Harper and Flaherty give banks $25 billion in cash but have virtually done nothing for Canada's forestry and manufacturing sectors under attack
On Friday Conservative Finance Minister Jim Flaherty announced a $25 billion dollar plan to buy packages of mortgages off Canada's banks in exchange for cold hard cash. The nature of the bailout package has been misconstrued by both Flaherty and Harper. Amid the rhetoric lets not lose sight of what's really going on: Canadian banks are being given a huge gift by the Harper government that will further line their pockets and do nothing for yours or mine.
"We are not going in and buying bad assets. What we're doing is simply exchanging assets that we already hold the insurance on" Stephen Harper, October 10 2008
Harper is misleading Canadians here, as the government is indeed buying assets. If you provide me something tangible, like an apple, and in exchange I give you cash, I call that buying. Wouldn't you?
The government is exchanging a large portfolio of mortgages for cash, cash which is going to the banks. Canada is buying those mortgages off the banks.
Harper also said "This is not a bailout; this is a market transaction that will cost the government nothing", and this is not accurate either. The government has to go to market to raise $25 billion dollars from the bond market. In order to attract capital in these troubled times it will have to pay an interest rate on that debt which is significantly higher than it was even five months ago. While the difference between the cost of money, and the interest rate being paid on these mortgages the government is buying off banks, will provide a net return to the government, it will do so only if its management costs and the rate of mortgage defaults totals less than that difference. Still, it's likely the government will turn a small profit.
However to say it costs Canada nothing to do this transaction remains inaccurate. First, Canada's total debt will go up by another $25 billion dollars on top of the 10 - $21billion of new debt (as of July) the government has heaped on top of Canada's debt pile and this is an unsettling trend. Should this debt-growth continue, rating agencies will take a hard look at Canada's financial stability and may downgrade our credit worthiness, which will lead to higher borrowing costs for the government of Canada. That can cost taxpayers interest rate charge increases measured in the millions.
Secondly that $25 billion dollars of new debt represents something of an opportunity cost.
Could $25 billion in direct investments be used to generate more economic activity in Canada? Could $25 billion be used to help move Canada to a greener future and thus generate more, new, economic activity? Could a government which believed in Canada more have fought for a better settlement for Canada's forestry sector in 2006? Could a government which had more foresight helped stave off the loss of hundreds of thousands of manufacturing jobs, lost to the U.S., Mexico, and Asia? Harper and Flaherty have done nothing to stop the continued hollowing out of our country.
Was the $25 billion dollar bailout even necessary? For months and months Harper and Flaherty have said that Canada's banks don't need the help, that Canada's economy is strong and doesn't suffer from the same issues as the U.S. is plagued with. True - costs for banks have been rising as a consequence of the credit crunch. But Canada's banks were not starved for credit. Their operations have not been halted. There are no banks failing here in this country.
The bottom line: getting $25 billion in low cost capital from Stephen Harper and Jim Flaherty is a real gift to the banks that will do more for their balance sheets than it will do for yours or mine.
