Topic: US/World Economics' effect on Canada

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail is another report that shows the impact of the credit crisis on Main Street:

 http://www.reportonbusiness.com/servlet/story/RTGAM.20081029.wpension29/BNStory/Business/home

'Disaster' unless Ottawa offers pension relief
Companies launch behind-the-scenes lobbying effort for temporary reprieve from pension funding obligations

JANET MCFARLAND AND TARA PERKINS

From Wednesday's Globe and Mail
October 29, 2008 at 12:00 AM EDT

Canadian companies are lobbying the federal government for relief from their pension funding obligations as market turmoil drives down the value of their pension-fund assets.

Pension industry consultants and corporate executives have confirmed that a behind-the-scenes effort is under way to persuade the federal Finance Department to offer a temporary reprieve for a diverse array of companies and not-for-profit organizations. Among the voices lobbying the government is Nav Canada, which operates Canada's air-navigation system.

Some companies say they are facing possible financial devastation if they are required to immediately make enormous contributions to their pension plans to fund shortfalls.

“There are companies that would absolutely fold if they had to make contributions based on the provisions of the legislation as they stand now,” said pension consultant Jeff Kissack of Watson Wyatt in Toronto.

One company executive, who spoke on condition of anonymity, said his firm cannot afford to fund the huge gulf in its pension plan, which was already a problem even before stock markets tumbled this fall. Since the beginning of 2008, Canada's benchmark S&P/TSX composite index has fallen about 37 per cent and Tuesday's surge will do little to offer much relief.

The executive said it cannot be the government's policy intent to act in defence of employee pension plans if it means fatally weakening companies that would otherwise have no other financial problems.

“If you actually force some of those companies out of business, it would be a disaster for the poor pensioners who only get 70 cents on the dollar or 80 cents or whatever it was at that point,” the executive said.

“It's not asking for a tax break or a bailout or a handout. … You're really saying let us use the money earned within the company and being spent to do the best things for people's jobs and for the company in the long run.”

The Office of the Superintendent of Financial Institutions, which oversees about 1,400 federally regulated pension plans, confirmed this week it has met with companies concerned about the impact of the current market turmoil on their defined benefit pension plans.

Judy Cameron, managing director of OSFI's private pension plans division, said OSFI is “monitoring the industry very closely” and is talking to some plans about their funding issues. But she said it is not within OSFI's powers to change funding regulations for plans whose investment holdings have dropped in value.

Such decisions would come from the federal Finance Department, which has not yet offered any commitments of support.

However, a Finance official said Tuesday the department has had a history of providing help to pension funds in difficult circumstances, offering temporary relief in 2006, for example, to help plans cope with funding shortfalls built up earlier in the decade. That relief has since expired.

“The government is closely monitoring developments related to pension funding,” the official confirmed.

One solution proposed by companies would be a temporary extension of the time limit for funding pension shortfalls, increasing it to 10 or 15 years. Companies currently have five years to make up shortfalls.

Another proposal being weighed by Ottawa would give companies a reprieve from doing a pension solvency valuation at year-end, which would help them avoid recording and “locking in” their lower asset valuations for required funding purposes.

Pension funds normally have to do a valuation of their obligations and assets every three years, then plan sponsors have five years to fund shortfalls. However, once federally regulated funds are in a shortfall position, OSFI requires valuations to be done annually.

Ms. Cameron said about half the pension plans OSFI oversees were in a shortfall position prior to this year, so are doing valuations annually. That means a majority of Canada's federally regulated pension funds will be required to do a valuation report at Dec. 31 this year, giving companies no leeway to wait to see whether asset values recover over the next year or two.

Another pension industry expert said the funding situation is especially exaggerated because pension funds are required to measure their obligations and assets on a “solvency” basis, which assumes a company is going to shut its doors immediately and must fund its pension now.

He said the calculation is artificial for most companies that are in good health, but they must nonetheless make large contributions to allow for this worst-case scenario.

“Before the market turmoil, this was a big issue, but now it's much worse,” he said.

Ron Singer, a spokesman for Nav Canada, said yesterday his company is one of the voices urging Ottawa for pension relief, especially regarding the unpopular solvency level funding.

“We are very concerned about the kind of regulations as they apply to solvency – as are most federally regulated companies that have defined benefit plans,” he said.

While I have no doubt that some companies are, indeed, “facing possible financial devastation if they are required to immediately make enormous contributions to their pension plans to fund shortfalls,” I also have no doubt that some other companies just see a ‘pool’ of free money being created and they want a bit of it, too.

The current regulations regarding pension fund solvency have served Canadians – workers and investors alike – well. We have avoided most of the nightmares that plagued America and Europe in the ‘80s and ‘90s. Some companies may need some temporary (repayable) help; some very temporary relaxation of rules may be part of that relief but, essentially, despite the corporate whinging, the system is not in need of a major overhaul because the “worst case scenario” can and does occur every now and again.

[Kirkhill]

In 1917, with the Income War Tax Act, the Government of Canada introduced a temporary general tax on income. The tax applied to both personal and corporate income.

    Government of Canada

[E.R. Campbell]

Former Prime Minister Paul Martin is out flogging his new book. I have not yet read it nor will I get to it until, maybe, late winter, unless my "read soon" stack shrinks a lot, even sooner.

