Can we really spend our way out of this mess? -

Can we really spend our way out of this mess?

The remarkable re-embrace of deficit spending is every bit as mindless as the financial panic that preceded it


Can we really spend out way out of this mess?

The phrase “paradigm shift” was coined by the historian Thomas Kuhn to describe the process by which an old belief system, long entrenched and widely shared, is suddenly overthrown by a new one. But how to describe the sudden revival of an old belief system to replace the new?

How, in particular, to explain the remarkable re-embrace of deficit spending (“fiscal stimulus,” in the phrase of the moment) across much of the developed world—not only by the political class, for whom its appeal is obvious, but by much of the economics profession? How, when so little fresh evidence has been offered of its effectiveness, and so much of the original critique that first discredited it remains intact? And how, in Canada of all places, which suffered more than most from a previous generation’s experimentation with deficit finance, and where the case for Doing Something would seem less pressing than elsewhere?

Yet here we are, with a Conservative government preparing to run a string of “stimulative” deficits the likes of which we haven’t seen since the early 1990s—as high as $40 billion, according to one report—urged on by the Canadian Council of Chief Executives, the Conference Board of Canada, and the editorial board of the Globe and Mail. Dissent, at least in public, has been confined to free-market think tanks, the Canadian Taxpayers Federation, and the odd crankish columnist.

It isn’t as if its new-found adherents show any great enthusiasm for the cause. It seems more resignation: we might as well try this. Or rather: people expect us to try this. Or perhaps: we will be punished if we don’t try this. For to the left of the Conservatives are four other parties, all of whom may be relied upon to criticize the government for not going far enough.

What we are witnessing is a kind of policy panic, a herdlike rush every bit as mindless as the financial panic that preceded it. If we have not gone as far as the Americans—at 2.5 per cent of GDP, even a $40-billion deficit would be dwarfed by the $2-trillion, 10-per-cent-of-GDP monster the incoming Obama administration is preparing—we have done so with even less justification. There, at least, the economic situation is such as to justify a little panic: the worst recession in at least 25 years, and possibly 70. Here, we have not as yet even met the technical definition of a recession.

I don’t doubt we will, though how deep and how long it will be is anybody’s guess: the worst-case scenarios currently forecast a peak unemployment rate of eight per cent, which would have been cause for celebration not so long ago. But the recourse to “fiscal stimulus” is a non-solution to a non-problem, or at best the wrong solution to the wrong problem.

Most recessions, indeed virtually all of those in living memory, are policy-induced. If not quite deliberate, they are at any rate the consequence of a tightening of monetary policy, generally in response to an earlier, too-loose policy.

This one’s different. This isn’t a policy recession. It’s what’s called a “balance-sheet” recession, driven first by the credit crisis—the collapse of financial markets, and the associated unwillingness of financial institutions to lend, either to the public or each other—and then by the efforts of businesses and households to retrench in its wake. Banks lend less. Households save more. Everybody hoards cash.

While the credit crisis has been most acute in the United States, its effects will inevitably be felt in Canada: with roughly 40 per cent of our economy devoted to exports, and 75 per cent of these delivered to the U.S., a one per cent decline in spending south of the border will tend to reduce the demand for Canadian products by about three-tenths of one per cent.

But to get a really severe, U.S.-style recession in Canada you’d have to have a really severe, U.S.-style credit crisis here. So far we haven’t seen that. And if we did, deficit spending would no more recommend itself as the solution here than in the U.S.

What is required, rather, are measures to address the problem at its roots: the disease, not just the symptoms. The first priority for policy makers, here as in the U.S., should be to fix the credit crisis; the second, to ensure that it does not recur. And, while there is room for some shoring up of aggregate demand while the patient recuperates, it is far from clear that fiscal policy is the right instrument for this.

How to get out of this mess? Best to ask how we got into it. The collapse of financial markets last fall fed a lot of instant analysis of the “capitalism is dead” variety. The fiasco was variously blamed on greed, the inherent instability of financial markets or the idiocies of investment bankers. The crisis, it was said, was the bitter fruit of years of free-market ideology, of a “frenzy of deregulation” that had allowed markets to run amok. The conclusion followed: if another Great Depression beckoned, Depression-era remedies were called for—loads of new regulations, and masses of public spending.

No one’s here to defend the actions of those who issued mortgages to people who couldn’t afford them, or who repackaged and sold these loans without regard to the likelihood of their repayment, or who bought these complex financial instruments and their derivatives without understanding what was in them, or who loaded up with too much debt themselves. But any attempt to pin the blame on “the free market” has to reckon with the pervasive influence of the state at every stage of the process. In brief, the government’s fingers are all over this thing.

Start first with the housing bubble, the doubling of U.S. housing prices in the space of a decade, whose subsequent collapse set off the crisis. And what inflated the bubble? The state: not by a failure to regulate, but more or less as a deliberate act of regulation.

This is true in at least three ways. First, there was the overly loose monetary policy pursued by the Federal Reserve in the wake of the 2001 recession. From 2001 through 2006, the Fed kept interest rates significantly below the rate consistent with non-inflationary growth, as indicated by the famous Taylor Rule, devised by Stanford University economist John Taylor. The result: rising inflation, and runaway housing prices.

Second, there were the various regulatory schemes, under both Democratic and Republican administrations, aimed at pressuring banks and other financial institutions to provide more and easier mortgages, especially for low-income borrowers: the Carter-era Community Reinvestment Act, in particular, originally intended to combat discrimination against low-income neighbourhoods in the writing of mortgages, in the 1990s became more or less an explicit quota system. As Peter Wallison writes in a study for the American Enterprise Institute, “it was now necessary for banks to show that they had actually made the requisite loans, not just that they were trying to find qualified borrowers.” To this end, banks were enjoined to use “innovative or flexible” lending practices, i.e., lower their standards.

Inevitably, Wallison writes, this relaxation of standards infiltrated the broader market: “Bank regulators, who were in charge of enforcing CRA standards, could hardly disapprove of similar loans made to better qualified borrowers.” This was reinforced by the actions of the two government-sponsored mortgage giants, Fannie Mae and Freddie Mac, whose original mission of promoting middle-class home ownership underwent a similar politically inspired transformation. With Congress’s blessing, the two went on a mortgage-buying spree, eventually accounting for nearly 50 per cent of all U.S. mortgages. The only proviso was that a certain percentage of these be for low-income housing: 30 per cent at first, rising to 55 per cent by 2007. To make these targets, they were required to take on the riskiest sort of loans, the so-called subprime mortgages. The rest is history.

A third broad contributor to the bubble is worth mentioning: the influx of savings from abroad, notably China. It isn’t that there was a savings “glut,” as is sometimes alleged: foreign savings simply made up for the decline in domestic savings. But whereas domestic investors could invest in any asset, China was prohibited by law, as Laurence Booth of the University of Toronto’s Rotman School of Management writes in a recent study, from investing surplus U.S. dollar reserves in real assets or buying U.S. companies. Instead, it was obliged to invest in “U.S. government and agency debt, mainly the mortgage debt issued by Fannie and Freddie.”

Of course, the housing bubble is only one side of the mess. The other was what was done with those mortgages after they were issued, as they were combined and recombined into packages of assets of dizzying complexity. That many financial institutions made reckless bets on these investments, without fully understanding what was in them, is well known. The interesting question is why. They employed a faulty risk management system that that did not properly account for the possibility of a once-in-a-lifetime, generalized market meltdown. Why was that? Compensation schemes emphasized short-term returns to the exclusion of any concern with the long-term health of the company. Again, why? Why should so many financial institutions have seemed so hell-bent on self-destruction?

Could at least part of financial institutions’ refusal to consider the worst-case scenario be explained by the fact that, at repeated intervals in the past, they had been spared the worst? The present crisis, after all, was preceded by the long-term capital management crisis of the late 1990s, and before that the savings and loan crisis of the early 1990s, both of which ended in bailouts. As the economist Tyler Cowen of George Mason University has written: “creditors came to believe that their loans to unsound financial institutions would be made good by the Fed—as long as the collapse of those institutions would threaten the global credit system. Bolstered by this sense of security, bad loans mushroomed.”

