The World Economic Forum has ranked Canada number one in the world for the soundness of its banking system.
Canada ranked just ahead of Sweden, Luxembourg, Australia, and Denmark. The United States ranked 40th, and Britain, 44th.
I see today that the Federal Reserve has stepped in to start buying commercial paper, and this seems to be garnering some cautious praise in the financial community. By offering to step in to the role traditionally played by money market funds, the Fed is not only trying to prevent a seizing of the broader economy, but to inspire confidence in the traditional players to get back in the game again.
This direct entry of the Fed into the market got me to thinking. Wouldn’t this be a great time to start a Social Security investment fund? I’ve written before about how the Social Security “trust fund” isn’t a true trust fund. It holds only U.S. Treasuries, and is really just a theoretical promise–more accounting gimmickry than trust fund. I contrasted this to the Canada Pension Plan Investment Fund which is a true segregated trust fund, managed by an investment board with a mandate to invest and grow the premiums of plan contributors.
I’m just spitballin’ here, as they say, but with stocks trading at fire sale prices, wouldn’t this be an opportune time to turn the Social Security trust fund into a real, honest-to-goodness trust fund for the benefit all Americans now paying into it, and who face the very real possibility that they may never see a dime from it? The trust fund could start taking the billions of dollars that Americans pay in premiums and investing them in American businesses to prop up this flagging economy, instead of playing the current con game wherein the government borrows from the public pension to finance whatever money-burning gambit it happens to be on at the moment.
But then again, this is probably just crazy talk. Why invest in yourself when you can just mortgage the country to China?
Over the past couple of weeks, I’ve written several posts in which I asserted that Governor Sarah Palin was not sufficiently qualified to be the Vice President, nor, in the event of some calamity, President. I even went so far as to suggest that she step down, and I suggested that John McCain had demonstrated a serious lack of judgment through his selection of Palin. I stand by my assertions, but I want to elaborate on why I think this is so important.
The financial issues currently facing the United States, have global consequences. It remains to be seen if the current financial crisis will prove to be as catastrophic as we have been led to believe it may be. But at the very least, it should be taken as a wake-up call. What we have learned over the past six months or so, and most strongly in the last two weeks, is that all of the world’s economies are linked in a complex web of debt. The global monetary system relies on a constant flow and cycling of debt in order for economies to function, and no nation relies on debt more heavily than the United States.
We have all become familiar with a new phrase during this crisis–”too big to fail.” Fannie Mae, Freddie Mac, and AIG, were corporations which were deemed to be, too big to fail. In other words, if they collapsed, the whole system would collapse with them. I suggest to you that the United States is itself, too big to fail. This is why I am so concerned with the quality of the leadership of this nation. The risks of getting it wrong are enormous, not just for the United States, but for the world.
The fact is, at this point in time, neither Republicans, nor Democrats show any signs of getting it. The Republican ticket promises more war along with spiraling costs in the trillions of dollars, and the Democrats promise universal healthcare when ultimately the nation cannot afford the Medicare and Medicaid it already has, nevermind Social Security. Both parties just agreed to put another $700 billion on the national credit card. The only people who do seem to get this are unelectable fringe candidates. While they understand the fiscal crisis, they are politically unpalatable, and in some cases, out to lunch on other issues.
Politics have deadlocked the United States into following an unsustainable fiscal policy. The problem is now so bad, and so deeply entrenched, that any politician even suggesting a cure, commits political suicide. It is politically more expedient to carry on as usual, and hope that somehow the nation can spend its way to prosperity. The most dangerous thing about that strategy is that it actually works, for a while. In historical terms, it doesn’t work for very long, but in relation to human lifespans, and political lifespans, it can work for quite a while. So, we end up deluded into thinking that if we just throw more debt at the problem, the economy will outpace the debt.
But compound interest doesn’t work that way. As the debt grows, more and more of the country’s productive capacity goes to servicing the interest on that debt. I would compare it to a consumer who only makes the minimum payment on their credit card, but it’s worse than that. Credit cards have limits, the U.S. Government does not–at least it’s not a fixed limit. The limit is, whatever amount the rest of the world is willing to lend to Uncle Sam. The question is, at what point does the rest of the world say, “You’re credit’s no good anymore Sam. Time to pay your tab.”
I believe the world is starting to seriously ponder that question right now. Other nations have gotten the wake-up call, and have realized they need to take steps to insulate themselves from massive financial failures like the ones we’re seeing now. I don’t think it’s unreasonable to draw a parallel between the balance sheet of the United States, and those of corporations like Fannie, and Freddie, and AIG. I also don’t think it’s unreasonable to assume that America’s creditors are drawing the same parallel, and seeing another “too big to fail” situation. Only in this instance, no one will have the capacity to launch a bailout. Everybody gets hurt.
This is why I harp so much on poor Governor Palin, and John McCain for having chosen her for purely political reasons. Palin not only doesn’t get this kind of stuff, she doesn’t want to get it. She thinks that if she can get by on a wink and a smile, then America can too. It can’t. McCain doesn’t want to get this either. He is a man of singular vision, who has come to believe his own war hero mythology, and would like to extend it to another war, or maybe two, or three. He would sooner bankrupt his nation in pursuit of victories that just aren’t there to be had.
