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Adventures in banking

The Canadian Centre for Policy Alternatives (CCPA) recently lobbed a grenade at the Canadian government and banking industry after uncovering some $114 billion in cash-and-loan support to prop our vaunted national banks, a bailout of sorts that every
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The Canadian Centre for Policy Alternatives (CCPA) recently lobbed a grenade at the Canadian government and banking industry after uncovering some $114 billion in cash-and-loan support to prop our vaunted national banks, a bailout of sorts that everybody in banking insists was not a bailout.

Does it matter?

The banks have reportedly paid back the low-interest loans from the Bank of Canada and U.S. Federal Reserve. Canadians were on the hook for $69 billion in mortgage backed securities that were sold off to the Canadian Mortgage and Housing Corporation, but the CMHC insured those mortgages anyway and the lack of defaults and foreclosures means the CMHC came out ahead on the deal.

The Canadian "bailout" was probably also the right thing to do. In the face of the biggest financial crisis since the Depression, the biggest priority was to keep our banks shored up with capital, and making loans and investments to keep the gears of the economy turning.

When credit dries up, awful things can happen. Homes don't get built or bought. Workers get laid off. Demand for goods and services plummets, and with it consumer confidence.

Truth is, history will show that the banks — and Canadians — are better off because of these loans and guarantees.

But it still wasn't all right, even if no harm came of it. We, the taxpayers, are the underwriters of everything our government does or fails to do, and we have a right to know when there's a chance we could get stuck with a large tab.

And the lies. Oh, the lies! Canadian politicians actually stood on the world stage and bragged about our great banking industry and strong economy. We boasted about our tough laws and regulations, our restrictions on mortgages, and the fact that we posted the highest economic growth of any country in the OECD during the downturn. These things are true on paper, but slightly less true if you consider the CCPA report.

Prime Minister Stephen Harper made the economy the centerpiece of his campaign, and all the discussion about the strength of our banks and financial sector probably had some kind of impact on the election in 2011. It's impossible to say how much, but I do think the debates and public discussions would have been a little different if Canadians knew the truth about the vulnerability of our financial institutions in the crisis.

Canada's banking industry and government was so lauded for its apparently exaggerated economic success that the Canadian dollar even became a refuge currency for other nations looking to bolster their own falling currencies and stave off inflation. That kept our dollar higher than it probably should have been, and while that's a good thing for Canadians looking to spend weekends in Vegas or trolling the outlet malls south of the Peace Arch, a high dollar is not as good for tourism, Whistler's industry, or exports. If it weren't for China buying up our resources to feed their economy, our own economic growth probably would have gone backwards.

And truly the banks are only part of the overall picture, with the other part being the level of consumer and household debt in Canada. Bank interest rates have been kept at historic lows since the crisis — ostensibly to help Canadians stay afloat and keep the economy running, but possibly to make it easier for the banks to pay back the money they borrowed from us — with the side effect that Canadians have been encouraged to rack up record amounts of debt; signing mortgages for homes they can't afford (while feeding our own housing bubble), and maxing out credit cards and lines of credit.

Canadians were so confident in our nations' economic strength that we've borrowed more than we could ever hope to repay if the interest rates suddenly jumped back to pre-crisis levels. That means interest rates — which should start to rise this year, if the pundits are correct — will stay on the low side for a long, long time.

After all, what would happen to the billions now covered if mortgage rates did go up? If the real estate bubble burst, Canadians could be collectively on the hook for a lot of overpriced homes that are suddenly under water.

The other side of low interest rates issue is that grandma, and probably mom and dad, aren't getting much in the way of a return from bonds and safe investments they rely on to bolster their incomes. And if you're responsible enough to put money away in our oh-so-secure banks you're probably not earning a lot of interest either.

Again, it's likely that our banks would have required some form of financial aid to come through the crisis healthy and whole. For all I know the decisions that were made saved Canada from a worse recession. Maybe all the money that was lent out will come back, all those mortgages will be paid, Canadians will start using the low interest rates get a handle on their debt loads and increase personal savings and Canada will continue to post a trade surplus and balance its budget. A little extra risk was probably worth it. And our banks really do deserve credit for keeping their heads, and not exposing themselves overly much to the risky investments that wrecked the U.S. and world economy.

Still, lies and half-truths are no way to run a country. Or an economy.