That’s not to say that some sort of regulatory reform will not be part of the solution. The days in which large investment banks could take on unlimited amounts of leverage are clearly over (as, indeed, are most of the investment banks themselves). But if there were gaps in the regulatory framework, it is also clear that a certain amount of misregulation was at work. The securitization craze, for example, was in part an attempt by U.S. banks to break out of the limits imposed by their geographic isolation, a legacy of Depression-era prohibitions on interstate banking. Internationally agreed banking standards, known as the Basel accords, are now seen to encourage too much lending in good times, too little in bad times, since the value of the capital that banks are required to set against loans will rise and fall with the business cycle.

But that’s for another day. The immediate problem is the freezing up of credit, particularly in the interbank market—the loans between financial institutions on which all other lending depends. So long as there remains an unquantified inventory of bad loans, hidden inside complex debt instruments and buried deep in balance sheets, a degree of generalized mistrust will prevail—a phenomenon Taylor calls the “Queen of Spades problem.” As in the game of Hearts, where every player seeks to avoid being the one left holding the Queen of Spades, so every bank wishes to avoid getting stuck with the “toxic” assets. In short, if banks were too blithe about risk in the past, they are neurotically risk-averse today.

Governments got us into this mess, and governments will have to get us out of it. But how? As much as you may have heard it repeated, our situation is indeed different from that of the U.S. We did not undergo anything like the same housing boom that the Americans did, nor has our bust been anywhere near as deep. Subprime mortgages, while not unknown here, did not take a remotely comparable share of the market. Our banks are relatively well-capitalized and broadly diversified. The credit crisis is not nearly as severe here as there, nor has our economy—so far—taken the same nosedive.

So it is hard to see the emergency that justifies a sudden lurch into $40-billion deficits, for starters. Add to this the practical problems. It’s all very well to spend money on infrastructure. Indeed, there’s an argument for bringing forward projects that were already in the works: in a recession, with all that surplus labour at hand, these are likely to be cheaper. But is it as simple as that? Is there all that much in the pipeline, waiting and ready to go? If not, how soon, realistically, can new projects get under way from a standing start? How likely are these to pass basic cost-benefit tests, if they are dreamed up on the fly? And is there all that much surplus labour hanging about? As things stand, Canada is still experiencing labour shortages, especially for skilled tradesmen.

The more fundamental objection is that fiscal stimulus does not stimulate much of anything. Journalists talk about government spending being “injected” into the economy, apparently oblivious to the fact that the money has to come from somewhere. Either it is borrowed, or it is taxed: in either case, whatever initial stimulative impact there might be (see construction delays, above) is very quickly unwound.

Standard Keynesian models showing large “multiplier” effects from deficit spending typically assume economies are closed to trade (else much of the spending “leaks” out to imports), and expectations of the future are blind, i.e., consumers and investors do not worry about the long-run consequences for debt, taxes and ultimately for inflation of running large deficits. They tend also to minimize the importance of government borrowing “crowding out” private borrowers. Relax these highly restrictive assumptions, and much of the case for deficit spending disappears.

Indeed, latter-day proponents are notably short of examples of it actually working as advertised. Take Japan in the 1990s, the textbook balance-sheet recession. The Japanese government ran huge budget deficits, poured money into infrastructure projects, year after year after year. Japan’s debt to GDP ratio rocketed from 14 per cent in 1992 to more than 85 per cent in 2005. The recession ground on regardless.

Before then there was the French experiment of the 1980s—François Mitterrand’s famous “dash for growth.” It lasted little more than a year, before he was forced into a humiliating U-turn. And before that there was Britain. At a Labour Party conference in 1976, a rueful prime minister James Callaghan told delegates: “We used to think that you could spend your way out of a recession and boost employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists.” Doesn’t anyone remember?

As for the Great Depression itself, perhaps I should quote Barack Obama’s new chief economic adviser Christina Romer, who it turns out is something of an authority on the subject. In a 1991 paper for the National Bureau of Economic Research (“What Ended the Great Depression?”), she attributes the economic recovery to an expansion of the money supply (something to do with massive inflows of gold). “Fiscal policy,” she writes, “contributed almost nothing to the recovery before 1942.”

One last point about fiscal stimulus: we can’t afford it. No, a deficit of 2.5 per cent of GDP, even a string of them, is not going to bankrupt us—on its own. But we are not starting from zero, and the longer-term fiscal forecast is bleak. The C.D. Howe Institute has just released another paper on the fiscal impact of Canada’s aging population, with the first of the baby boomers reaching retirement age next year. The study estimates the increase in costs associated with the rising numbers of elderly, especially for health care (net of lower costs for education, as the numbers of children decline), at $1.5 trillion, enough to raise the tax burden for the main “demographically driven” programs from 14 per cent of GDP to nearly 20 per cent. This is not the time to be plunging headlong into deficits.

To repeat: this is a problem of credit markets. Much of what needed to be done to get them working again has been done. For example, Ottawa’s $75-billion purchase of mortgages from bank portfolios, or the offer of temporary federal insurance on interbank loans.

But so far as broader macroeconomic support is required, the necessary and sufficient mechanism is the Bank of Canada. Understand what this does and does not mean. Much commentary on the economy seems to assume that, in the wake of the biggest financial bust in history, no one has to feel any pain. Policy makers are urged to reflate housing prices, boost consumer spending, force banks to lend, almost as if the intent were to repeat the whole sorry history of the last decade. This cannot be. A certain amount of “taking our medicine” is inevitable: banks need to repair their balance sheets, consumers need to save more, and no amount of easy money can avoid that.

Still, if it’s stimulus you want, monetary policy is the best, quickest and most effective instrument. It works fast, it is less prone to politicization, and it more nearly targets the problem at its source: in the workings of financial markets.

Much nonsense has been printed to the effect that the bank has “run out of ammunition,” that with interest rates at historic lows fiscal policy is the “only game in town,” that the refusal of banks to lend means monetary policy is “pushing on a string” (in Keynesian terms, a liquidity trap). None of this is true. Again: Canada is not the United States. Interest rates have further room to fall here. It’s not clear that banks are refusing to lend. And as the Federal Reserve has shown, central banks have many more tricks available to them than simply twiddling the interest rate dials. In recent months, the Fed has been effectively bypassing the banks, buying up mortgage-backed securities on the open market, buying commercial paper, even announcing it will buy government bonds— anything to get money into the public’s hands, in whatever amounts the public wishes to hold. And while fears of deflation have been raised in the U.S., the Bank of Canada has an additional advantage: our generally successful experience with inflation targets means the public can have confidence that, come what may, the bank will see to it that prices do not drop.

But this approach comes with its own risk: with all this liquidity sloshing around, there is potential for a serious outbreak of inflation, once the crisis has passed. Central banks will have to be as quick to withdraw liquidity from the economy as they were to provide it. That has not always proved to be the case in the past.

The combination of massive monetary easing and large deficits is particularly worrisome. All it would take to turn a manageable $40-billion deficit into an out-of-control $100-billion deficit would be a sustained spike in interest rates. Then the magic of compound interest takes over, and it’s the 1980s all over again.

But look. We all know the budget is going to be about stimulus. You know it, I know it, and God knows the interest groups know it. “Stimulus” has become the catch-all for every special pleader and crackpot schemer looking for a handout. Very well: two can play at that game. There’s much the government could be doing that would be beneficial for the economy in the long run, even if it had little to do with the present crisis: tax cuts, sales tax harmonization, a national securities regulator, health care reform, the works. Couldn’t we all just agree to call this “stimulus”?


Can we really spend our way out of this mess?

  1. So what is making Harper do this? You and Terence Corcoran are surely not the only two people in Canada who are questioning this madness. In fact, I am pretty sure that you could get a pretty decent proportion of the populace to come out against this/

    So what is behind it? Pure politics?

  2. Wow are people just not paying attention or what I mean really Andrew? First off remember before xmas when the g8, g20 soon to be g200 where all the major countries in the world finance ministers said they would all put 2 – 3 % of gdp into stimulous packages (in point of fact if we didn’t put this one together there would be hell to pay from the US + and make absolutley no mistajke about that. Not to mention the entire media saying stimulous, stimulous etc. etc NOW or we will all vote coalition and all the coalition saying stimulous stimuolous now or we throw a coup and take over. Now we are going to have to put up with the usual nagging class saying well maybe we don’t want one after all and of course Iggy travelling around blaiming it all on Harper (like that will work) I love poltics and and the great canadian trait of a form of poltical ADD!

  3. We live in crazy times – the only thing missing is the Ministry of Truth. PMSH is just riding the Obama bow wave because if he doesn’t, Iggy will. Until the shine is off the Big O, until the media goes from licking his boots to investigating his vast spending policies, there is no hope for sanity.

    This is hopefully the crescendo of the post WW2 rise of liberal socialism in Europe and the Americas. The idea of fiscal responsibility is absent in our current leaders – Europe is in far worse shape than the US or Canada, but Obama appears to be trying to catch up. They can borrow and print all they want but they can’t change the laws of economics.

    The rebirth of Keynes, the Belief that a minor trace gas is casing catastrophic atmospheric warming – pure Ministry of Truth.

    A word for the wise – take care of yourself because the reality of the future isn’t going to be achieved by a “Yes we Can” belief.

    • Perhaps not, although I do tend to think that the Obama-esque attitude of “Yes we can” is far better than the Neuman-esque attitude of “What, me worry?” demonstrated by Harper/Bush.

      • No it is not.

    • I have an idea, since you appear to have all the answers: you run!

  4. I think it is ironic that if it were the Liberals in power, then the deficit would surely be much smaller than if the Conservatives were (are) in power. For the Liberals would have the Conservative clamouring for balanced budgets or, at least, small deficits. The Tories have no one to the right to keep them in check.

    • Except for their voters.

      • and their voters don’t really care about fiscal issues. They only care that they aren’t Liberals.

  5. “Governments got us into this mess, and governments will have to get us out of it.”

    This is a surprisingly simplistic, black and white statement for a columnist of Andrew’s calibre. I understand the argument made and the caveats offered. However, risk managers, investors, and individual home buyers all had a major role. Assigning blame is much more nuanced and complex than this column implies.

    That said, I think the stimulus packages are quite short-sighted. Over and over I have read that Americans in particular but also Canadians are not saving enough. Absent a stimulus, this would likely be corrected. I think the stimulus is a mistake.

    My great hope out of the stimulus is that if money is to be spent, it will be spent on things truly beneficial to Canada – mass transit infrastructure at the top of my list, particularly for Toronto whose public transit system is grossly underfunded and an embarassment for a city of its size.

    Hope are high. Expectations are low.

    • AC is merely channelling Will Rogers: “If Stupidity got us into this mess, then why can’t it get us out?” The subliminal equating of government with stupidity is consistent with AC’s historical stance (and it is certainly difficult to find contrary evidence).

      It is the tragedy of our species that recognition of the fundamental stupidity of a growth-based economic model that externalizes environmental and natural resource costs is not possible. By the time things are bad enough that economists, politicians, bureaucrats, and the voting public are forced to see that we have sold out our future (with a vast ecosystem debt), we won’t have much of a future left.

      So all these discussions that remain within the various classical economic theories are merely mortequinoflagellation.

      • Cool. Then full cost everything, and explain to the widow with four children why her power bill is $900 this month.

        • Exactly my point: we can’t handle the truth.

  6. Can we really spend our way out of this mess?

    No, but we seem determined to spend our way into another one.

  7. “Dissent, at least in public, has been confined to free-market think tanks, the Canadian Taxpayers Federation, and the odd crankish columnist.”

    Read comments on news sites, such as here and, and you’ll find plenty of dissent. Alas, the opinion of mere voters doesn’t matter. Only those of think-tanks, organizations and media types.

  8. No, no, no, JV.. you missed Coyne’s point.. he was arguing that this isn’t an example of his chosen paradigm failing because it was only communism in name and really was just a dictato.. oh wait.. I got my “this failure doesn’t count” lines confused again, didn’t I?

  9. All good points, but you forget one big one: too many Americans (and Canadians, and…) were spending more than they were earning for at least a decade. This high degree of personal leveraging had to lead to a generalized crash eventually – and it did. Now that consumers and companies have cut back spending to pay for all this debt, it is important for government to increase spending in order to avoid deflation. As Jim Standford has pointed out, this stimulus spending has to be real stimulus. Thus, (i) spending not tax cuts (that will only go to help pay down personal debt), (ii) spending on Canadian goods (so that the stimulus is here rather than in China) and (iii) temporary (so that we can quickly stop once no longer needed). Again, this is why tax cuts are no good since it is very difficult to remove a tax cut once installed.

    • So if consumer and corporate debt are the cause, why not just pay off everyone’s debt? No need to get all complicated with stimulus spending and tax cuts, is there? With no debt, everyone can go back to spending more than they earn again, and all will be rosy…

      Somehow, I think the causes might be just a tiny bit more complex than that.

    • You’re right on the spending more and going to much in debt. People need to repay their debts and save more. If it’s not good for people and corporations to go in debt, why would it be good for government? After all, the governement is the people. If the governement is in debt, aren’t you to? I thought it was the taxpayer’s money that was used to reimburse the debt.

      Furthermore, where does the governement get all the money to spend in “stimulus packages”. They get it from you, the taxpayer! If the government gets that money from you, then you can’t repay your debts or save that money. Can the government just print the money? Sure it can! It’ll be another way of taxing you as it will create huge inflation which will impoverish you and enrish it. With the value of money down, the government’s debt will be worth less.

      Finaly, who do you think knows best where to spend money in the economy? the consumers or the governement? If the governement spends in areas that create jobs but will not sell their products as consumers simply don’t buy them afterwards, what good has it done? On the other hand, letting the consumers spend the money is a sure winner as they are the ones directing the market. Not the government. At best, the government can try to guess what economic sector is promising and invest in it. But hey! it could be wrong. Whatever happened to the USSR where the governement did some all around planning of the economy? Was it a successful experiment to substitute consummers deciding where the economy and market are going for the government deciding?

  10. It’s simple: Government must be seen to be “doing” something about a problem. You can go down a huge list of ineffective but somehat popular government programs that do little but make people feel better about a problem that has no easy solution. You must do something because Canadians demand it. You can’t ever be seen to do nothing.

  11. There’s no mystery here. After the federal election in 2008, the Conservatives announced a budget with spending cut back sharply, especially to political parties (but with no deficit spending) designed to weather the fiscal storm prevailed on the world by irresponsible financiers in the US. The Opposition parties went balistic at this notion (particularly shutting off political party funding) and formed an unholy “Coaltion” to upset the government. Neither the Canadian public nor media at that time said “good move – cutting back spending, just what we needed – screw those idiots on the Left”. No, the media said something like, “stupid Conservatives, causing all this kerfuffle, what’s their problem?”

    Between political and public pressure to make it all go away, the Conservatives were essentially forced to back down and revamp their spending to conform with what people want, ie. spend more money, go into debt to “stimulate” the economy and protect jobs. The real failure is of the Conservatives to stand their ground and sell the virtues of their original plan to Canadians. However, in the current climate of personal entitlements, belt-tightening is an obsolete concept, so they would likely have failed, and Canada would be under the influence of the morons known as Dion, Layton and Duceppe.

    • MGW:

      “spending cut back sharply”

      Remind me – how sharp was it? What was the total value of the spending cuts?

      • SAB

        Approx. $30 million a cutting politicians subsidy alone is a good starting point. This will stock the food banks with plenty for our less fortunate fellow Canadians.and the lines will only get longer during this trouble economic time.
        As the old saying goes, look after the pennies and the dollar will look after itself.

