Yesterday we talked about the study released by the Canadian Centre for Policy Alternatives, in which they accused our federal government of giving the banks a bailout during the recession. While we disagree with this line of thinking, and explained in our post yesterday as to why we disagree with it, it’s raised some interesting discussion around this blog. Just what is a bank bailout anyway? And how is what our government did any different from what their government did?
First, let’s start with the bailout that actually did happen in the United States. The years of 2008 and 2009 were especially hard in the United States. People could not pay their first or second mortgages, mortgages were going underwater, and people were losing their homes – rapidly. Because of this, the banks weren’t getting the profits of that mortgage interest (or even the principal which they had originally loaned) and therefore, many of them were in trouble. Big trouble.
Then enter the TARP program – the “Troubled Asset Relief Program” that former President George Bush instated. This program shoveled $700 billion worth of the country’s (and taxpayers’) money into the banks – some banks that didn’t even need them! All banks were made to draw from the program, so that those who actually needed it wouldn’t feel the negative stigma of needing help. Many believe that this bailout only troubled the U.S. further, weighing on taxpayers at a time that they could hardly afford it. But after all, it was also a time that the U.S. couldn’t afford to lose many of their biggest banks.
So how is that different than what happened here in Canada? Well, instead of just bailing out the banks and funneling money into them as quickly as they could, the banks sold Ottawa mortgages. The banks, as we also explained in our post yesterday, bundled up a bunch of the mortgages they had on their books and then sold them to the government. The government in turn, would give the banks money for the mortgages and the banks would then turn around and lend it out again to the homebuyers and small businesses that needed it. And we needed them to do it. Without all of those businesses still chugging along, we would have been in even more serious trouble during the recession.
The biggest difference is that while the U.S. banks were largely just given cash for free, the banks in Canada were not. They simply had to sell off some of their assets in order to regain liquidity, and save our economy from going under.
Finance Minister Jim Flaherty had very little to say about the CCPA when it first came out and everyone was reacting to it. In fact, it was only a comment from his office that was given to the papers. However, speaking to the Manufacturing Summit in Kitchener on Tuesday he said, “The mortgages that we purchased from the banks provided more liquidity for the banks during the crisis and resulted in gain by the taxpayers of $2.5 billion. We actually made a lot of money on it.”