I could go on about a lot other things which have gone wrong in America over the last eight years, like imprisonment without trials, torture, secret interrogation facilities, warrantless wiretapping, the abandonment of international law, etcetera, etcetera. But as reviling as these things may be, none of them has sparked the kind of outrage and concern as has the current financial crisis. “Guantanamo shmantanamo! What’s happening to my 401(k)!?!” If any issue can galvanize Americans to a cause, it may just be a threat to their collective wallet.
Barrack Obama is far from perfect, but in him I can at least see a man of intelligence with an open mind. It is that open mind which distinguishes him from his competition. It will take a willingness to accept new, and painful realities if America is to climb out of the hole it has dug. If this sounds alarmist to you, that’s because it is. But this crowded theater, really is on fire.
I’ve spent a lot of time during the past two weeks poring over the financial news, trying to wrap my head around all of the events that got us to where we are today. It isn’t easy to understand, and the financial media does a horrible job of explaining it. Fortunately, we have National Public Radio, and This American Life to save the day. This is the second time I’ve plugged this because it really is that good.
If you find yourself frustrated, as I did, trying to understand this whole mess, take some time to listen to these two episodes of This American Life. The first show, The Giant Pool of Money, first aired back in May. You can stream it, or download it for 95 cents. The second show, Another Frightening Show About the Economy, first aired on Friday. Check your local NPR station for air times, or just wait a week, and it will be available for streaming and download as well. I can’t praise these shows enough.
If you want more on the subject, the creators of the show have also started the Planet Money Podcast, and the Planet Money Blog.
The party is back on! Everyone please resume your normal irresponsible spending behavior.
I can see why this bill was passed too. What was missing from the previous bill was tax relief for Oregonian arrow makers, and Puerto Rican rum. Key sticking points, I’m sure you’ll agree.
The Dow Jones Industrial Average dropped 778 points (6.98%) to 10,365. Perhaps more indicative of market perceptions though was the almost 9 percent drop in the broadly based S&P 500 Index. It fell just over 106 points to rest at 1106 at the end of trading.
In Canada, the Toronto Stock Exchange followed suit with a drop of 841 points, or 6.93 percent.
Markets were reacting to the U.S. congress failing to pass the $700 billion bailout package proposed by the U.S. Treasury and the Federal Reserve.
It is becoming painfully clear though that this is not just a U.S. problem. Europe has now seen four bank bailouts in the past few days. Money markets around the world have frozen up, with banks unwilling to lend to one another because nobody trusts anybody anymore. The fallout of this may soon be that non-bank corporations who rely on short-term borrowings to finance daily operations may be the next to fall.
Update: It’s worth noting that in percentage terms, today’s drop in the market is nowhere near being the worst. During the 1987 crash, the Dow dropped 22.6% in a day.
Here’s something you might not have known about the Federal Deposit Insurance Corporation (FDIC) which insures client deposits at U.S. banks. According to Derek DeCloet of The Globe & Mail:
the deposit insurance fund, at $45-billion (U.S.), could probably handle only one or two WaMu-sized busts before it runs out of money, which would force it to turn to the U.S. taxpayer for a loan.
How can that be? The United States, home of more than 8,000 financial institutions, has had relatively few of them go broke since the savings-and-loan debacle, and that was nearly 20 years ago. Only three small FDIC-insured banks failed last year and none in 2005 and 2006. There has been plenty of time to build up the fund. But it hasn’t happened because some genius decided, back in the mid-1990s, that the deposit insurance fund need not save too much for a rainy day. So for the next decade, most U.S. banks got a holiday from sending their dimes to FDIC.
See full article: Solvency Street is paved with pain
A couple days ago, I wrote about a Merrill Lynch Canada report which warned of trouble ahead for the Canadian housing market. Now a Scotiabank report highlighted in a Globe & Mail article makes the case for why the Canadian housing market won’t melt down like it has in the U.S..
The Scotiabank report makes some valid points about the differences in the lending landscape between Canada and the U.S.. There is no question that Canadian institutions did not engage in the same type of lending tactics as we’ve seen in the U.S.. I agree that the Canadian banking system is, in general, much more stable than that of the U.S., and I agree that we shouldn’t see the domino like effect that we have seen in the U.S. which has brought down multiple institutions.
But while it’s reassuring to know that the system may be more sound in Canada than in the U.S., the report still makes no mention of the potential consequences of a prolonged downturn in the U.S. economy. I think that’s an important point, because while Canada might not see the massive defaults and institutional failures of the U.S., it could still see sharp corrections in some of its more inflated markets that could affect a lot of people.
My thoughts on the subject are simple. I don’t have any charts or data. This is purely an armchair economist’s analysis of human behavior, so take it for what it’s worth. Whenever times are good, and money is plentiful and cheap, people overextend themselves. This applies equally to individuals, corporations, and governments. When signs emerge to suggest a change in the economic climate, people convince themselves that these are false positives, and that “things are different this time.” Eventually history repeats itself, the economy takes a dump, and then people go around saying they won’t get fooled again…until they do.