    • This is the most common sense reality response to the current economic / political condundrum we have in Canada at this time Jan 2009. Canada would be a better place if we fixed the silly majority government stranglehold a majority dictatorial PMO has when in office. Please try this… name one person or entity in Canada who can overrule the PMO with a majority government (and not the GG).
      A sad state of affairs at the moment if you love your country – not bad for the left wingers of the country – they are licking their chops for an election in February/March.
      Preduction – Liberal minority with NDP support for majority rule. Same a Mr. Trudeau and the NDP coalition 1979/80s – remember the NEP? Maybe even an NEP II for 2010?
      Just some thoughts.

      • Wow… you guys never tire of flogging that NEP horse. How long with Westerners use that as the boogeyman?

        • Until you have lived through it as I did, I suggest you keep your comments to yourself. The NEP raped the west to feed the east and it took many year to rebound. People walked away from the homes and lost jobs faster than they are now. That is the Liberal way divide and concer. Now that the shoe is on the other foot and the east is suffering, the green shilf was born and Ignatiffe was a supporter of it until he seen the reaction they got not only from the west but all over and had the poorest showing in the election since Turner. Yes make no mistake about it we westerners will remember the NEP for the rest of our lives.

          • I lived through it too. It was rotten. It messed up a lot of lives. And it is infuriating to see the malice and scorn towards Westerners from people like Andrew. I’ve seen it from a lot of people in the East. Maybe in Andrew’s case it comes from ignorance, I don’t know.

            Toronto Star columnist Chantal Hebert once said that if the NEP had been inflicted on Quebec it would have been an independent country a long time ago. It blows my mind that Dion tried to have a second go with his Green Shift aka NEP version 2. If people like Andrew don’t put a lid on it and if the Liberals don’t smarten up you’ll see a second separatist movement in this country. For my part, I will not forget the NEP and there is not a chance I will ever vote Liberal.

          • Good for you.

    • Sharp cutbacks on government spending do nothing but spur on an economic recession, which are most often characterized by a lack of money exchanging hands. If even the government stops getting money out there, it really builds on itself and slows down the economy considerably. I agree, the opposition and now Harper are going too far with a stimulus package of this magnitude and focused on rather ineffective stimuli such as personal tax cuts. However, Harper was not at all on the right track initially – despite his insistence, there are problems with the economy that need to be addressed in a quick and effective manner, and his initial plan had virtually nothing of that sort.

  12. Andrew, well written, and I agree completely that trying to spend our way out is ludicrous, and will result in even greater damage to the overall economy. If they are so dam headstrong set on deficits, why not something that will stimulate the economy and can be temporary, suspend payroll taxes for both emeployees and employers for 6-12 months, will put money in peoples pockets and will encourage employement growth, and it can be as temporary as needed.

    • Way to miss the point, bud: What you suggest is exactly the kind of stupid government borrowing Coyne decries.

      • Cutting taxes is not borrowing if spending cuts are included in the equation. If we had proper fiscal accounting, we all know the EI fund is in massive surplus, and should be cut not raised as just occurred. The Japanese proved very well that stimulus spending simply prolongs the agony, remember, the government doesn’t create wealth, it borrows it from us. If the alternatives as they seem to be presenting them though are no tax increases but massive spending to put us in deficit, or hold the line on spending and cut taxes to go into the red, I know which side of the ledger I lean on.

  13. Great article Andrew, it should be required reading for all politicians (the ones that actually read).

  14. After reading this, I came to the conclusion that Coyne is a better economist than political analyst.

  15. Terrific piece, Andrew. Having watched the Japanese experience up close over the past several decades I certainly share your view that the repeated infrastructure stimulus packages did not work here in Japan, apart from lining the pockets of a few construction companies.

    One person who understands the uselessness of the infrastrucure stimulus packges in Japan is my friend Tim Geithner, who spent several years at the US Embassy in Tokyo in the early 1990s. He told me in a conversation in Washington in 1997 that he thought Japanese policy makers had paid far too little attention to fixing the credit problems in the Japanese finacial system and too much time building new highways. Let’s hope he remembers these lessons in his new job (assuming he survives his Senate hearings).

  16. This is just vote buying with our own money. Governments like deficits. It means there is no accountability, just spend, spend, spend. Next thing you know we will have a structural deficit again but hey the ones responsible will be collecting their exorbitant pensions or be dead and buried while our grandchildren will still be paying for it.

  17. Stimulus is all the rage right now. I can’t believe just how quickly Keynesianism came back in fashion, even amongst hard core business types. The ironic thing is there’s no way Keynes himself would have favoured this. He favoured government action back when government spending was 10% or 12% of GDP. In developed countries today, it’s anywhere from 35% to 65%. In Canada it’s 40% or thereabouts. We already have all the “fiscal stablisation” we need.

  18. The phrase “made in newsroom recession” was coined by Wherry blog commenter Canadians Against Deficit Spending in late 2008 to describe the phenomenon by which corporate media manufactured consent for massive deficit spending by scaring Canadians into believing we are in recession, a recession featuring twenty five SUV deep lineups at Tim Horton’s drive thrus, million dollar bungalows, and historically low unemployment, inflation, interest rates, etc.

    People are talking about a housing bubble when we have the highest population growth in the G8; where do you suppose the 400,000+ who came to Canada last years are living? You’re on crack if you think the country with the world’s highest immigration rate is going to see a decrease in the price of housing anytime soon.

    I don’t deny that the economy is beginning to tank in Canada, but that is a direct result of weeks of outright fearmongering by the press, hence “made in newsroom recession”. In America, it is the “diversity recession”, the risky mortgages being a direct, deliberate policy decision by Bush to increase home ownership among minorities. It was minorities, not Wall Street or the banks, who made out like bandits in this crash.

    It was an ugly site, the media’s “reporting” of this “crisis” over the past few months, failing to disclose that the “economists” advocating bailouts for banks, big union, and big auto were employed by banks, big union, and big auto, all big advertisers, not incidentally. Not a word about the root cause of the credit crunch: affirmative action housing. Disgusting.

  19. Two Yen, what you are saying is very nearly blasphemy. Discounting the obvious beneficial effects of stimulus spending? How dare you? How can you even look yourself in the mirror? Everybody knows the economy needs massive stimulus. In fact, we may not be stimulating enough, or fast enough. ALL the cool kids are saying so.

  20. The reason we are in this mess is not due to the free market, but the total absence of the discipline of the free market.

    The collateralized debt obligations at the centre of this crisis were traded over the counter, not in any secondary market. Pricing was based on complex mathematical formulae which, as you rightly pointed out, did not take into account the possibility of a housing price deflation – one of the most common formula is known as the “Monte Carlo Simulation”.

    But that in itself would not have been a disaster if this derivative had been traded openly in a market like the stock market. The price would have adjusted to the perceived risk. As soon as some of these assets were traded in a secondary market, the brahmans of the financial world finally acknowledged that the Emperor had no clothes. Lehman Brothers CDO bonds were sold on the open market on 10 October 2008 at a rate of 8 cents on the dollar – the same day as huge worldwide stock market declines and a record level for the TED spread – results quite far in fact from the AAA rating given to these assets by bond agencies.

    Greenspan was right to repudiate his laissez faire, free market worldview before Congress – it is demonstrably wrong. Financial institutions acted more in line with what John Kenneth Galbraith predicted than Adam Smith. Time to face the facts.

    • I will reserve judgment on the degree to which the US government encouraged vs. forced lending institutions to make stupid loans to miserable credit risks (aka “real American families struggling to own their first home and who deserve a break”). But the needle clearly belongs somewhere between encouraged and forced. Add in for fun the perturbed politics of Fannie & Freddie making huge contributions to federal politicians. Please reconcile, with a straight face, this fact with a laissez faire free market. Good luck.

    • Greenspan was the chairman of the Federal Reserve. The Federal Reserve is the antithesis of the free market. This institution is on the main ones which made the free market disapear! The government created the Fed and with it has huge influence in the market. Creating a central bank was in the Communist Manifesto by Marx.

