New Year...Same Problems

Never before have I looked at the economic reports prepared by the various Canadian and International Financial Institutions and seen so many negatives. Expectations of growth, future sales, consumer confidence, property values, deficits, interest rates, all of these economic staples seem to headed lower.

The incredibly weak American economy has been in dire straits for some time now and just like the popular band of the same name, the American Government has chosen to stimulate it with "Money for Nothing".

In newsletter after newsletter I seem to be discussing the clouds on the horizon, and the stormy waters ahead. And although we are probably not yet experiencing the worst of this economic downturn, there are definite steps that must be taken in order to help our little economy from avoiding the disastrous fate of our juggernaut neighbor.

In short, we must make money available to those who are qualified to borrow. This includes home owners, students, people looking to purchase cars, and those starting up businesses, both small and large. The lending policies of the Canadian Banks have always been quite conservative though. And anyone whose credit worthiness qualified them to borrow 2 years ago should be qualified to borrow today. Thus far, the Bank of Canada has reduced borrowing costs for Canadian banks, they have increased the available capital that the banks can draw from, they have increased their appetite for risk on Canadian mortgages, and they have been and continue to stimulate the Canadian economy in the only way that they know how, through the Canadian Banks. This however, may be the problem.

Much like the United States, our country's Monetary Policy depends heavily on its Financial Institutions. The monopoly created by our Banks allows them to collude and decide what monetary stimulus is passed on to us. This has thus far succeeded in averting financial disaster in recessionary and expansionary periods but may not work today.

We will need more of this monetary stimulus if we are to recover from this great blow our economy has suffered. Banks will need to pass on decreased borrowing rates in their entirety; they will need to make credit available to us just as the Bank of Canada has made credit available to them.

Our Banks were involved in a high risk game with Banks around the world; a game from which they reaped huge profits for a period of over 10 years. It is the greed of these financial institutions that has led to the massive losses that we see today. The unlimited appetite for debt of the American consumer was packaged and sold around the world, it is only now that these packages and their even more carefully packaged derivatives have led to insurmountable losses that we the Canadian consumer are made to pay.

In order to recoup some of the losses that were incurred by greed, we the consumer, will suffer. Our Banks will band together and use the monetary stimulus afforded to them by the Bank of Canada to strengthen their footing. Eventually, they will let these lower rates trickle through to us and increase credit availability. But will it be too late? Will prolonged loss of available credit and the qualified borrowers coupled with the artificially high borrowing rates levied upon us lead to a change in our spending habits? Most definitely!

It is therefore no surprise that the Bank of Canada reduced its overnight lending rate by 0.5% on Tuesday. It may however have been slightly surprising that the Canadian Banks decided to reduce the prime rate by the same amount. As you know the previous reduction was only partly passed on to the Canadian borrower and this was met with friction from both the Canadian consumer but more importantly the Bank of Canada and the Canadian Government. It is my hope that the friction of our Central Bank, the Canadian Consumer and the Canadian Government will be enough to avert a depression in Canada.

It is our firm belief that it is time for all Canadians to utilize these monetary stimuli to there advantage. We fully recommend, for those of you with mortgage rates over 5.25% to call us to discuss ways to save yourselves a great deal of money in the next few years. Furthermore, those of you who maybe "fence sitting" when it comes to buying a home, should take advantage of these unprecedented rates and call us for a pre-approval to go out and buy that new home or investment property.

Thank you all for your support in 2008 and despite the economy, I hope and wish that everyone has a very successful and prosperous 2009.

Marcus