Terence Corcoran - Financial Post - Money doesn't grow on trees, so why is Finance Minister Jim Flaherty running around shaking Canada's financial forests to "loosen credit" as if it did? For a while over the last couple of weeks, it looked like Mr. Flaherty was going to chop down a whole bank to liberate loose cash for all the businesses and consumers that are supposedly starved for money. Bank of Canada governor Mark Carney also emerged to take a few swings of his axe: "What is clear to me," he told the Globe and Mail, "is that there is unfilled demand for credit for worthy investments, and I'm sure that our banks will see these opportunities in the fullness of time." Is that what they call "moral suasion" these days?
Mr. Flaherty has since changed his tone a little in the wake of a Monday meeting with bank CEOs; the banks apparently have plenty of statistical evidence to prove that they are lending money as fast as they reasonably can under the circumstances. As for Mr. Carney, if he thinks there are a lot of "worthy investments" out there starved for credit, then why doesn't he make the loans himself ? On second thought, that's a wisecrack that isn't so funny, since the Bank of Canada is already buying up mortgage and other loans and, as Mr. Flaherty scans his files for federal institutions that he can browbeat into lending taxpayer money to shaky borrowers, the Bank of Canada is one of the likely candidates.
For now, at least, it looks like the chartered banks have been relieved of the risk of having Ottawa dictate their lending policies. The banks could get another shaking next week, though, when the Bank of Canada issues the results of its survey of senior loans officers. It's bound to show that the people who assess credit risks in banks are being more careful and that conditions have tightened. In some sense, conditions must have stiffened in the last couple of months, and with good reason. The point is that, despite a tougher environment, bank lending continues to grow. As for the loan officer survey, maybe the banks should stop answering the Bank of Canada's calls if the information is just going to be used to embarrass the banks.
The banks, through all this, have also been busy restocking their capital bases, selling equity and preferred shares. Royal Bank raised $200-million yesterday on top of a $2.3-billion common share issue in December. Bank of Nova Scotia raised $200-million and TD Financial Bank raised $300-million earlier in the week. This is money that falls to the banks capital base and frees up expansion and lending opportunities. That's where the market is working and doing more to ease credit than anything Mr. Flaherty might do.
With the banks apparently already doing their bit to keep credit flowing, Mr. Flaherty appears to have moved on to other areas of the credit markets that have stopped functioning or that have been vacated by previous players. Commercial paper markets are said to be dry, and buyers of securitization vehicles have reportedly left the building. GE Capital and others have vanished, leaving big holes that will take time for others to fill.
Mr. Flaherty is now reportedly trying to work his magic on these other credit markets, including having the Bank of Canada play a role in backstopping commercial paper and securitization offerings. But what need is there for government to suddenly start subsidizing and guaranteeing market transactions? Commercial paper and securitization markets only stopped functioning after investors got burned with products that turned out to be not exactly as advertized. As soon as new clean and transparent products are offered, buyers will buy them.
Other government-backed credit expansion ideas include increasing the value of mortgage-backed securities the government will guarantee. The banks have also apparently suggested that the government could renew and expand an existing small business lending guarantee that expires in March. The banks could also participate in working up joint lending programs with Ottawa's Crown corporation money-lenders, including Export Development Corp., Business Development Bank and the Farm Credit Corp.
It could be worse. If all that comes out of Mr. Flaherty's tree-shaking effort is a modest expansion of these existing corporate welfare schemes, then Canadian taxpayers will have been spared a U. S.-style extravaganza. The question is how far down the subsidy path Mr. Flaherty is willing to be led. Talk of jump-starting the commercial paper market and sparking a government-guaranteed renewal of the securitization market is not encouraging.
All of these efforts, even the smallest, have a cost. Piled on top of major spending deficits, they lead to even greater buildup of debt and unprecedented risk in the hands of taxpayers. As the Jan. 27 budget is written over the next week or two, and lagging economic data are released, the pressure to be seen to be doing something big is likely to grow. The task of the Finance Minister will be to keep those demands in check and keep reminding Canadians --and himself-- that money doesn't grow on trees.