Defining a Bailout

Did I mention I'm Canadian?

Well, I am. And recently while I've been keeping up on economic news I've been encoutering two really popular themes about the home country.

1. "Canada's banks are really, really stable."
2. "That's a LIE! The government gave them a massive bailout!!!"

So, which is it? (Spoiler: It's the first one.)

First, some examples of people making the latter claim. This guy at Pacific free Press. "Sean" in the comments section. The people at "Global Research". etc...

I'm particularly dissapointed in that last one... I'd expect someone who uses the word "research" in the name of their very organization to, well, research things. And it's not like it takes a lot of reseacrching to find the problem in these claims after all. Opening a dictionary and looking up the definition of two little words would get the job done:

1. Bailout: noun. A rescue from financial distress.
2. Insurance: noun. A promise of reimbursement in the case of future loss.

Now, let's look at what that link at "Global research" has to say about how the Canadian governemnt "bailed out" the Canadian banks, shall we? I'm going to go ahead and highlight a word in the statement they spend consireable time ranting about:

"Canada Mortgage and Housing Corporation (CMHC) will purchase up to $25 billion in insured mortgage pools as part of the Government of Canada’s plan, announced today, to maintain the availability of longer-term credit in Canada." (Canada Mortgage and Housing Corporation Supports Canadian Credit Markets, CHMC Press Release, 10 October 2009)

So apparently the Canadian banks were rescued from the financial distress of... holding a bunch of mortgages that they were guaranteed not to lose a penny on.

Wow, they must be so grateful for that "bailout".

What actually happened, is that the government bought the mortgages so that the banks would have more cash on hand to engage in more lending. And the reason the government wanted this to happen is because at the time the global recession was seizing up credit markets all over the world and they wanted to make sure Canadians kept ready access to credit while this was happening. It was a simple recession-fighting measure that had nothing to do with rescuing (a.k.a "bailing out") the Canadian banks. There was nothing to rescue them from.

A Quick Note on Health Insurance and Free Markets

Having lived through the recent unpleasantness that was the public debate over health care reform in the US there are a lot of observations I could, and probably will, make. Number one on the list, and the focus of this post, is the bizarre level of blind faith a very large number people in the US place in the idea that just turning any economic problem over to "the market" will automatically fix it.

Before getting into why this idea is spectacularly wrong when it comes to things like health insurance, let me get something out of the way first.

1. No, I'm not a communist.

2. No, really, I'm not a communist.

3. I LIKE capitalism. It works really well for lots of things. If I got to build my very own custom-designed society from scratch and I had to figure out what system to put in place to keep its people supplied with basic commodities like food and clothing and transportation and books and televisions and little yellow rubber duckies for the bath, I'm going with the market. It's GREAT at that kind of thing.

Unfortunately, instead of treating it like the useful tool that it is and putting it to use doing things it's designed to do and then hanging it up on the wall when you're finished, there is this large segment of the US population (I'll call them... Republicans) that has decided to practically deify it and declare it's the right tool for ALL jobs economy related. And this is where we run into trouble. Because a free market *sucks* at handling insurance. Any insurance at all really... but especially something like health insurance. To illustrate why this is let's take a look at a very simple example of how market forces act on two different businesses.