  21. And another thing – doing nothing is not a policy option when the government is staring into the abyss of a potential catastrophic deflation. We are not out of the woods yet. The mere fact that governments all over the world are taking some sort of action to try to boost aggregate demand increases business confidence and thus reduces the risk that the economic soufflé will collapse. There is no way to make this economic downturn totally painless. But there is lots the government can do to minimise the human suffering which goes along with economic displacement.

    The danger is that Harper will use this situation to implement tax cuts for the middle class which will not cushion the pain of the recession and will not boost aggregate demand significantly while creating a structural deficit which he intends to reduce later by massive cuts to core program expenditure. Everybody is talking about stimulus, nobody is talking about what concrete measures are necessary to avoid a structural deficit. It was very wrong of Harper to reduce the GST in this context. It did nothing to boost aggregate demand and lots to degrade the fiscal position of the federal government. In fact, the facts point to the GST cut creating a structural deficit even before tax receipts started to decline as a result of the recession. In any case, let’s hear from Harper what he plans to do to restore the federal government to balanced books before he goes on a spending spree.

    I remember very well the policies of the first Mitterrand administration – he went against the new monetarist orthodoxy, nationalized all sorts of things including banks, and ended up devaluing the franc 3 times before the painful “tourant de la rigueur”. The historical context is different. Mitterrand had a political strategy of coming to power with help of the far left and then governing with the centre right. At least trying to implement the “programme commun” was an essential part of this strategy. If all developed nations had continued with Keynesian orthodoxy, France would have not suffered the capital flight it did. But in the context of the new monetarist orthodoxy, Keynesian policies were bound to fail – that is the real lesson here. In the current economic and financial situation, Canada swims against the tide at its peril.

    • The best thing government can do for the economy is nothing. The human ressources need to be realocated to more productive areas. Those are areas valued by the population. What government does when it creates jobs for the sake of creating jobs is to delay the realocation of ressources. People going to temporarly do some work in the public sector will not be placed in permanent jobs producing goods and services valued by the population/consumers but will instead be in sectors valued by the government and certain special interest that manage to get public funding to advance their cause or business. Those public jobs won’t be generators of wealth as they are paid by our taxes. Certain small groups will benefit at the expense of the population while the private sector which truly creates wealth will see its human ressources bid away by the government who will most likely (at least temporarly) offer better salaries because it can go in huge and almost indefinite deficit to finance it’s spending while the private sector can not.

    • So borrowing money at the exact same time that everyone else is borrowing is a good thing? You may want to think twice about that.

      I know many people want to use this to say that capitalism is dead….well we have seen things like this before, unfortunately, but we survive them.

      And to say that the tourant de la riguer was because others didnt follow the Keynsian orthodoxy is ridiculous. It isnt others fault. Just as the current situation in the US isnt anyone elses fault other than the US’s. Lets try and boil past all the fancy names and cut to the heart of the problem, bad loans that cant be paid back on a large large scale. Those assets are the cre, they were amped up through some dodgy securities and abandonement of basic banking rules, know your customer being the main one.

      Investing turned into raw bets, risk ignored and too many people not really knowing what risks were there.

      For all the slams against “capitalism” I would ask what alternative is being proposed, or are we just saying that better oversight is required. Regualtion and oversight are not an ananthema to free markets. Free markets dont operate well where there is no trust, no resort to impartial courts or contract law. So those things that facilitate have any free marketeers proper support.

      Off balance sheet items, imporper risk assessment, government guarantees on debts these are things that twist the markets.

      What started out as a reasonable idea, helping people access credit so they could buy a house turned into a worldwide orgy of debt, because nobody thought they could lose, so nobody did the hard work required.

      Getting us out of the “mess”. The big things have been done, the anking system isn’t verging on collapse, but we haven stabalized fully yet. Everything else is cuased by the financial system going wonky and revealing the true state of risk of problems. People are doing a massive “All Change”.

      I remain skeptical about Canada’s need to “stimulate” to the extent it is about to. However, as long as it can be removed quickly or time’s out then at least it is being done in the least damaging manner.

      I think GM not taking the loans is a great example of how things might not be as bad as some portrayed, although I supported the offer. Once again the lack of normal bankruptcy financing was the reason for the government to step forward, a legitimate role for government I think.

      The criticism is overwrought, the worst of the storm has passed, it isnt over and could restrengthen. I worry more that the UK is about to slide into major problems and or that China is worse off than the dictatorship is letting on, we will know in April when Q1 results are posted. Canadian Bank results come out in late Feb early march. That information will tell us a lot.

      The cranes in downtown Toronto are still operating, this is nowhere near as bad as 1990/91.

      So pack away your Gailbraith, interst rate cuts and money supply increases have done their job of preventing the meltdown and they are about to cause a refloat. Managing that is the REAL CHALLENGE.

      • Glad you’re so confident that we are no longer in danger of a catastrophic deflation. Clearly the Harper government doesn’t share your opinion. Get ready to be groped by the dead hand of the state …

        • Deflation is a concern. And deflation is solved by monetary policy, not fiscal policy.

          The Japanese lost decade is still under some debate. Yes rates were lowered but they didnt print money at the rate they needed to. As well, regulatory polcy kept the banks from realizing losses….this is the MOST important thing, getting the losses realized prudently and quickly. Once they are off the books the FI’s can proceed in a normal fashion. The Japanese banks hung on hoping to work heir way out, this prolonged the problem.

          The losses realized should be as large as the institutions can take in these situations to clear the decks.

          Fiscal policy is more about short term demand issues. Problem is that some of our drivers, oil, food, lumber, autos etc are exported, so we can’t make up for losses in foreign demand. There is only so much we can do, specific industry support liek the auto stuff, maybe support for home renos, which is coming, but if your customers are poor then there is little you can do.

          I am not convinced that much of what will be proposed today will make much macro difference, but if it is done responsibly then it maybe we can get some things done that needed doing in the long run.

          So dont get me wrong, we were in serious serious trouble in Oct Nov. I think we might have been within days, of some nasty stuff. we have pulled back from the brink and the moentary expansion is well justified to prevent significant deflation. Th US needs to do re-ordering, but they will be raising taxes. Canada was and is in a different situation, we dont realize how much better off we are, so I question why we need to drop the Deficit Bomb as big as we are about to.

          If the GST cust were stimulus then I dont what is. Canada needs to ensure it doesnt blow its position. As I said, the next stage, the clean up on recovery, is the key one. Do that right and we are off to the races

          • Funnily enough, I agree with almost everything you wrote. However, GST cuts were not stimulus and were very bad economic and fiscal policy to boot. The boost to aggregate demand was trivial compared to the bad effect this had on balancing the budget. By my estimation, the GST cuts already put the federal government into a structural deficit before any additional spending.

            There are various explanations in academic works why the Japanese ‘liquidity trap’ was not cured by Keynesian inspired deficit spending. I find the most credible and in fact the definitive explanation to be that quantitative easing (the printing of M0 money) was not undertaken at the same time.

            You are right that failing enterprises must be allowed to fail and factors of production allowed at the earliest possible opportunity to reallocate to more productive activities. However, when such failures happen in a massive and simultaneous way, it incurs systemic risk. This crazy orgy of spending may just keep individuals and enterprises confident enough that things will not get too much worse that they will actually not get too much worse. If so, it will be well worth the price when faced with the deflationary alternative.

  22. “The danger is that Harper will use this situation to implement tax cuts for the middle class which will not cushion the pain of the recession and will not boost aggregate demand significantly while creating a structural deficit which he intends to reduce later by massive cuts to core program expenditure. ”

    this is the kind of danger I could learn to love.

    • If that is what Conservatives truly want, scaling back the role of government in a massive way, they should have the courage to campaign on it and include it as an explicit part of their platform. No surprise that there remains a fear amongst electors of a Conservative ‘hidden agenda’.

  23. The problem is not with stimulus spending but rather, with wasteful spending, or, spending on the wrong things. The objective should be not only to create jobs but to create jobs in the right areas.

    We must stimulate new areas of growth, such as green technology. We should spend on public transit, wind energy,solar energy or any other form of renewal energy. We could also spend on energy-saving technologies that will help reduce energy consumption.

