The woes of the American economy have a lot of people worried and with good reason.The trade on securities around the world means that offshore banks are not only holding bad paper from the subprime crisis but other securities also tied to the US banking system.The recent collapse of several of the major players is generating a lot of hand wringing around the world.
Canadian banks are not immune from any of this.They have already taken significant losses due to asset backed commercial paper with subprime mortgages bundled into them but they are also seeing a silver lining; buying up assets of some of these failed US banks.This is increasing their presence in the US banking system.We can only assume that they will carry Canadian banking practices with them into their new holdings.It would be prudent to do so for both the American customers as well as bank shareholders.
The markets however are a springboard of volatility.They are hoping that government will bail out the major failures and so save the market system from collapse.This could be a short sighted move by government in this writer’s opinion.Here is why.
The financial system depends upon investment in order to operate.While the lions share of investment is corporate, it is still people at the bottom who are the ones most affected.They are losing homes and savings by the millions and there are millions more in the wings who could also be affected in the near future.These people could lose their livelihood as well.A bailout of the industry that has created this crisis is like rewarding the kid who stole candy.If the kid is forced to work off his debt as reparation, he learns a lesson and the company benefits.Wall street stole the factory not just a candy bar.
It is not even a question that hundreds of billions of dollars need to be put into the system.That is a given.The problem is the way it is done first, and secondly how ordinary people benefit from this infusion of cash.Any bailout plan would necessarily have to include massive restructuring and regulation of all exchanges including futures.It would have to end margin buying forever and it would have to severely restrict the activities of hedge funds if not outlaw them.Without these guarantees in place, the tax dollars invested could just as easily be gambled away in the future.Without them the government is rewarding the kid who stole the candy bar.
Can the American economy survive?It can and probably will as long as prudent financial principles are utilized.Trading in securities has to be controlled and transparent.Trading in stocks and bonds has to be long term and based on real value not what the seller thinks s/he can get for it.
The American system needs to be rebuilt from the ground up and it needs significant oversight of its activities.Anything less could continue to weaken the world’s economy.The US owes not only its own people but the global community for its abuses, neglect and greed.The time to pay the piper is now.
Failure will hurt people everywhere.Homes will be lost, jobs will be lost, business will fail and government unrest will be sure to follow.This affects all of us, Canadian, American, British, German, Japanese and many others around the world.
Canadians need to be credit wise, savings savvy and watchful of change within our own systems.The price for not doing so can be disastrous.