He has been making one important (albeit self serving) point: the G20 Heads of Government (HoG) (president and prime ministers)  need to meet to discuss things like the credit crisis.

Martin claims – and I believe him – that the biggest impediment to a G20 HoG meeting has been US disapproval. The US was enthusiastic about the G20 finance ministers/central bankers meetings but feels/felt that 20 is/was too big for a productive HoG level meeting. I say felt/was because soon, of course, President Bush will host a G20 HoG Meeting in Washington.

In my opinion: There are too many Groups. The G20 is too big but the G8 is both to small and poorly structured.

I think we need a Gn in two parts:

1.   The Gn (n=13± but no more than 15) proper consisting of something like: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, the United Kingdom and the United States – a mix of the responsible rich and developing countries, large and medium countries and so on; and

2.   The Gn steering group consisting of: APEC, the European Union, Mercosur (maybe) and NAFTA.

But the key point Martin makes, and it is a good one, is that the EU and the USA cannot ask China and India to come and help solve the crisis and then shut them out of the world’s most exclusive leaders’ forum.

[GAP]

first question....why Italy....represents the Mediterranean area, but it's economy does not dominate it

second question: what is Mercosur (maybe)

Nothing from Africa.....

But the key point Martin makes, and it is a good one, is that the EU and the USA cannot ask China and India to come and help solve the crisis and then shut them out of the world's most exclusive leader's forum.

I think what annoyed me most about Martin, while stating this was that the world should have listened to him and him alone....this Christ on a Cross approach sucks for credibility...but at least he's not lacking in modesty....

[E.R. Campbell]

first question....why Italy....represents the Mediterranean area, but it's economy does not dominate it

second question: what is Mercosur (maybe)

Nothing from Africa.....
I think what annoyed me most about Martin, while stating this was that the world should have listened to him and him alone....this Christ on a Cross approach sucks for credibility...but at least he's not lacking in modesty....

Italy, like Australia and Canada, is a responsible medium economy - but it could be Spain.  )
                                                                                                                           ) I'm not hung up on who, exactly, just 12 to 15 responsible members, large and small, from various regions.
Maybe South Africa and/or Morocco could be added - replacing someone?                         )

Mercosur is the South American free trade group.

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s National Post, is a report on a potentially useful outcome of the credit crisis:

http://www.financialpost.com/news/story.html?id=917627

Crisis used to push for single regulator
Breakthrough in Ottawa's bid for watchdog: advisor

Eoin Callan and Barbara Shecter, National Post; with files from Paul Vieira in Ottawa

Published: Thursday, October 30, 2008
 

The severity of the global financial crisis has created a sudden opening for Ottawa to ram through a plan to create a single Canadian watchdog to oversee financial markets and replace a jealously guarded system of provincial supervision.

Prime Minister Stephen Harper will force the issue at a meeting of premiers in Ottawa and expects to head to Washington days later armed with a credible pledge to create a national securities regulator, as world leaders gather for the most ambitious economic summit since the end of the Second World War.

The creation of a central authority has been three decades in the making and is seen as vital to bringing Canada into line with other industrialized nations and improving Ottawa's ability to react when the stability of the financial system is threatened.

"It seems ludicrous that others around the world are looking to merge regulation of securities, banking and insurance and we don't even have a single securities regulator," said one person advising the government.

The political opening was created in the past two weeks following urgent appeals for federal relief from provincial ministers and financial institutions, including Desjardins, the biggest lender in Quebec.

A breakthrough came this week after face-to-face negotiations between Finance Minister Jim Flaherty and Monique Jerome-Forget, the Finance Minister of Quebec, the biggest stumbling block to a single regulator.

The federal Finance Minister agreed to belatedly include Desjardins in a national plan to backstop banks, but attached conditions, according to people familiar with the dialogue.

As part of the deal to guarantee new borrowing in international markets by Desjardins, Quebec softened its opposition to moves toward a federal regulator that would include a seat for each province on its governing board, people close to the process said.

Both Ms. Jerome-Forget and Mr. Flaherty declined to comment on the dialogue.

Desjardins fiercely resisted the link between its plea for a federal backstop and government supervision, but was excluded from the talks after officials in Ottawa indicated discomfort at underwriting billions of potential borrowings without closer oversight of the institution's books.

Mr. Flaherty told a Bay Street audience Wednesday that "given the unprecedented turmoil in international financial markets," it was "time to move toward a single securities regulator."

The Minister said Canada faced a "new reality" after the "sudden and dramatic" collapses on Wall Street, with each "raising the risk of Canada's system being side-swiped."

He stressed it was important the new Canadian Securities Regulator "reflects regional interests, yet can quickly respond with a single voice to market developments."

Mr. Flaherty's staff are thought to have a working draft of the legislation ready, following consultations with Washington and London and recent cross-country hearings held by a special panel appointed by the Minister to revive the long-dormant issue.

His comments on Bay Street on Wednesday set the stage for preliminary negotiations between the federal Minister and his provincial counterparts on Monday at Pearson International Airport, before he flies to Brazil for crunch talks with finance chiefs from the Group of 20 most-industrialized nations, itself a warm-up to the leaders' meeting Washington.

