Whew! Thank goodness he did not raise the deposit guarantee. Imagine the consequences if he had.
People would ask themselves, "What exactly is going on that banks or depositors now need such protection? Are the previous assurances that Canadian banks are just fine not true anymore?"
Here's what further effect I think such an announcement would have:
- people conclude that there must be a need for such protection, i.e. that banks are actually much weaker than they had been told, thus creating or exacerbating the very condition that the new guarantee seeks to placate; bank stocks would get hit, weakening the banks in reality
- to the extent that people actually trust the guarantee, they have a greater incentive to see cash as the safe haven; they can now safely take more money out of the stock market and put it in a bank! After all, how many Canadians have more than $100,000 in cash that needs protecting? Certainly not ordinary working Canadians, it's people with substantial investment portfolios who are now in a state of severe stress as they watch the markets melting down day by day. The urge to sell out of the market and put it in cash in a bank increases, thus further weakening the market.