A Bailout By Any Other Name Would Not Smell Sweet
Yesterday the Canadian Centre For Policy Alternatives, a progressive think-tank, released a report entitled The Big Banks’ Big Secret about financing extended to Canada’s banks between 2008 and 2010. The CCPA report attempts to document the financial support that Canada’s banks received from both the Canadian and American governments in response to the economic crisis that began in 2008. This runs contrary to the popular media line that Canada’s banks did not need to be bailed out, a line that has been used by Stephen Harper’s Conservative Party while successfully seeking re-election. Unsurprisingly, shortly after the CCPA report was released it began to come under attack. Criticisms included the argument that the banks hadn’t been bailed out at all and that the bailout that hadn’t occurred wasn’t secret anyway. Whether the banks were actually bailed out is the simpler of the two criticisms to answer, so I’ll start there.
Did the banks actually receive a bailout? This particular disagreement seems to come down to an insistence on using a very narrow definition of the term “bailout”. David Akin of Sun Media, for example, tweeted the following:
“Bailout” means govt took equity or ownership position in bailed-out entity. GM, Chrysler, Eurobanks, Wall Stret banks. Canada “bailed out” GM, Chrysler. Canada took no ownership in banks in Canada. That’s not a bailout.
Stephen Gordon, an economist at the University of Laval who also writes for the Globe and Mail’s Economy Lab, tweeted this analogy in defence of the “not a bailout” view:
Scenario 1: Go to the bank machine and find your bank account is dry; friend gives you $100. That’s a bailout. Scenario 2: Go to ATM and find that although you have enough finds, ATM is broken. Friend gives you $100 cash in exchange for a $110 cheque.
Let’s say that the reason that I needed $100 was that I was out of groceries. Would I say that my friend in Scenario 2 had bailed me out? Absolutely. I would probably say something like this: “I’m glad Jennifer was around to bail me out when the ATM was broken and I needed groceries.” While it may not fit a strictly academic understanding of what a bailout is composed of, it certainly fits within the broader public understanding of what it means to be bailed out, which is to receive some unusual form of support in a time of crisis. While there are times when the distinction does matter (so please don’t think I’m saying it doesn’t), the question that is ultimately important is this – did Canadian banks require funding of unusually large amounts or from unusual sources in order to maintain the proper functioning of the Canadian banking system? And no one, to the best of my knowledge, actually argues that there was not a crisis which required unusual steps to address. The $69 billion CMHC mortgage purchase through the Insured Mortgage Purchase Program is not disputed by anyone who I’m aware of, for example. Barry Allan, of Toronto-based hedge fund Marret Asset Management Inc., was quoted in the Financial Post as saying the following:
Did the Canadian banks have liquidity issues back in 2008? Sure they did, but so did every single bank in the world. When the entire interbank lending system breaks down, that’s a liquidity issue, not a solvency issue.
So we can all agree, I hope, that an unusual situation resulted in an unusual response, regardless of whether we’re willing to agree on whether the word “bailout” is the correct term to describe it.
Similarly important is this question – was this information adequately communicated to the public at large in order to facilitate proper democratic discourse? This gets at why it’s important to acknowledge what occurred and the question of whether or not the bailouts were “secret”. The CCPA report argues that it tried to get access to certain information from the Bank of Canada about their lending programs, but its Access To Information requests were denied. Thus the term “secret” is meant to indicate that the full scale of the funding is not publically known. This is an area that I don’t know nearly enough about to comment on, so I’ll leave that discussion to people more versed in what information is available and where it’s available from.
