Chapter 7 Money and the Canadian Banking System

http://www.humanevents.com/article.php?id=31117

Summary:
The article I read about is from Human Events by Newt Gingrich over the bailing out of the insurance bank AIG. Americans are outraged that they are being asked to share the debt for the reckless traders on Wall Street and reckless borrowers on Main Street. They believe AIG does not deserve the 165 million in planned bonus and the 170 billion in taxpayer funds AIG has received so far is ridiculous. In addition, majority of Americans believe that Treasury Secretary Timothy Geithner did not inherit the problem of throwing billions of tax payer money to bail out, but helped create it. Even before he was Treasury Secretary, he was strongly involved in the bail out Bearn stern followed by a series of other banks. Currently, American taxpayers are going to pay $170 billion to AIG; $1,224 per taxpayer. This sum could have been gone to better cause such as: doubling the Navy’s fleet of aircraft carriers, pay for a four-year education at a public university for more than two million Americans, or cover the electricity bill of every household in America for an entire year. When we reward failure, all we get is more failure in the future. As long as Washington backs them up, their mind set will not change and will never learn from the mistakes of this tragedy.

Connection:
I believe the connection of the article to our text is bankruptcy. The problem we see today is caused by the sub mortgage prime loans. Had the investment banks not decrease the bank rate for loans to such a low rate and only lend to those who have the ability to pay back, the problems might not have been as severe. In Everyday Economics 7.2 of our text, Canada under went a similar situation in which Canadian Commercial Banks made a series of bad loans and invested in real estate. CCB received a sum of 255 million bail out package but bank confidence drastically decreased from the consumer's perspective. If there were such case in the past already, why hasn't the investment take major precautions? Yet, the magnitude of the problem this time is at a whole different level. From the Fisher equation of exchange, GDP will decrease because money supply, and the velocity of circulation of money will decrease in the next 5 years. The value of the legal tender of American dollars face significant decrease as well since consumer lost confidence in banking and chose to keep save their money rather that invest in banks. It will take sometime before consumer confidence and the prosperity to spend recovers.

Reflection:

I believed that the rationale over the fact that the recession did not affect the Canadian economy as bad as the Americans is the different systems in which banks operate. Besides the Canadian branch banking system as opposed to American's unit banking, Canadian banks are more reserved in terms of investment and huge loans. It is due to this reason that when the world economy began to decline, the amount of bad loans made by Canadian banks are minimum compared to the United States. Moreover, Canadian banks are have regulations under the government and Charter banks while the US banks have limited government involvement. Before I also believe that AIG does not deserve bail out for the money could be put forward to better use. Yet from the text, I learned that the purpose of bail outs was to maintain taxpayer confidence in the banking system as a whole. If AIG was left for bankrupt, depositors will take out their savings out of fear. If the masses decided to take such actions at the same time, it will cause even more bankruptcies. Hence, Bail outs served the purpose of restoring confidence. By saving one bank, it may guarantee the survival of others. Yet, banks take advantage of that and issue a series of bad loans. I hope that through this economic crisis, banks and investors will learn their lesson.