Chapter 7: Money and the Canadian Banking System

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

Summary:

This article is about the bailing out of the insurance bank AIG. According to the article, AIG received 165 million dollars in planned bonus and 170 billion dollars in taxpayer funds for their Bailout. This outraged many Americans because in a sense, they are being asked to share the debt among reckless Wall Street traders, as well as reckless and incapable Main Street borrowers. Also, this huge amount of bail out money could’ve been used for other projects, such as covering the electricity bill of every American household for one year or paying for a four-year education for two million American students at a public university, etc. Moreover, in this article, it states that as long as the capital of USA backs them up for their mistakes, lessons will never be made, and mistakes will never be learned from.

Connection:

The main connection of this article to our text book is bankruptcy. Our most recent economic depression is caused by the sub mortgage prime loans investing banks lend out. These banks decreased bank rates to a low rate and loaned out money to everyone, even people who do not have the ability to pay back. This action resulted in the severity of the economy today. What’s more is that according to the Fisher equation of exchange, the GDP will decrease due to the expected decrease of money supply and money circulation in the next 5 years. As well, the value of the legal tender of American money faces significant problems. Consumers will definitely lose confidence in banks and as a result, will save money rather than invest it in banks.

Reflection:

I think he recession did not affect the Canadian economy as much as it did to the American economy mainly because of the different banking systems in which the banks operate. Canada’s branch banking system is more reserved in terms of investments and loan huge amounts of money. The Canadian system which opposes the American’s unit banking system is also why our Canadian economy isn’t affected as much. The uniting banking that the Americans operate with loan out money even for the people who cannot repay their debt. Hence, the effects of bad loans hurt the American economy more. On the other hand, bad loans loaned by Canadians are affected less due to the Canadian bank’s reserved manner. In addition, the Canadian banks are monitored by government regulations, while US banks have limited government involvement. Initially, I thought that AIG did not deserve the bail out of such a huge amount of money. However, from the text, I learned that the reasoning behind the bailout is not just to help AIG from bankrupting but to restore taxpayers’ confidence in the banking system as a whole.