I think there’s a much more important sense in which the bailouts were “secret” though, and that’s that they’ve been deliberately hidden from public discourse despite their size and enormously important nature. How secret was this program? Well, let’s compare its media coverage to a few other major stories from the past few years – the elimination of the long-form census, the Keystone XL pipeline, and the F-35 fighter jet purchase. I had hoped to search a variety of news sites, but most don’t have free archives that go back very far, so the only one I was able to search completely was CBC.ca. I searched for the following terms: “Insured Mortgage Purchase Program”, “long form census”, “F-35″, “Keystone XL”. Here are the number of hits each turned up:
|Long form census||451|
I didn’t filter the results to ensure that they were all completely relevant, but the picture the results paint is pretty clear. Now, you’d think that a $69 billion mortgage purchase would merit a bit of discussion on a major national news source, but only six results discuss the program at all. Google News finds just 18 results in Canada for the term “Insured Mortgage Purchase Program” between 2008 and 2011. It’s a story that was “secret” or hidden from the public in the sense that it was not talked about.
Why does this matter? There are a few reasons. It matters because the idea presented to Canadians through the press and through the statements of Conservative politicians is that Canada’s banking system was insulated from the financial crisis of 2008, despite this clearly not being true. Mark Carney, the Governor of the Bank of Canada, said recently that “Canadian fixed income markets, the Repo markets, the core funding markets seized up during the crisis, and that’s not acceptable. It’s not an acceptable state of business.” The Financial Post recently reported that Canadian banks “got hammered by the credit crunch that precipitated the crisis like everyone else in the industry. Essentially what happened was that banks stopped lending to other banks and investors stopped buying bank debt, leaving almost the entire sector short of cash.” That Financial Post article goes on to link large bank profits with government programs to provide them with easy access to liquidity. Another Financial Post article says that “The disappearance of liquidity was global phenomenon. Governments and central banks were faced with a dilemma: They could be good free market players and allow their economies to collapse, or they could pump money into the banks” (emphasis added).
The truth is that Canada’s banking sector was not spared by the financial crisis of 2008, and this is an extremely important fact that deserves a full public dialogue. It’s also important because these issues are still ongoing. The Bank of Canada’s interest rate has been at historically low levels for the past three years, indicating continuing problems with lending. These are issues that, to varying degrees, are still affecting Canada. They’re also important because there are ongoing discussions about how to address these issues internationally, and Canadians’ views on what sort of stance Canada ought to take during these discussions are almost certainly impacted by the false belief that Canada’s economy and banking system have been insulated from the crises affecting other nations. These issues are important to discuss because this lie or distortion – that Canada’s banking system didn’t need any help – informs voters’ ideas about how we ought to treat banking and finance in general moving forward, about the state of our country, about our prospects for growth in the future.
This also all matters because the Harper government has campaigned – successfully – on the idea that it is comprised of talented economic managers who skillfully guided Canada through the worst of the recession, leading a country whose banks were so strong that they didn’t need support from the government as other countries’ banking systems did. This idea has been repeated by many in Canada’s media; the Globe and Mail, in its editorial endorsing Harper during the 2011 federal election said that “Canadians take Mr. Harper’s successful stewardship of the economy for granted, which is high praise” while the National Post declared that Harper was the man “who can steer Canada forward during uncertain economic times”. The Conservatives have frequently attempted to paint a picture of Canada as having no significant financial problems (other than deficits), as they did when they incredulously argued during the 2008 election that Canada’s economy was not going to enter a recession. It may or may not be the case that correct decisions were made in response to the financial crisis, but it is of the utmost importance that we acknowledge that there has been a crisis, that it necessitated a fairly drastic response, and that the effects of that crisis are continuing to have significant effects.
The Conservatives could quite fairly argue something like: “Canada is facing difficult economic times, as are other countries around the world. Canada was one of many countries seriously affected by the economic crises of 2008, but we believe that the Conservative Party responded to those crises in a timely and effective manner, and that we have reduced the potential impact of those crises as a result.” But that is not at all what they have argued; they have argued that Canada is doing quite well indeed and let’s not mess about with things too much. They’ve used this as a platform to argue internationally that there is no need to tackle these issues in a concerted manner between countries – after all, Canada is just fine. We need to have an open dialogue about the fact that Canada is not, and has not, been “just fine”. Once we do that, it can be up to an informed public to decide what that means about how we ought to act in the future.
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