Mr. Flaherty will be conspicuous in the company of G20 finance ministers in that he will be the sole finance chief who does not have some direct authority over securities regulation.

"The fact that one of them has no national presence makes us look like a banana republic," said Michael Code, a lawyer who presented to the Expert Panel on Securities Regulation that was established by Mr. Flaherty in February.

The advisor said the current financial and economic crisis is "Exhibit A" in the case for a national regulator because of the global nature, and the co-ordinated response of governments.

Currently, the heads of the central bank and the government's finance department have to meet with the leaders of 13 provincial and territorial securities regulators when acting on the world stage.

This was blamed for slowing Canada's reaction to the crisis at critical moments, including when regulators temporarily suspended the practice of short selling, when financial speculators bet a stock will fall.

This is dull but vitally important stuff. Québec has been a major stumbling block and, in the process, Québec’s ‘leaders’ have done real harm to Canada. The government of Canada ought to have Québec over a barrel right now: a national (less Québec) agency is, probably, all but a reality – if created it would cause all investors everywhere to abandon Québec's banks and major companies; the Montreal Stock exchange would become a bad joke and would soon shrivel and die. Québec has no choice but to hold its nose and join – but the separatists will have a field day making Charest out to be a weak-kneed sell out and making Harper into an anti-Québec bully.

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Ottawa Citizen, is a gloom and doom report from TD Canada rust:

 http://www.canada.com/ottawacitizen/news/bustech/story.html?id=efac367f-1b2f-4988-afe4-454e54d40ff1

Major recession threatens G7: TD Bank
It 'could be the worst since the Great Depression': forecast

Eric Beauchesne, Canwest News Service

Published: Saturday, November 01, 2008

There is a significant risk that the Group of Seven major industrial countries, which include Canada, will sink into the worst recession since the 1930s Depression, a major Canadian bank warned yesterday.

The Canadian economy will "formally slip into a recession at the end of this year," TD Bank forecast, adding its name to a growing list of financial institutions projecting a downturn.

There is a 30- to 40-per-cent chance that the recession in the G7 industrial countries could be worse than now expected and the worst since the Great Depression, it added.

The dire forecast was issued following news that the Canadian economy shrank by 0.3 per cent in August, which was less than feared, and which economists agreed was small enough to have allowed the economy to skirt a recession in the third quarter of the year.

However, they warned that the economy was on thin ice and that it was going to get thinner.

Scotiabank recently forecast the economy was going into recession, a view shared by analysts at BMOCapital Markets, but not by all forecasters and not by the Bank of Canada.

TD Bank cut its forecast for the Canadian economy to 0.5 per cent this year from its earlier projection of 0.7 and slashed its forecast for next year to 0.5 per cent from 1.2, adding that the downturn could be even worse than it is now projecting.

Under that "pessimistic" scenario, Canada's economy would actually contract by a sizable 0.6 per cent next year.

TD cut its forecasts for the U.S. economy as well, projecting zero growth next year.

"We are also forecasting a deeper global recession," it said, predicting the world economy would expand by only 2.1 per cent.

Here, the contraction in Canada's economy in August reported by Statistics Canada only partly reversed the strong 0.7-per-cent growth spurt posted in July.

"Given the marked deterioration in the economic outlook since that time, it unfortunately will look like a loud early warning shot," said Douglas Porter, economist at BMO Capital Markets, noting the report "is a bit of ancient history, since it precedes the intense financial turmoil which erupted in mid-September."

Adding to the darkening economic outlook here and globally was news that consumers in Canada's largest export market have cut back sharply on their spending. U.S. consumer spending fell a greater-than-expected 0.3 per cent in September, the first monthly decline in two years despite a better-than-anticipated 0.2-per-cent rise in personal incomes.

"Indeed, the sharp decline in consumer spending currently observed in the U.S. will most certainly continue to crimp exports and yield much softer growth," said Marco Lettieri, economist at National Bank of Canada, which projects the Canadian economy will contract during the final quarter of the year, which if matched by a contraction in the first quarter would mean that a technical recession -- defined as back-to-back quarterly contractions -- is in fact under way.

"The tone of the report was very weak, as it suggests that U.S. consumers, a key component of economic activity, may have thrown in the towel," said TD Securities analyst Millan Mulraine.

An indicator of U.S. business activity in October also fell further than expected, and to below what is viewed as the recession level threshold. The Chicago Purchasing Managers Index slumped to 37.8 from 56.7, the first time this year that it has fallen below the 50 point mark, suggesting a contraction in overall activity and with declines the prices, production and employment indicters.

"On balance, this was a very weak report," said Ian Pollick, another TD Securities analyst. "We continue to look for further weakness in the months to come.

The two reports, however, didn't undermine a continuing modest rally on Wall Street, where the blue-chip Dow posted another triple-digit gain of 144.32 points to 9,325.01

However, a powerful three-day rally on Bay Street was cut short, leaving the benchmark TSX down 93.45 points at 9,762.76. Still, the dollar made further gains, rising nearly a full cent to 83.02 cents U.S.

