The Canadian Imagination

What it means to be Canadian; examining and reworking Canada as a nation.

Wednesday, December 17, 2008

I give up!

In the wake of the drastic slash to 0.25% of the United States Treasure prime lending rate and the subsequent leap of the Canadian dollar as investments moved to places with higher interest rates, it may be tempting for the Bank of Canada to follow suit.

It might be worth remembering that Canada is faced with a rather different loss of confidence in the economy than the United States. Do we really want to completely discourage any kind of savings whatsoever?

Besides, it is not the prime rate between banks that should be of concern to us, but the willingness of banks to take credit risks at any interest rate. The final death of the BCE takeover by the teachers' union should be a warning bell to us all. That deal was as solidly grounded as any such large deal could be: until the banks and other lending companies pulled the rug out from underneath it, and it collapsed like a house of cards.

This is not just some distant high-level business deal. This has immediate relevance to us all. Our modern economy absolutely relies on fluid credit for continued flow and continued solvency at every level, from the highest to the lowest. No matter how liquid our finances, no matter how solid our credit history: we have suddenly all become high risk. Until that perception changes, there is no reason for banks to significantly lower their consumer lending rates.

The natural consumer response is not to borrow if at all possible ... and then watch the retail economy collapse! and the jobs it supported, vanish!

Somehow it seems entirely appropriate that the Toronto Stock Exchange electronics should sputter, freeze, and just give up.

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