    The hi-tech wave is ebbing; the next big wave may well be green technology.

    Let us use government money wisely to catch this wave.


  24. You have to understand the economics behind this. If money isn’t pumped back into circulation we are doomed to continue this downward spiral, dragging other nations down with us. Without getting into some long diatribe about the economics behind this, suffice it to say it needs to be done in conjunction with stimulus to spur private enterprise, and public consumption. These three combined will not only keep money in circulation, but improve public morale, resulting in higher consumer confidence, resulting in the stemming of jobs lost.

    Don’t freak out…as a percent of our nation’s GDP, we are in a very manageable debt to equity situation…

  25. the problem with tax cuts is that we have seen it does not ‘stimulate’ the economy. last year bush cut billions of dollars of taxes and the taxpayers saved that money or payed off old debt – which does nothing to stimulate. and there are many studies that show tax cuts being inferior to infrastructure investment as a jump start to economic stimulus.

    permanent tax cuts will create a deficit for the long term. the lost revenue will not be replaced even when the economy recovers, except through an increase in taxes or reduced spending.

    the appetite for deficit financing in the US is near-infinite, but there is a strong reluctance here in Canada to go into deficit. according to the polling firm Pollara, infrastructure investment is the top stimulus idea that Canadians would support.

  26. As others have said, recessions are dangerous because they can easily feed themselves. Injecting some cash immediately and over a short period of time can break the economic downward spiral before it escalates too far. Basically, we needed something, preferably short-term infrastructure spending since it’s the most reliable method, which would inject liquidity into the market. That is why Harper was dead wrong by doing nothing in late 2008 and waiting this long into 2009 to do anything.

    However, the opposition’s cry for a huge stimulus package, which Harper seems to be more than happy to provide now, is also not the answer. It will likely solve the short-term problem, but leaves us with the same huge long-term problem from the 70’s and 80’s that we still haven’t fully recovered from, which is unnecessary and large deficits.

    This is what happens when our political parties jockey for position instead of compromising – we get two bad solutions on different sides of the right one.

  27. We can get a temporary buzz from an injection of cash, but without healthy markets, this great trading nation is stuck in deep drift of snow. But don’t tell this to Taliban Jack Layton, the voice of the CIC and head of an anti-American party or Gille Duceppe, King of the “demandeur” province.

  28. We are mortgaging the future and everyone knows it. I’m more afraid of the present than I am of the future though. Let them spend. Some good will come of it at least.

  29. One of our worst financial mistakes is an idea of trickle down economics where governments give tax breaks or a lot of money to large enterprises in the hopes that they will hire people and so forth. Why not examine trickle up economics where governments ensure people at the bottom of the heap, through tax breaks on small earners and large taxes on large earners, get enough money to be able to spend some.

  30. Andrew – I happen to agree quite fully with your views on this. You bring up a good question about why, if there is no successful precedent of deficit spending, do so many people call on the government to do so? I fear it is North America’s turn to have a lost decade, as Japan suffered in the 90’s.

    • JB: Because Andrew’s wrong, that’s why.
      Check out the Progressive Economics trackback link on the first page of the comments.

  31. From this morning Guardian News in England……..

    Unemployment leaps closer to 2 million• Jobless rate expected to hit 3 million by 2010

    And they like the Yanks have spent billions (pounds) to try and stop this world wide change in the work force….. once again “World Wide Change in the Work Force” get in Andrew? the middle class is about to put back into it’s old grove …… no more middle class wealth,

  32. Addendum

    Off to Saint Mary’s University this evening for this ….. interesting?



    Transparency, Leadership, Accountability

    Who are the key players, what questions should we be asking them, what are their roles, and are they fulfilling them?

    • Just returned from Saint Mary’s University on a Panel discussion on “Ethics in the Financial Industry” not to bore y’all but two important things came to light no matter how hard this educated group tried to white wash their industry.

      a) ….. Greed was the problem for the crash but greed is good as it is productive in the financial industry as drives profit margins….?????

      b) ….. There is no such animal as Ethics in the financial industry because regulation will not work and there will be another crisis after this one but they do know what it will be so how can stop it …..

      I sat still knowing bankers are just like real estate agents …… hands in your pockets rang in my ears ….. and financial advisers are like Alcoholics …… it’s always going to be different next time but after that first drink …. they want more and more ….. and these people will more profit and more profit and will want to make up for lost revenue all at the cost of the unsuspecting investor…….

  33. Andrew Coyne’s article “Can we really spend out way out of this mess (January 21)” really hit the nail on the head. After witnessing the outcome in the US, we Canadian should understand that when you’re in a hole, you stop digging.

    Caroline Grosso
    Sudbury, ON

  34. Stimulus used to be called “pork”, back in your grandpa’s day.

    It’s only “stimulus” if you consider PCP to be stimulating.

    The role of pork-distributor is the same as that of a drug pusher. No, no, don’t thank them for their trouble! They are being amply rewarded.

    PMSH’s attempt to be everyone’s crack daddy is going to fail badly. I mean, it will fail to help ordinary people – it will be a roaring success at improving the positions of those who are situated closest to the spigot of cash. When that failure becomes obvious in a year or two he’s going to be branded by his political opponents as being insufficiently interventionist. He’ll be called a cold-hearted capitalist SOB for failing to implement Marxist-inspired boondoggles with sufficient alacrity and zeal.

    Then, the people will elect a bona-fide class warrior. Probably it’ll be Just-Watch-Me Jr., who is now drooling with envy at the revolutionary potential in the hands of the new POTUS BHO. But in practice, no matter who actually wears the purple, I expect it’ll be a kind of triumvirate of Little Castro the communist visionary, Boob Rae the silver spoon socialist and presumed Power Corp favorite, and the egghead from the ‘States with national socialist tendencies.

    Blame everything that happens on the will of the people. They want their cake, and in the end they’ll be surprised at how much of it they will be forced to eat.

  35. Yah Niraj, as long as we spend on the right things, everything will work out fine. That’s really profound.

  36. International Monetary Fund Managing Director Dominique Strauss-Kahn was interviewed yesterday on a BBC show called HardTalk (I think) and I heard him say that governments practically everywhere were rightly giving the stimulus idea a go. He admitted that it does have its problems and most of those were pointed out by Coyne. However, the reason why almost all the west’s governments and government economists were doing this was because the alternative was far worse.

    Coyne and other right wing money pundits are in such an extreme minority these days because they fail to see reality for what it is. Doing nothing would a) bring down most banks, b) bring down a lot of major companies and c) create a further wave of failures unnecessarily who simply get caught in the tsunami.

    So, despite the problem of deficits and stimulus spending, the alternative is unthinkable. And that is what this is all about.

    I’m not so sure there are broad agreements (according to the IMF guy) on WHAT governments should spend on – he seemed to think it would be different in every country given their own circumstances. Hungary has far different problems than the UK or Canada for instance. We’re sort of ok at the moment.

    In Canada, we should probably have some infrastructure construction – but not so much as to over extend the construction workforce – and simply support the poor and newly unemployed so their spending power is strengthened and they do not default on their loans. Support learning, support pension funds and keep Canadians afloat who have been caught in the crossfire and get shot up as innocent bystanders.

    So, Mr. Coyne, do not get your shirt in a knot over this. It has indeed been done many times before and it merely kept us from the abyss. We need to face reality and TAX the more well-off (a horrid idea I know) to balance the sheets. As in America, giving tax breaks to the rich and then spending even more, the strategy doesn’t do any good, does it. If governments need to spend more, tax more to even it up. We are all so scared of taxing the well-off because they threaten to take their money elsewhere. Elsewhere just got a lot further away.

    Yes, there are a lot of things that need fixing as Coyne points out so let’s do that.

  37. “However, the reason why almost all the west’s governments and government economists were doing this was because the alternative was far worse.”

    The alternative is far better than you think, and in any case is inevitable.

