If there is one myth that the Conservatives have milked well, it is that it was their strong stewardship that guided Canada's financial sector through the darkest days of the global recession. Indeed, they have never tired of congratulating themselves for the fact that no Canadian banks failed during this period. The reality, of course, is somewhat different as Canada came far closer to a US-style banking meltdown than most realize.
Recall back to Finance Minister Jim Flaherty's first budget presentation in Ottawa in 2006 where he proposed a plan he called "Fostering Competition in the Mortgage Insurance Market" in which he opened up Canadian markets to more foreign investment, doubled the amount of tax dollars used to insure these mortgages from $100 Billion to $200 Billion, and relaxed rules to allow for 40-year no money down mortgages. People flocked to these instruments just as they did to sub-prime mortgages in the US, scooping up $56 Billion dollars of these loans in a year. Often these were lower-income Canadians stretching to buy a home that they previously could not have afforded.
By early 2008 this policy had helped stoke the housing market to new highs in volume and prices, to the extent that one bank executive warned that “the government has got to put an end to this”. The understanding was that too much risky debt was coming into play in the financial market.
In July of 2008, 40 year mortgages were again disallowed from Federal mortgage insurance and, as the financial crisis exploded in October, Harper took credit for his "early" response to the issue. He never once noted that it was his party that had opened the door to such risky debts or that he had put an extra $100 Billion of our tax dollars at risk to insure them. And, as he called his election that fall in defiance of his own fixed election date law, he also quietly slid through the largest bailout in Canadian history, first purchasing $25 Billion in risky mortgage policies from the Canada Mortgage and Housing Corporation (CMHC). This amount was augmented with a further $50 Billion infusion only a month later on November 12, 2008. Harper claimed that this was not a bailout because it was being funded by a sale of government bonds instead of tax dollars, however it still worked out to a direct cash injection into the banking industry of 4.6% of Canada’s GDP, and that was being funded by the issuing of debt instruments that the taxpayer was put on the hook for. Debt instruments that were underwritten by the very banks that the bailout was being given to so that they also got to charge fees as they brokered these T-Bills to the public.
So it is hardly surprising that during the 2008 election Flaherty was discussing a $2 Billion surplus but two months later was predicting a $64 Billion budgetary deficit. Having to come up with $75 Billion to cover bad debt will help do that to a budget. The road back has been a long one, exacerbated by the interest payments required for the bond issues. By January of this year, Flaherty had also finally reversed all of the way back to a 85% equity cap on mortgage refinancing to be "encouraging responsible lending and borrowing and encouraging people to increase their home equity."
The damage, however, has already been done. Canadian taxpayers are on the hook for an extra $100 Billion in insured mortgages and $75 Billion in bonds. Personal finances have hardly fared better over this period as household debt has skyrocketed to $1.4 Trillion and mortgage delay payments have increased by 50 percent. According to the IMF it is the household debt issue that now most risks the Canadian economy rather than any external fiscal uncertainty as Harper keeps warning.
Meanwhile, in this election Jack Layton has his own solution to Canada's personal debt crisis: implementing a plan to cap interest rates on credit cards to prime plus five percent. Naturally, he is marketing this as simply a savings to Canadians to help them through these difficult times, and who wouldn't like a break on their payments?
What this neglects to mention is just how much of a drag on our economic recovery this could cause. Financial institutions walk a fine line between exposing themselves to bad debts and earning interest income by managing their interest rates and credit requirements. Forcing them to limit their revenue opportunities can only have an associated drop in the availability of credit to most Canadians - the very credit that allowed Canadians to help keep the economy going. For many citizens who may support this rate cap, it will be a rude awakening when they find that their cards have their credit limit reduced or have their cards revoked as is allowed according to their credit agreements.
No one is arguing that household debt is not a concern, however this sort of nanny-state manipulation of the financial markets has never historically worked out well, and potentially stalling the economic recovery in order to protect consumers from themselves is not the solution. It is simply not the government's job to protect people from themselves. Building a robust economy where workers earning power increases enough to allow them to contribute more to the economy and to reduce their debt on their own is a far better solution.
Although it took them five years to try, fail, and then reverse their near-disastrous policies, at least the Conservatives have returned the mortgage market back to the solid platform that the Liberals had created for it. They may pretend that they were heroically rescuing the market from the mistakes of others, however The Economist is not so easily fooled as it notes that "Much of the country’s resilience stems from policies—such as bank regulation and sound public finances—which predate Mr. Harper."
With luck, we won't have to learn how long it would take the NDP to go through the same process, nor will we have to endure the drag on the recovery that would be sure to accompany such a venture.
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