Double Dip or Just Dip? Canadian Banks Need To Take More Risks

cibcPresident Obama proposed today to spend $50 billion on infrastructure spending in the United States.  With the November elections pending this spending is seen as politically expedient by some.  It’s also seen as a necessary measure to continue to jumpstart the moribund American economy.  I never really have a problem with government spending on infrastructure, so let’s hope this works.

It is pretty clear now that the large stimulus funding that almost every Western government injected into the economy in 2009 has worked.  With the financial meltdown that we saw in the late fall of 2008, something had to be done to get money moving again.  Slowly, we saw economic growth again with positive numbers over the last few quarters.  It’s only now that there seems to be some real concern in the US about the economy stagnating.  Some people say double-dip, others are just saying dip.  With prices not moving up it certainly has many within the US Federal Reserve and the US government very worried.

We haven’t heard much about credit being froze up lately.  However, that was a buzzword in late 2008 as everybody was holding their wallets tightly. Of course at the time it was government’s job to loosen up credit.  Over the interceding time, businesses have conserved capital and built-up cash reserves.  They are still reticent to spend in many ways and you can’t blame them.  The only problem with that is it’s bad for the economy.  If we could only get that money moving again, we’d have much more positive economic growth numbers.

This struck me the other day when I read a Globe and Mail report on the behavior of Canadian banks.  The first paragraph of the article said it best.  It said that the head of Canada’s largest bank was concerned about the sputtering economic rebound has dealt the industry a tricky dilemma: how to boost lending when solid borrowers are increasingly hard to find.  In essence what the article was saying was that the demand for credit particularly among corporate clients had dried up amid the difficult economy.  So our Canadian banks were thinking about lending money to poorer risks in order to try to get back profits.  In other words, to try to create demand for credit.  It seems so strange to read about.

It is kind of an interesting scenario.  Banks over the last 18 months have set aside money to take care of losses caused by the financial meltdown of 2008.  However, Canadian banks don’t really lose money, in fact their profits just get a little bit less but of course still well over $1 billion.  So you can understand how if they are finding it difficult to find people to lend money to, maybe the economy isn’t quite what it’s cracked up to be.

The problem seems to be all of this cash everybody is sitting on.  The banks are desperate to grow their asset base to compete against others around the world but with interest rates so low they will not necessarily get paid for the risk that they might assume.  It’s hard to feel sorry for our Canadian banks with their billion dollar profits.  Needless to say, their attitude and behavior is usually a good barometer for how good the economy is doing.  Seeing them starve a little bit in their own eyes is a bit telling. Maybe, just maybe, they might change their attitude.

Of course the big problem remains in the US economy.  Problems down south seem to be much more entrenched than they are in Canada.  The employment rate remains around 9% and there doesn’t seem to be any immediate hope of that going down.  You look at the American public debt; the war in Afghanistan and the maddening deflationary tendencies within the US economy and it’s troubling.  It will always be a problem for Canada.  Simply put, for us to have a high standard of living with big economic growth numbers Canadians need Americans to thrive and right now they are not doing that.

The way that this is cured in 2010 is to boost consumer confidence.  However, after what consumers have been through how do you do that?  It can be done slowly over time and that is exactly what is happening.  Our Canadian banks might be complaining about a lack of demand for credit but their credibility is zero with their billion dollar profits and their skeletons in the closet.  I am one Canadian who thinks maybe they can afford to take a few more risks.  I think it would be good for the economy.  I think it would be good for Canada.  It would also be good for the banks even if they do have those profits shaved.  Perish the thought I know.  Doing the right thing has never been so obvious.