© The Ottawa Citizen 2008

The US and much of Europe is already in recession so demand for our goods and services is declining, sharply. It is prudent to forecast that we will follow.

But, Prime Minister Harper was being honest during the election campaign: Canada is in much, much better shape than the US or Europe and our recession should be a wee bit shorter but considerably shallower than those in the USA and Europe.

[Kirkhill]

.....
But, Prime Minister Harper was being honest during the election campaign: Canada is in much, much better shape than the US or Europe and our recession should be a wee bit shorter but considerably shallower than those in the USA and Europe.

I think that this can be simply explained by Canada having a massive chest of resources, a very diversified industrial sector and an well educated population.  Even if the rest of the world stopped buying and selling Canada could continue to function as a self-contained economy.  It can supply homes. It can supply cars, trucks, roads and planes.  It can build electronic equipment.  It can feed its population.  Most importantly it has the Energy Supplies to be able to do all of those things. 

It does not HAVE to trade to meet its needs. 

It trades to meet its wants.

And given that there are other national economies the MUST trade to meet their needs it is both morally desirable that Canada trade to allow other countries to meet their needs from our surplus capacity and it is materially beneficial to us.

In the paradigm of MacKenzie-King "Trade if necessary, but not necessarily trade."

As long as Canadians don't succumb to believing that American news is Canadian news and instead accept the evidence of their own day to day existence (food in the stores, cars being bought, credit being available.......) and don't succumb to the irrational then there is little reason that Canada shiouldn't broadly continue with "Business as usual".

(Self-serving note here:  It is in my interest for people not to panic - I am currently trying to sell my house.  )

[muskrat89]

I'm not sure if this has anything to do with anything, but thought I would add it....

http://www.azcentral.com/news/articles/2008/11/01/20081101hardcredit1101.html

In Mexico, credit is available - at a 70% interest rate

Nov. 1, 2008 12:00 AM
Republic Mexico City Bureau

MEXICO CITY - Plastic skulls and skeleton cutouts lined the aisles of Wal-Mart on Mexico City's University Avenue, ready for last-minute buyers ahead of festivities for Day of the Dead.

But the really scary stuff was in front of the store, where workers passed out fliers offering Wal-Mart credit cards - at a 69.6 percent annual percentage rate.

In Mexico, already-high interest rates are rising even further as banks worldwide tighten lending limits amid a worsening economic crisis. Some economists are worried it could send millions of Mexicans spinning into a cycle of debt, a situation that could hurt the United States, Mexico's largest trading partner.

"There is definitely a risk because you're combining high interest rates with lower income," said Liliana Rojas-Suarez, an economist at the Center for Global Development in Washington.

Up to now, Mexico's financial system has suffered less damage than that seen at U.S. banks because of tougher lending terms imposed after Mexico's own crash in the 1990s.

Mexico also has a much smaller market in derivatives, investment instruments that amplified the credit crisis in the United States.

However, the financial burden on Mexican families is getting steadily heavier.

Since December, average bank credit-card rates have risen 10 percentage points, from 31.61 percent to 41.78 percent in September.

Pamphlets advertising Wal-Mart's variable-interest credit cards warn applicants that interest rates could be 65 percentage points higher than Mexico's prime rate, currently at 8.73 percent.

Costco charge cards carry a 52 percent interest rate. Visa cards from Banamex, Citibank's Mexican branch, charge 46.49 percent.

Woolworth charges 61 percent on a store credit card financed by General Electric. And Suburbia, a chain of clothing stores owned by Wal-Mart, is charging 70.6 percent on its variable-rate card.

Mexicans tend to use non-bank loans, including store cards, far more than bank credit, according to the Financial Services Consumer Protection Commission.In the United States, Wal-Mart's variable-rate charge cards range from 9.87 to 19.87 percent. Nationwide, the average rate for variable-rate credit cards last week was 11.68, according to Bankrate.com.

In recent years, the number of mortgages and car loans also has soared in Mexico, at rates much higher than in the United States.

Ford, for example, was offering five-year, 17 percent loans on a Focus sedan in Mexico City last week, and that was with a 25 percent down payment.

Mexicans are already having trouble meeting their payments, according to the consumer-protection commission.

Credit-card accounts in default rose 28 percent from January to July, from about $1.6 billion to $2 billion.

The number of debtors coming for help at the commission's office on Mexico City's main Insurgentes Avenue has risen from 40 to 75 a day in recent months, counselor Merari Murillo said. She said the increase began around June.

Mexicans are already more than twice as likely to default on their debts as Americans. About 2.7 percent of Mexican loans go into default, compared with 1.1 percent in the United States.

Credit has always been more expensive in Mexico than the United States, said Rafael Amiel, Latin America director at Global Insight, a consulting firm.

Capital is scarcer in Mexico, and thus, banks can charge more for it, Amiel said.

There are fewer banks, meaning less competition. And the banks charge high service fees, allowing them to make profits even though they loan less money.

[E.R. Campbell]

Here, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site, is a report on the impact of decades of neglect of the productivity issue:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081103.wflaherty1103/BNStory/Business/home

Ontario to receive equalization payments

KEVIN CARMICHAEL

Globe and Mail Update
November 3, 2008 at 8:49 AM EST

Finance Minister Jim Flaherty said Ontario will receive equalization payments for the first time in its history next year, and that the amount will be “more” than Premier Dalton McGuinty's government is anticipating.

