Chapter Three Economics Blog

Link:http://www.ctv.ca/servlet/ArticleNews/story/CTVNews/20081112/Ottawa_mortgages_081112/20081112?hub=CTVNewsAt11

Summary
On November 12, the Canadian government bought out $50 billion in residential mortgages to encourage the banks to lend more money and lower interest rates. The federal government bought the mortgages from the banks, so that the banks would have money to lend it back out to people asking for a loan or mortgage to buy a house or start a business. With the Canadian economy on the brink of recession and the nation’s financial institutions hesitant to lend, the government hopes that the purchase will increase the sales of houses and properties, therefore increase consumer spending. Finance Minister Jim Flaherty states the mortgage buy out is not a bailout, but is just an asset swap, so the banks would have more liquidity to lend out.

The Role of Government in a Market Economy: Market Shortcomings
The government in this financial crisis intervene because of third party effects. If the government had not buy out the mortgages, the third party, which would be the potential home buyers and business owners, would be negatively affected. They would be negatively affected because they would not be able to get a loan or cannot afford one because of high interest rates. This means people would not be able to live in a home or start or expand their business. Therefore, in this case, the government sort of set up a price ceiling. Since the government feels that the interest rates are too high for consumers to afford, they try to lower the interest rates by giving the banks more money to cut interest rate. All in all, the government hopes to lower the price of interest rates to attempt to increase the demand of getting a mortgage and increase spending.

Reflection
Although the federal government is trying to stabilize the lending industry and encourage lower interest rates, the mortgage purchase is not helping the Canadians who want to buy a home or start a business. Banks are still reluctant to lend; they have practically not cut interest rates to assist their clients in borrowing money. The banks’ interest rates are still way higher than the prime rates that they were offering. Home buyers still believe the interest rates are too high and are not affordable. From my perspective, the mortgage buy out was simply unsuccessful. Hardly any money was passed down to the Canadians who wanted to borrow. The government should have known the banks would still be hesitant to lend in the current financial crisis and should set up programs that would directly lend money out to home buyers and businesses.