    The roots of this crisis are in governments’ use of central banks to create vast amounts of fiat currency and then hose it around their jurisdictions creating a false “boom” in whatever sectors benefit most directly from the new money. Money is easy to acquire during a boom, for the favored sectors, and the businesspeople receiving the money lose touch with financial reality and massively overinvest in whatever it is they do. For a few years up until 2000, hi tech was the favored sector and you got hundreds of startups which were doing nothing particularly original or profitable. When that blew up in their faces governments redirected the firehose of cash towards real estate and I think you know what happened there. Banks, many of them the largest in the world, were the willing accomplices to this monetary fiasco, and no wonder. Their executives pocketed literally billions in salaries and bonuses from handling the “boom” money, and when their bad investments inevitably blew up, they started whining and pleading to governments that the alternative to letting them pay the price for their greed and corruption is “far worse”.

    But bad investments are bad investments, and the solution to a problem in which people or companies have borrowed far more money than they can ever pay back is not to lend them more money. Don’t listen to anyone who tells you otherwise, even if they have $2000 dollar suits, PHDs in economics and they work for the IMF.

    All bad investments will be liquidated eventually. Governments can delay the liquidation but they can’t prevent it. The longer it takes for bad investments to be liquidated, and the more money which governments print and borrow in order to delay the liquidation, the more painful and severe it will be when it happens. But it is going to happen. Until it happens you will see economic conditions become worse and worse as the people, money and resources which should be re-allocated to sensible, profitable activities will instead be locked into unprofitable activities. Entrepreneurs and investors will refuse to commit to truly profitable and worthwhile projects because the moment they enjoy any success, governments will swoop down on them like vultures to confiscate their profits and use them to bailout the idiot sad sack bankers and politically connected corporations (or should I say sad sachs).

    Bad businesses must fail and be liquidated, even the gigantic sacred cows – especially the sacred cows. People must leave their jobs doing unprofitable things for too much money and find reasonable jobs in profitable businesses. Imprudent people who gambled away their money in bad investments mustn’t be bailed out by confiscating the money of prudent people. If governments absolutely refuse to let this happen then it will eventually be forced on them through revolution or war. Better to let the laws of economics slap you in the face now, than procrastinate for years and let them fall on you like a ton of bricks.

    • Al Heck. I don’t disagree with you on the basic thrust of letting bad businesses fail or imprudent investors take a hit. The problem is that there are a lot of good businesses and a lot of royally duped investors who also get nailed if you let the whole thing fall apart – as happens when too much of the system falls apart at once. Everyone runs and hides their money – consumers and investors and lenders. Then it just gets really nasty from there. The art of financial management for governments and central banks is to let restructuring take place, as it must, without bringing the whole thing down at the same time. It’s a balancing act. Sooner or later the weak will be weeded out but you can’t tear up the entire lawn to do that.

      • The destruction of good businesses and the tragedy of royally duped investors is a fundamental problem of central banking, that is, the government monopoly on the printing of money and the cartelization of the banking industry. Under this system everything does indeed get nasty, and it does so by design, for the simple reason that the nastiness is how the leaders of the cartel become filthy rich.

        I just found a great article today which describes how ordinary savers and investors are pooched. Google up the whole thing if you want more details. The essence of the racket is that ordinary people are unable to invest their money in productive companies and receive dividends, because the companies can more easily raise money by borrowing fiat currency printed out of thin air by the central bank.

        “…the effect of [central banking] is to shunt profits away from investors in productive enterprises to the payment by productive enterprises of interest to financial institutions which … themselves require little capital because of the nation’s banking laws and [the central bank’s] unlimited cheap credit. This system is a bankers’ dream come true because it maximizes the borrowing of money [by minimizing the need for companies to raise money from shareholders]. Unfortunately, the moral hazards of (i) such a near complete supplanting of capital and, (ii) (thanks to the [central bank’s] legal monopoly) interest rates untested by competitive market pressures and hence dissociated from reality, virtually guarantee an ultimate crash. It is hard to imagine a system with a greater built-in predilection for boom and bust.

        “… So long as the [central bank] is running the show, your money will have no place to participate in and profit from the economic growth of this country. Your place will be to spend your money to make profits for others, particularly banks.”

        That’s why ordinary investors and good companies get wrecked. For a government to step in and claim to be fixing the wreckage by pumping more money into the system from the central bank via the banking cartel is only to prolong and exacerbate the tendency to moral hazard and malinvestment.

  38. The answer to Government and Consumer is: Do not spend what you have not allready earned.

  39. FINALLY! FINALLY someone eloquently putting into words what I have wanted to scream from the rooftops. What the HELL is Canada doing?

    What a colossal waste of our children’s money. What a colossal failure of policy. What a colossal mess. I’m so mad, yet what am I to do? Vote Liberal? No political representative has opposed this, thus NO ONE in the wider public even understands the implications of this; no one has even bothered to consider that this is all a load of BS, that this won’t do a damn thing to stimulate the economy.

    The non-partisan Congressional Budget Office just called Obama’s plan a waste of money that will be ineffective in helping the economy (yesterday) and they are about to do 10%+ GDP. We are doing 2.5% and this will magically rescue our economy? How are we letting them get away with this? Who are these “economists” that are proposing this? Who still believes in Keynesian economics?

  40. Drawing from many diverse and credible sources, as well as referring to the lessons learned from all major economic and financial turmoils since 1930 Andrew Coyne has presented a very informative and compelling argument against Harper’s knee jerking and politically motivated reaction to the current economic slowdown in Canada. Coyne opens his article by questioning, tongue in cheek, whether this dramatic and potentially very costly u-turn by Harper is a ‘paradigm shift’ in reverse.

    Paradigm shift, a concept introduced in the philosophy of science by the physicist Thomas Kuhn takes place when the existing theory in a field of science repeatedly fails to adequately explain certain outcomes. The buildup of such anomalous results over time often lead scientists to the construction of a newer and stronger theory that can also predict and explain those occurrences that were earlier viewed as anomalies.

    For sure citing certain elements of scientific approach that Thomas Khun’s and his followers advocate with the opportunistic tactics that Harper and his team follow all in one paragraph – notwithstanding the sarcasm intended by the author- would still give Harper a huge undeserved credit.

  41. The opposition parties all wanted stimulus spending back in November, it couldn’t happen fast enough, Iggy in Halifax said he wanted tax cuts for the lower and middle income earners. Now it seems the opposition is opposing what they were asking for, in effect opposing themselves, idiots all of them.

    The only people who can’t see or refuse to see through the B.S. are the usual sheeple who can always be counted upon by the opposition to bleet out their talking points.

  42. Hello Mr. Coyne… From the BRITISH COLUMBIA perspective you are 100% WRONG with your comment ” We did not undergo anything like the same housing boom that the Americans did… “. Check your facts if you care at all. The last time I checked, BC was Canada’s 3rd most populated province. If you don’t believe me when I say that British Columbia has experienced as much of a boom in real estate as CALIFORNIA, FLORIDA, ARIZONA, NEVADA etc.. (all places in the USA where the housing bust is most pronounced) feel free to email me and I will point you to several real estate blogs here in BC where you can see for yourself the unambiguous charts and information which show unequivocally the absolutely undeniable parallels with the US housing bubble. A few months ago Merrill Lynch Canada had something to say about Canada tracking the US housing bubble experience with a two year lag and Robert Shiller (recognize that name?) is on the public record calling Vancouver one of the bubbliest housing markets in the world. The FACTS are that not all of the US housing market experienced the housing bubble equally and not all of the US market is suffering the housing bust equally. The very same holds true for Canada.

    • Question is, are people who have no income or crappy credit being approved for the mtgs that are being granted in BC?

      I dont deny there is a bubble in BC and that prices will fall, but California and Nevada are seeing 40% drops. Not unlike what Ontario saw in 1989/90…we HAVE seen this before and we live through it.

      I suspect BC’s boom is being fuelled by specualtion but also a lot of legit demand. The interior, the Okanogan, was being fuelled by money from Alberta’s oil boom. While both generate froth and sepculation there are differences in the kind of bubbles they generate and more importantly differences in the effects that happen when they burst.