“Ontario will be very happy with the figure I give them,” Mr. Flaherty told reporters on his way into a meeting with his provincial and territorial counterparts Monday. “It will be more than they expect.”

The 51-year-old equalization program will be the focal point of the gathering, which is scheduled to end around noon at a hotel near Toronto's Pearson airport. Mr. Flaherty revealed last week that he will take steps to rein in payments, which the minister says are growing at an unsustainable pace of about 15 per cent a year.

Mr. Flaherty, who is facing the first federal budget deficit in more than a decade, declined to provide details of how he will restrain the growth of the equalization program, which seeks to redistribute Canada's wealth to poorer regions from the richer ones.

The program paid $13.6-billion in the current fiscal year to all provinces except Ontario, British Columbia, Saskatchewan and Alberta.

One of the reasons Mr. Flaherty is seeking to rework the program is to account for Ontario's tumble into the group of provinces that will receive payments. The economy of Canada's largest province is being battered by the global financial crisis and a recession in the United States, events that have destroyed demand for Ontario's factory exports.

Ontario Finance Minister Dwight Duncan kept up his government's feud with the federal government, suggesting he thinks Mr. Flaherty's goal is keep the province from receiving equalization payments – despite the federal minister's repeated assertions to the contrary.

“I don't have the sense they get it in terms of Ontario,” Mr. Duncan told reporters.

Mr. Duncan said Mr. Flaherty still hadn't told him any details about the changes in store for the equalization program.

“If you want to have a serious dialogue, you might put a piece of paper in our hands beforehand,” Mr. Duncan said. “We'll receive the proposal. We won't be able to respond today.”

Mr. Duncan risks becoming isolated at the meeting, as many of his colleagues were taking a more collegial tone ahead of their latest meeting. Like Mr. Duncan, finance ministers from Nova Scotia, Prince Edward Island, New Brunswick and Manitoba said in interviews Friday that they were waiting to hear what Mr. Flaherty has in mind for the equalization program.

But while apprehensive about the possibility of lower equalization payments, all four ministers expressed sympathy for Mr. Flaherty's predicament and said they would enter today's meeting with an open mind.

“I can sympathize with what the minister is going through; everyone is going to have to do a little bit of belt tightening,” New Brunswick Finance Minister Victor Boudreau said. “So long as everyone is treated fairly, I'll be okay with that.”

Mr. Flaherty told reporters last week that he wasn't planning to “review” the equalization program, which was overhauled in 2007 after an extensive study by a panel led by Al O'Brien, a former Alberta deputy finance minister.

“We want to make sure that's not a program that gets bent out shape because that's a program that just got put back in shape,” Manitoba Finance Minister Greg Selinger said. “But there's been nothing put on the table, so we have to keep an open mind and find a way to co-operate together.”

PEI Finance Minister Wesley Sheridan acknowledged that Mr. Flaherty's concern over equalization is rooted in the possibility that Ontario might end up drawing from the program. “Once that happens, the cost of equalization grows dramatically,” Mr. Sheridan said.

Nova Scotia Finance Minister Michael Baker said he was unsure about Mr. Flaherty's assertion that the equalization program is growing at an unsustainable rate, since his province is due to receive decreased payments.

“This is a constitutionally mandated program,” Mr. Baker said. “I certainly appreciate the difficult times his budget is in, but it is important to remember that the equalization is just that, a constitutionally mandated program.”

Ontario is the victim of decades of political irresponsibility at the national and provincial levels. The Conservatives, Liberals, Progressive Conservatives, NDP and, indeed BQ must all share the blame.

The federal government has, since at least the 1940s, played favourites – usually often, but not always, to Québec’s advantage – and trying to “pick winners.” (I once heard a very senior civil servant opine that the government’s record at picking winners was worse than random chance; we would have done better he, suggested, had cabinet (or the PM or the Clerk or whoever) simply picked the first (or second, or last) item on any list (a list, by definition, must have two or more items).)

Provincial governments have done much the same – consistently favouring or, at least, forgiving weak, even dying, ill managed companies and sectors in an effort to buy votes.

R&D spending has been grossly misapplied since the 1940s: government should directly fund Research – on a large scale - and only indirectly, through the tax system, support Development (except in a few ’in house’ cases like DND that do both R and D. But effective R&D is one of the real keys to competitiveness and productivity.

Similarly, both national and provincial governments have applied ill-considered corporate/business taxes and regulations especially those related to improving productivity by buying capital equipment. Canadians, people like you and I, have, consistently, demanded that governments ‘tax the rich’ – especially the impersonal rich corporations. We can excuse Canadians for their ignorance but politicians leaders ought to have been just a wee tiny bit more responsible than those they led – that was not, and still is not the case.

Don’t even get me started on the ‘compensation’ for celebrity CEOs or the undue attention paid to unelected, unaccountable celebrity ‘busybodies’ like Maude Barlow and Buzz Hargrove.

