Thursday, October 16, 2008

Buying confidence 10 billion at a time

The Bank of Canada has increased the amount of cash injections into our financial system. Yesterday they injected $10 billion, an increase of $6 billion over $4 billion they previously announced.

The cash injections are done through PRA (Purchase Resale Agreements) transactions where the government buys securities and commercial paper from participating banks with an agreement to resell them back to the banks at a fixed date, in this case on Nov. 13.

It’s like a short term loan with varying fixed rates in this case averaging 2.808 percent.

The reason for all this of course is because the banks, including all the foreign banks are not lending money to each other.

And all this is over and above the $25 billion plan announced last week to buy mortgages from Canadian banks.

The real question becomes how long can the government continue to do this and how large will these required cash injections become.

In order to increase cash availability, the Bank of Canada is considering letting the mutual funds and pension funds take part in these short-term debt purchases.

Might as well let the Mutual Funds in on the game, since their sales probably suck right now anyway. It will just be a new product listing for them where we all can participate and the Teacher’s fund should have available cash since they are balking at the BCE deal.

Other plans being considered by Flaherty is to increase the deposit insurance beyond the current $100,000 limit and guaranteeing short-term bank debt which I assume is a way of allowing the banks to go out of ratio for short periods of time.

Somehow I would feel a lot more confident if I didn’t have to dig through Bloomberg to find out what exactly is going on.

And if Steve would quit saying:
We will take whatever steps are necessary and that these options don’t involve significant outlays of taxpayers money.

Define significant.

No comments: