THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 243

CHAPTER GLOBAL Financial Crises and the Subprime Meltdown 211 The U.S Treasury Asset Relief Plan and Government Bailouts Throughout the World The Economic Recovery Act of 2008 in the United States had several provisions to promote recovery from the subprime financial crisis The most important was the Treasury Asset Relief Plan (TARP), which authorized the U.S Treasury to spend US$700 billion purchasing subprime mortgage assets from troubled financial institutions or to inject capital into banking institutions The hope was that by buying subprime assets, their price would rise above fire-sale prices, thus creating a market for them, while at the same time increasing capital in financial institutions Along with injections of capital, this would enable these institutions to start lending again In addition, the Act raised the federal deposit insurance limit temporarily from US$100 000 to US$250 000 in order to limit withdrawals from banks and required the U.S Treasury, as the owner of these assets, to encourage the servicers of the underlying mortgages to restructure them to minimize foreclosures Shortly thereafter, the Federal Deposit Insurance Corporation (FDIC) put in place a guarantee for certain debt newly issued by banks, and the Treasury guaranteed money market mutual fund shares at par value for one year The spreading bank failures in Europe in the fall of 2008 led to bailouts of financial institutions: the Netherlands, Belgium, and Luxembourg injected US$16 billion to prop up Fortis, a major European bank; the Netherlands injected US$13 billion into ING, a banking and insurance giant; Germany provided a US$50 billion rescue package for Hypo Real Estate Holdings; and Iceland took over its three largest banks after the banking system collapsed Ireland s government guaranteed all the deposits of its commercial banks as well as interbank lending, as did Greece Spain implemented a bailout package similar to the United States to buy up to 50 billion euros of assets in their banks in order to encourage them to lend The U.K Treasury set up a bailout plan with a similar price tag to that of the U.S Treasury s plan of 400 billion pounds It guaranteed 250 billion pounds of bank liabilities, added 100 billion pounds to a facility that swaps these assets for government bonds, and allowed the U.K government to buy up to 50 billion pounds of equity stakes in British banks Bailout plans to the tune of over US$100 billion in South Korea, US$200 billion in Sweden, US$400 billion in France, and US$500 billion in Germany, all of which guaranteed debt of their banks as well as injecting capital into them, then followed Both the scale of these bailout packages and the degree of international coordination was unprecedented In response to the subprime meltdown in the United States, the Canadian government banned subprime mortgages in Canada in the summer of 2008 Although there are currently no publicly available figures, it is estimated that more than half of the total new mortgages approved by Canadian financial institutions during this period (worth over $50 billion) were risky, 40-year mortgages, and that 10% of these mortgages (worth over $10 billion) were taken out with zero money down At the time of writing, it is not clear how this brief experiment with U.S.-style subprime lending will affect the Canadian economy and the country s otherwise prudent mortgage landscape