Anyway Diefenbaker and Pearson, Trudeau, Mulroney, Chrétien, Martin and Harper, Frost, Davis and Petersen, Rae, Harris and McGuinty and Lesage, Levesque, Bourassa, Bouchard and Charest, too, can all share the blame – but so can we, ordinary Canadians, for ignoring important issues like competitiveness and productivity and whinging for more, more and MORE.

[GAP]

Find me a politician with enough gonads to do what you suggest, and you will have to look far and wide for one NOT in office. There is not one politician out there with enough pizazz and gonads to put the system right without buckling down to the almighty vote count....They don't even realize that if they had enough charisma and a well thought out plan the people would back them. (well some anyway.....)

[Rifleman62]

Am I correct here or wrong? The manufacturing sector is always for an undervalued Cdn $ as it helps sell Cdn mfg goods to the "world" (approx 85% of everything we produce goes to the USA). Same goes for good old Buzz. It's productivity stupid. Right now, due to the CAW, Canada is the most expensive place in the world to manufacture an automobile. It is either $67 or $69 per hour in a CAW auto plant according to several reports I have read. I don't know if its Cdn or US $ (if it's US $, the situation is worse). With North American auto companies in a mess, what NA auto CEO in their right mind would build a car in Canada? To heck with NAFTA or the 1965 Canada–United States Auto Pact. This is 2008, a new US government, and America in financial difficulty.
A dollar should be a dollar(or darn close to it) for a country to be sovereign. In Canada we keep subsiding low productivity. It's like rewarding failure to get votes/elected.[/bHere are some of the results of this policy:

Federal equalization payments:

Quebec - $8.35 billion
Manitoba - $2.1 billion
New Brunswick - $1.69 billion
Nova Scotia - $1.57 billion
Ontario - $247 million
P.E.I. - $340 million

In the last election, did not the people of Quebec vote to march to the beat of their own drum, AGAIN?

[Thucydides]

One reaction to a putative Obama administration might be a John Galtian "strike" (read Atlas Shrugged). If this happens, the economic slowdown will have serious reprecussions, especially for us, since 85% of our exports go to the US. A permanent recession will make life tough for us (and the US recession will hurt all world economies, so there will be no one to take up the slack):

http://pajamasmedia.com/instapundit/

AN ARMY OF JOHN GALTS?

I really do not want to be that "greedy" guy whom Obama so hates. "Greedy," loosely defined in Obamanomics, is 49 percent of voters. For the record, if you make $249,000 per year or less you are fine; somewhere around $250,000 and above, you are officially evil and he is coming after you.

I want to appease the new administration and not be too productive. So, upon Obama's passing his new redistribution plan, I will slow my work schedule, lay off a few people (Obama's got their back) and let someone else bust his tail since I will now be able to get "redistributed wealth" from those poor fools who are ambitious, energetic, work hard and have made good decisions.

I cannot wait, as I need a break. And it will be nice to not be vilified by politicians. It will feel good to be liked again.

Wish me luck for the next few years. I am looking forward to a respite from hard work, taxes and creating jobs.


You sure hear a lot of people saying this kind of thing. So what happens if this stops being a joke and becomes a trend?

UPDATE: A reader emails:


Count me among the ones seriously considering this. I'm in my mid-forties and run a company employing 124 people. Yes, I make more than 250K a year and pay out more than a million in salary and benefits. If my tax burden increases any more it simply isn't worth it anymore and I'm seriously considering cashing out and semi-retiring. I won't be able to live as well I once did, but that's ok because I'd get by. It's simply isn't worth it if I don't have the option of growing my business and just seeing the extra effort go to taxes to a wasteful government. I know it would result in at least half my people losing their jobs, but I couldn't guarantee they could stay even if I did. Frankly, I'm just tired and if there is no reward for the extra effort why should I bother?


On the other hand, reader Dave Holsclaw is less positive:


Trouble is – when the evil folk who earn more than $250K fail to provide the necessary dollars to fulfill the dreams of The One, the sliding scale of evil will appear. Soon, those who earn $175K and then those who earn $105K will be identified as evil and have their property confiscated.

The story is always the same. The socialist/communist/fascist state destroys the productivity of the middle class, confiscates the fruit of their labor and enforces a two class system – the many (who labor to support the State), and the few – The One, his family and his chosen disciples (who enjoy the power, status and wealth that the State provides).

There is no such thing as simply slowing down and enjoying the dole.

The thief comes to kill and steal and destroy. That’s it.


Well, that's a cheerful take.

ANOTHER UPDATE: Reader Scott Brooke writes:


I've been reading with great interest your theories on "going John Galt". I've not read Atlas Shrugged yet, it's sitting on my nightstand with a bookmark about 5 pages in, but I think I get the general gist of it. Perhaps there's more reality in the book but the idea seems preposterous, no matter how appealing it might be to join such a quiet revolution. Successful people can't just turn off their success DNA. They need it beaten out of them. And while I agree that Obama's policies will begin the slow turning of the screws, we're far from getting the beatings. No, successful people crave success, not money, although that often comes along with it. It's part of their "being" to be successful. To think that people can shut that off is as silly as thinking poor people will stop being lazy if the government provides for them.

