Handling Bailouts and Such Matters in Canada

Whispering in the Wind (WITW 110) February 24, 2016

Federal bailouts and direct subsidies have been a part of Canada’s political history going back to confederation and the building of the transcontinental railroad system – in 1871 British Columbia joined confederation on a condition that the transcontinental railroad system would be extended to include British Columbia, within 10 years.  In more recent times the injection of government cash into a troubled sector (or firm) has caused considerable debate on the role of government in propping up a firm or firms that are failing because of poor judgement and/or mismanagement – said another way, when does a firm or a group of firms become too big or too important to fail?

2008 – 2009 Banking Crisis and Bailout

The Oxford dictionary defines bailout to be: “an act of giving financial assistance to a failing business or economy, to save it from collapse”.  The global financial crisis of 2008 - 2009 hit Canada particularly hard, with Canadian banks in desperate need of liquidity (cash) – in part a result of the Canadian banks being over exposed in the mortgage business.  Rather than going to the country’s central bank and asking for the cash on commercial terms (as was done in the United States), the Canadian government’s political solution was to unload $69 billion in bank-held mortgages on to the government’s crown corporation, Canada Mortgage and Housing Corporation (CMHC).  Stephen Harper justified his actions by saying that Canada’s banks “are the only banks in the western world where we’re not looking at bailouts, or anything like that,” and his government’s decision, to undertake “some transactions with our banks to improve liquidity” – it was a purchase agreement, not a handout.  While it is understandable that the global financial market was/is an unregulated mess and it is understandable that the Canadian banks needed a major cash infusion due to the crisis, nevertheless, the bailout should have been done on quasi-commercial terms through the Bank of Canada – and that’s one good reason for having a Bank of Canada.  As to the bottom line, the Canadian banks didn’t suffer much and the taxpayer took the hit.  As far as CMHC’s role in the Harper strategy to bailout the banks, smells like a “conflict of interest”.

Other Economic Bubbles, Ready to Burst?

While a financial, bank crisis was averted in Canada seven years ago, using unconventional if not unethical means, the cash crunch was addressed with few consequences on the banking sector. That was seven years ago and Canada has a new prime minister and a new administration in control.  The country will have to wait until March 22 when Prime Minister Trudeau’s government is expected to reveal its master plan for the country.  Whether the budget and its forecasts address the real economic issues facing the country is something I’ll be watching out for: 

1.   Will the stimulus package promised create jobs, jobs, jobs? 

2.   Will the infrastructure spending create the quality jobs needed, in the needy areas of the country?

3.   Will the Bombardier “bailout” be handled with appropriate conditions, conditions that deal with the real management issues facing Bombardier?

4.   Will the budget presented on March 22 establish processes that will clearly outline the environmental targets agreed to in Paris; the steps necessary to form a National Energy Strategy; and a vision on making Canada a more sustainable nation?

5.   Will the budget undertake further steps to address the out-of-control pricing in the Vancouver and Toronto housing market, including a review of foreign investment in Canada’s housing market?

6.   Will the budget address the boom/ bust issues facing Alberta, Saskatchewan and Newfoundland and Labrador?

7.   Is Alberta’s oil sands dream still alive, in the minds of the current, Liberal government? Will the pipeline issue become a vital part in Nation Building?