      Ontario’s boom in 89/90 was full of leveraged specualtion. I am not sure that BC’s is as much. It will still be painful, 20%, maybe 25%, but not 40 to 50% that they are seeing in the US.

      Banks up here also learned to try to work through those, they learned that the liquidations they were doing in the 80’s didnt help matters. Us, liquidation of whole streets.

      There is an interesting debae about mtg cramdowns. It may be better to force the value of the mtg down to its new level, and force the bank to realize a partial loss, than for the bank to carry larger hidden unknown losses for longer, while they hold onto the asset of the house. We will see what happens.

      It is ugly, and has been caused by forgetting basic rules of lending, in aprticular know your customer. Teh Americans remain very good at industrializing things… thi scase they industrialized mortgage origination. Liek any process that tries to gain scale, without proper controls you lose control of quality ad on a large basis.

      The problem originated in the US, and has spread to Europe and now Asia as demand falls. It is hitting Canada because ou customers arent buyong what they used to. That will change, likely, and things will improve.

      If we are goign o spend the money then lets hope it is on longer term stuff rather than short term things.

      Oh, one thing people forget about the New Deal. FDR broke strikes and unions to ensure wrk took place and government workers were paid below scale to ensure that they would go back to private work when the jobs reappeared. Layton and Jom Stanford seem to forget that in all the Bromance Novellas they write how to end a small recession.

      One final point, I was in downtown TO yesterday, and the cranes are still operating. Unliek 1990 when they stopped completely. The moneument to that recession was at Bay and Adelaide, a building that went unfinshed for 15 years. Doesnt seem to be happening this time.

      • There is legitimate demand in the USA as well!

        I believe somewhere in the order of 5 million new immigrants to the USA yearly not to mention the world’s most sophisticated economy bar none!

        There are housing bloggers here in BC who have bothered to put a tremendous amount of information together. If you search for them do by-pass 99% of the Real Estate Industry blogs ( I know of 1 notable exception in North Vancouver) where you will only get the “buy now or forever..” spin or the “it is different here..” spin. That’s ok because I know it is their personal incomes that depend on this spin so they must spin, spin, spin.

        But guess what? There are bloggers in the USA who have documented these exact same spin sentences spoken by the US Real Estate Industry. Spoke for the same reasons and spoken all the way down to where they are now in the USA and the UK and, and and. The spins are in quotes for all to see and they are identical to what we see and hear in BC. Isn’t the internet wonderful.

        I read and watch the official stats and spin pumped out by the Real Estate Industry (and their “experts” which includes politicians and banks) but I rely on the bloggers for the actual truth. It takes a lot more work to get at the truthful information as opposed to reading the main stream media “stuff”. The bloggers have simply been more truthful, more accurate and most of all have demonstrated more critical analysis.

        Starting with the US bloggers, where the worldwide housing bubble began and is now ending and then reading the local bloggers I have seen for myself that the housing bubble here in BC is almost identical to the one in the US, the UK and Spain to name but the most flamboyant cases. The only differences are the timelines.

        Look at the blogger’s charts and calculations. In particular look at the charts based on the US Case-Shiller Index and a Seattle and a Vancouver bloggers’ efforts combined. Some local blogger put the Vancouver numbers on to the US Case-Shiller chart and well…. see for yourself.

        The numbers look the same as the USA and possibly worse! In fact the chart I am looking at right now shows Vancouver housing prices falling faster than anywhere in the USA to date! The housing price percentage decline is smaller than in the USA but we are also 12 months or more behind the USA timeline. Other than that Vancouver looks like Miami or Las Vegas or San Diego. See for yourself.

        You have to dig for this information because your elected officials and and the Real Estate Industry and their supporting “experts” do not want the population to see it. It is deemed better to “manage” this crisis a little bit at a time by putting a positive spin on all the bad news (reality).

        I can certainly understand why the Grand Poobas think this way.

        On the other hand it is these same Grand Poobas that got us where we are.

        Give or take a few Grand Poobas here or there.

        I stand by what I said earlier –>> Hello Mr. Coyne… From the BRITISH COLUMBIA perspective you are 100% WRONG with your comment ” We did not undergo anything like the same housing boom that the Americans did… “.

        • So Jim, what is fuelling the boom? Once again, BC real estate may be in for a fall. But it is the effects of the fall matter. Those effects wil differ based on what fuelled the boom.

          In the US, there were no effective standards, you could get a loan by breathing. The standards for downpayments were non existent, lots of no money down.

          Do those conditions apply in BC, or are there just lots of people who put money in thinking Real Estate would never go down, but they have jobs, and downpayments?

          Both situations are sad, but one ends up threatening the health of the lending system, the other results in financial hardship for those forced to sell.

          Is there mtg fraud going on in BC?

  43. I share Andrew’s pain on this one…..but this is apparently what “we” asked for. Numerous pundits, Parliament etc.

    As I said at the time of the “crisis that none foresaw” an election at 300,000,000 was a reasonable insurance premium on ensuring consensus for an increase in spending of 30,000,000,000. Of course that is now more like 64 billion when you factor in 2 years.

    The problem was and still is the US financial system combined with the overextended nature of the US consumer.

    The US consumer is apparently repairing their balance sheet quickly. But the job losses are mounting. The imperative was and will remain ensuring there are no catastrophic events that would not normally have taken place, or are not fixable due to unique circumstances.

    I mean things like lack of Debtor in Posession financing that is/was preventing the normal bankruptcy procedures from taking place.

    My hope for the budget are that any “stimulus” is cancellable quickly. The politics of this makes it difficult to avoid in a minority situation. The one difference between the cons and others is that at least the conservatives leave room for tax increases later, if necesary. If you want an example of what a continual tax and spend government looks like, the UK under Labour is model. They have nothing left and there is a good chance that they will be in bankruptcy and default before the decade is out.

  44. As everyone seems to agree, recent prosperity was based on a house of cards created through giving credit to people who couldn’t afford it. Morgages are considered the main culprit but it is also that people have been encouraged to live on credit. All credit has been easy, not just morgages. We will not have a typical recovery because we now know we can’t go back to the days of easy credit. Consumer spending cannot go back to what it was.

    Lowering taxes while increasing spending is idiotic. Harper is lowering taxes to satisfy his conservative leaning and base but increasing spending to satisfy everyone else. That’s a recipe for disaster.

    Requiring matching funds from provinces and cities is also a terrible idea. The same taxpayer pays all three levels of government so that is just passing down more deficit. That means the the 7 billion dollar infrastructure deficit spending is really 21 billion dollar deficit spending as we know that the provinces and cities will go into deficit to match the funds.

    The only justifiable deficit spending is in necessary expenditures and in spending that improves our competitiveness. Infrastructure is necessary because it’s falling apart. This won’t prevent the recession or be a cure all but it will lessen the pain. Montreal has experienced a ridiculous number of water main breaks and bridges are crumbling so dangerously that traffic has had to be restricted. I am sure that other areas of the country also have infrastructure in pitiful shape. It’s outrageous that our infrastructure has been allowed to deteriorate to this extent.

    Globalization has resulted in the loss of well-paying blue collar jobs on which much of the middle-class was dependent. If we accept that these jobs are gone permanently we must figure out how to replace them. We can’t all be professionals and low-paying service jobs cannot fill the void. Saying “oh well those people will just have be poor now” is a recipe for social unrest.

    So yes, deficit spending is reasonable if it is done right. Increasing the deficit to lower taxes is not reasonable.

  45. What we are witnessing is a kind of policy panic, a herdlike rush every bit as mindless as the financial panic that preceded it. If we have not gone as far as the Americans—at 2.5 per cent of GDP, even a $40-billion deficit would be dwarfed by the $2-trillion, 10-per-cent-of-GDP monster the incoming Obama administration is preparing—we have done so with even less justification. There, at least, the economic situation is such as to justify a little panic: the worst recession in at least 25 years, and possibly 70. Here, we have not as yet even met the technical definition of a recession.

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