The tide works its magic over time but almost nothing happens to stop the slow erosion. People only "act" when there's a hurricane. Obama and his "Hope" are a tide, not a hurricane. The best we can wish for is a slow retreat of the tide because without a hurricane, people will continue to be what they are at the core. Successful or lazy but no real change in action.


On the other hand, reader Jeff Stevenson writes:


You think that it hasn't already started to become a trend? Please don't forget that the very people who are saying these sort of things are *not* the sort that just talks. These are the folks who are action-oriented, start businesses and create jobs. They are not the sort to spout off and create "manifestos" and issue propaganda statements, they take action.

I do technology consulting in a high demand field and I have the ability to raise or lower my income, depending on how hard I feel like working. I am setup perfectly to react to the Obama/John Galt issue. I have read Atlas Shrugged and I am already *executing* a plan to work much less next year. Notice that I did not say that I was considering, or talking about, or thinking of. I have already shed customers and lined up a few reliable ones for the next year (and perhaps the one after that) to enable this plan.

I had initially targeted 2009 as an expansion year, hiring new people and growing the business. Now, maybe not so much.

See ya' on the other side.


And Prof. Joe Olson writes: "FWIW, I turned down 3 consulting jobs this Fall (during which I'm not teaching) because the net return wasn't enough for me to disrupt my travel and recreation plans." Presumably it won't get better under Obama's plan.

MORE: Reader Kartik Gada writes:


For many years (especially the last 130 years), people came to America because the goverments of their home countries did not reward hard work or entrepreneurship. America attracted the best and brightest, and benefitted greatly. We drained the brains out of governments too foolish to nurture the full potential of their best people.

Now if America itself becomes a place that is tough for the best and brightest, not only will new immigrants stop coming here, but many US-born people may leave to find a new country with lower tax rates. People can leave America for much the same reason they came.

What if, say, China sets up a 'special economic zone' that attracts branches of major US corporations, and where US expats are courted, and offered a life of low or even zero income tax, good schools, etc. all while working at the same US corporations, just out of the China division? Some Americans would go. A marginal tax rate of 0=12% vs. 50% in California or New York is hard to turn down.

Furthermore, remember that the top 1% of Americans pay 40% of taxes. If that 1% leaves for a greener pasture, won't revenue from income tax drop by 40%? What then?

Some smart country, somewhere in the world, will offer big incentives to over-taxed US private-sector people. Some will go. Many could go. That country will reap the biggest windfall ever. The US will effectively have scared away the geese that lay the golden eggs.


It could be an opportunity for someone.

STILL MORE: Reader Jim May writes: "Kartik Gada hits the nail on the head. I left Canada for the greater opportunity and freedom in America. I never expected Canada to follow me here."

MORE STILL: Reader Rahul Biljani emails:


‘Going John Galt’ is not that easy – Congress quietly passed an ‘exit tax’ earlier this year to penalize any (somewhat) high net worth US resident that decides to vote with their feet.

As quoted in the links below, the U.S. government , through the Heroes Earnings Assistance and Relief Act of 2008 (the HEART bill, for short, and I am not making this up), effective June 17, 2008, imposes an “exit tax” on certain citizens and long-term residents who expatriate or terminate their long-term residency. Such individuals, called covered expatriates, will be deemed to have sold all of their worldwide property for its fair market value on the day before expatriating or terminating U.S. residency, and will be liable for U.S. tax on the amount deemed realized in excess of $600,000 (subject to cost of living adjustments).

Covered expatriates are: citizens and long-term residents who (a) have an average annual U.S. tax liability for the previous five years of $139,000 (adjusted for inflation), (b) have a net worth of at least $2,000,000 on the expatriation date, or (c) fail to certify compliance with all U.S. federal tax obligations for the previous five years.

Link

Link

Maybe the government has thought this out more than we think.


Ouch.

FINALLY: Reader Michael Hauk writes:


I’m sure you are getting boatloads of emails on this subject, but here is one more data point:

I am a physician in a highly paid and understaffed specialty. Many of my colleagues are openly discussing going part-time to lower our tax exposure, should Obama get his socialist wish-list through Congress. I did my medical training in the military, and had frugality instilled in my make-up by parents and grandparents who lived through the (real) Depression. My family and I already live well below our means, and we can live just as well on less. Much, much less.

Obama believes healthcare is a right. Well, good luck fulfilling that promise when those of us who provide it decide it’s not worth it anymore…


They'll be going after slackers, hoarders, and wreckers . . . . More seriously, I don't think the government would see a shortage of doctors as a problem. Instead, it's an excuse to cut costs with wait-based rationing.

[Redeye]

I find my odds of winning the lottery to be significantly higher than the likelihood of something like this happening.

One reaction to a putative Obama administration might be a John Galtian "strike" (read Atlas Shrugged). If this happens, the economic slowdown will have serious reprecussions, especially for us, since 85% of our exports go to the US. A permanent recession will make life tough for us (and the US recession will hurt all world economies, so there will be no one to take up the slack):

http://pajamasmedia.com/instapundit/

[Thucydides]

I find my odds of winning the lottery to be significantly higher than the likelihood of something like this happening.

