How to save banks and start trade wars

Does anyone else find the following argument scary?

Canada’s banks are supremely healthy, best in the world even, and if we don’t throw them a massive taxpayer-funded lifeline right now, they’re going to be in serious trouble.

That, in a nutshell, sums up the sentiment being voiced by Finance Minister Jim Flaherty, Canadian bank executives and analysts at the moment. All over the world governments are injecting billions, nay trillions, of dollars to prop up their country’s biggest financial firms. The U.S. is buying $250 billion worth of shares in the likes of Citigroup, J.P. Morgan and Bank of America. Britain is shelling out $65 billion to help Royal Bank of Scotland and Lloyds. France is doing it. Germany is doing it. Even educated Swedes are doing it. The fear now is banks in those countries will be able to borrow funds at lower rates than Canadian banks, and that, in turn, will lead to higher borrowing costs and put Canadian businesses at a competitive disadvantage.

There probably is some truth to that fear. But when the argument for a bailout is no longer about bringing stability to credit markets, and instead is about evening the score with the competition, you’re into dangerous territory. To be fair, Flaherty is far from alone. Countries like Japan and Australia were at first resistant to financial system bailouts but caved so as not to become uncompetitive. Search “bailout” and “competitive disadvantage” in Google News and you’ll get nearly 450 examples of bankers and politicians griping that they need to level the playing field.

This is not just a slippery slope. It’s more akin to standing on Everest and setting off a WMD. How long before a government somewhere extends bailout packages to other industries also hit hard by the global credit crisis, like automakers, steel producers, aircraft manufacturers etc. Other countries will likely respond in kind, lest their industries be put at a competitive disadvantage.

This is how trade wars begin folks.

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