Sunday, March 27, 2011

The Irony of the Conservative Economic Message

Prime Minister Harper's message in this election campaign is that Canadians should fear  a minority Liberal government supported by the NDP and/or the Bloc Quebecois on the grounds that this would create financial instability and jeopardize economic recovery.  But this fear  is not only exaggerated; it is  profoundly ironic. 

That is because the primary reasons for Canada's relative economic stability are not anything in the Conservatives' rather tepid "Action Plan", but because of what both Paul Martin and Stephen Harper were prevented from doing in the years before the Financial Crisis of 2008 and the Great Recession of 2009.

During that period, the banking industry, business organizations and conservative think tanks were all gazing enviously  at the reforms of the financial sector that were happening in the United States, such as the 1999 repeal of the Glass-Stegal Act.  The Liberal Government of Paul Martin and the Conservative government of Stephen Harper were consequently quite interested in bank mergers so that Canadian mega-banks could compete internationally with the big international investment banks as well as the new global hedge funds. The quid pro quo for this, which would be needed to compensate Canadians for the reduced competition in the domestic banking industry, would be to let more American financial institutions into the Canadian market, along with all kinds of new and innovative financial products. The "financial innovation" that the Bush administration liked to brag about was set to come into Canada; and it was in a similar spirit that the Conservatives even included the encouragement of sub-prime mortgages in their first budget in 2006. (Luckily, this policy was reversed  the following year as home foreclosures started to become a crisis in the U.S.)

In other words, Canadians enjoy their superior financial stability in part because we did not have a Conservative government prior to 2006 and in part because we have only had minority governments since 2004. While we could not escape all of the effects of  collateralized debt obligations and securitized subprime mortgages in Canada, since our banks still traded in these securities, we nonetheless avoided the disaster of having to bail out a merged Royal Bank /Bank of Montreal or CIBC/TD to the tune of billions of dollars; and we only promoted subprime mortgages for a year or two.

It is doubtful that we would have been as safe from that danger if  Stephen Harper  had come to office sooner, or if either Martin or Harper had had the policy latitude afforded by a majority government. Thank God for small favours.


Anonymous said...


I don't know but I suspect that Martin was one reason the Liberals resisted the financial derivative/deregulation bandwagon -- Martin listened to his bureaucrats and the Office of the Superintendent of Financial Services has a very strong no nonsense culture (stemming from the reforms following the bank bankruptcies in the 1980s).

Harper was handed an excellent hand and has his government has played it poorly. The only good thing we can say is that they moved relatively slowly to follow the Americans. However, he lowered the GST and the timing was bad as it aggravated the business cycle (and the Bank wasn't happy at the time so it isn't an issue of we didn't know). They didn't reign in CMHC or perhaps they encouraged CMHC which was off to the races promoting absurd mortgages even after the US market was imploding (which started a fit with the Bank). When the downturn occurred they had their head in the sand and ignored it for about 3 months, critical lead time in putting in place stimulus. Then their heart wasn't in place to put in the stimulus. Less stimulus earlier would have been more effective (not to talk about the way they did it). As it is, some of the stimulus took effect when we well on the way to recovery.

They didn't play it very poorly -- e.g. not done any stimulus, which might have been their inclination in the absence of a minority.


Mark Crawford said...

Thanks--somehow I had the impression that Martin was interested in mergers. At least I was right about Harper. What Conservatives did was take the GST cuts and tax expenditures--which were in the works before the crisis even began--and dressed them up as "part of canada's economic action plan". Those tax expenditures actually had nothing to do with the recessin in the first place, but the recession gave them a great excuse to spend millions of dollars of advertising on them!

Anonymous said...

Certainly, the Liberals tested the waters on a merger but pulled back when they go public resistance.

The GST timing was bad because it was procycylical, stimulus in a boom.


Anonymous said...

Hi Mark,

I think the question you've asked is primarily a political one, not
economic. With respect to the economics, my view is that you're
absolutely right that our financial sector regulations are what kept us
from experiencing the same kind of downturn that occurred in the States
and elsewhere.

What I don't know, is whether minority governments helped to keep
deregulation from happening here. I'm not sure whether either a Liberal or Conservative majority government would have moved to do much dismantling of regulations (or that the Conservatives would have allowed sub-prime mortgages earlier, i.e., had they had an opportunity prior to


Mark Crawford said...

Hi B --you're right. Strictly speaking, I don't know that a
majority government would have been likely to allow bank mergers--only that they would have been able to if they had wanted to. But it is a fact that sub-prime mortgages were in the first Tory budget, which strongly suggests that, had they come to office sooner, we would have been more exposed to the financial crisis.

How much more is admittedly
a matter of speculation.



Anonymous said...

I don't have it handy but there was financial sector reforms (mortgage reforms) put forward by Flaherty early in their first minority government. I remember the words used at the time "We want to bring the financial innovation happening south of the border here to Canada".

I don't have any doubt that if the Conservatives had a majority they would have opened things up and we would be in as big a mess as the rest of the world.

The lie is and always was that the only evidence they ever offer about their fiscal prowess is there own statements. Say it loud enough and often enough and people start to believe it. The facts are that they took a $12 billion surplus and squandered it away chasing an ideological dream.

Thanks for your post and I wish more people would contrast the facts with Conservative party lies.