group, RBC Royal Bank and CIBC, at a competitive disadvantage. So the government acted to level the field, not to aid troubled banks.
What does this mean for us? The market will recover. Probably not tomorrow, maybe not even in a year, but it will recover. The real question is what to do with our money now, and in the near future. We have an industry whose stock prices have been punished just as hard as the rest of the world, but they’re still in good shape, with healthy balance sheets and capital reserves; this suggests that the Canadian economy is very well positioned to lead the way in the recovery.