While I am delighted at your ability to win lotteries, the "strike" is driven by a combination of the immutable laws of economics (incentives and rewards as motivators to human action) and human nature. The only real question is how many people will take strike action under a putative Obama administration (or even in 2010 under a McCain administration as a Democrat Congress allows the tax cuts to expire), and what sort of action the administration and the Congress will take as tax revenues and economic activities erode?

We will live in interesting times.

[Redeye]

Well, given that Obama's tax plans really aren't that drastic, you are not going to see masses of high-income professionals suddenly decide that they no longer have any incentive to work.  To suggest so is utterly preposterous.

In any case, I'm glad it's over and done with - and with what I view to be the best possible result.

While I am delighted at your ability to win lotteries, the "strike" is driven by a combination of the immutable laws of economics (incentives and rewards as motivators to human action) and human nature. The only real question is how many people will take strike action under a putative Obama administration (or even in 2010 under a McCain administration as a Democrat Congress allows the tax cuts to expire), and what sort of action the administration and the Congress will take as tax revenues and economic activities erode?

We will live in interesting times.

[Thucydides]

Well, given that Obama's tax plans really aren't that drastic, you are not going to see masses of high-income professionals suddenly decide that they no longer have any incentive to work.  To suggest so is utterly preposterous.

Raising marginal tax rates, removing caps on FICA and other levies and undermining welfare reform by introducing tax credits to people who do not pay tax is pretty radical. The stock market is already speaking (as it reacts to the prospects of future earnings) by dropping 500 points, and continuing down.

We not only need to be ready to react to counterproductive tax policy and protectionist legislation and regulation coming from the Congress and the Administration, but also potential collateral damage as other US trading partners react to protectionism and weakening US markets.

http://www.pajamasmedia.com/instapundit/

Well, the stock market is certainly tanking:


Major indexes have lost about 10 percent since Barack Obama was elected president -- a vote preceded by a steep rally -- and the losses represent the Dow's worst two-day percentage decline since the October 1987 crash.


Is it really fair to blame this on Obama? I don't know, but those who thought he was going to bring about a stock market rally by being elected have certainly turned out to be wrong.

UPDATE: Reader Jonathan Adams thinks it's fair to blame Obama, and cites this story: China urges Obama to respect free trade, defends currency policy. Adams comments: "If even the Communists worry about Obama’s violation of free trade principles, I think it’s reasonable to put failure to assuage the fears of those who expect and rely upon a free market squarely on his shoulders. Yes, the headline has a distinct Orwellian feel to it, but in context with the pre-election statements and post-election market moves … what if they’re serious?"

ANOTHER UPDATE: The breakdown of denial?

[Redeye]

Are the tax credits refundable or non-refundable - I got the impression in a quick read that they are non-refundable so really they just make sure more people at the lower end of the income spectrum come off the tax rolls.

The stock market is finding footing again - and its reactions to the election of Obama being president are difficult to isolate from the various factors impacting market movements.  Historically speaking, markets have done better under Democratic presidents, interestingly.

My biggest concern would be if Obama actually persues protectionist strategies, because you do not have to be a genius in the field of economics to know that protectionism is a bad policy decision.  I'm confident, however, that he will not take too many drastically protectionist steps.  He is not going to abrogate NAFTA, nor would I suspect that he would walk out on any other trade agreements.  I do like the idea of putting some emphasis on labour and environmental standards in future trade negotiations, but I don't see any real scope for renegotiation of existing deals on those grounds.

When it comes to taxes and budgets, clearly there has to be drastic measures and the work ahead is going to be very difficult.  The US Social Security system is unsustainable, the cost of the Iraq war is causing massive deficits, and that cannot continue.  What benefit has the invasion of Iraq created for the United States?  None that I can think of - certainly none that justifies the cost.  Perhaps if the supposed justifications for the invasion had been true (that Saddam Hussein had been in league with Al Qaeda, something anyone with a basic understanding of either would know is unlikely, or that Iraq had an active WMD program), then some benefit could be shown, but that is simply not the case.  As for other policy matters - FICA and such levies have to increase - or the benefits have to shrink.  Otherwise all that's happening is a massive debt is being accumulated that will simply have to be reckoned with by the next generation.  That's why I don't understand why Republicans claim moral high ground on fiscal conservatism, because it was Bill Clinton that balanced budgets and ran surpluses. George Bush doled out tax cuts while allowing spending to get completely out of control, and that has to be reconciled.  At some point the US will have to pay the piper, after all.

Raising marginal tax rates, removing caps on FICA and other levies and undermining welfare reform by introducing tax credits to people who do not pay tax is pretty radical. The stock market is already speaking (as it reacts to the prospects of future earnings) by dropping 500 points, and continuing down.

We not only need to be ready to react to counterproductive tax policy and protectionist legislation and regulation coming from the Congress and the Administration, but also potential collateral damage as other US trading partners react to protectionism and weakening US markets.

http://www.pajamasmedia.com/instapundit/

[tomahawk6]

The the most common  tax credit is the Earned Income Tax Credit. You dont even have to have a kid to qualify just less than $12500 in income.

The Earned Income Tax Credit (EITC) sometimes called the Earned Income Credit (EIC), is a refundable federal income tax credit for low-income working individuals and families. Congress originally approved the tax credit legislation in 1975 in part to offset the burden of social security taxes and to provide an incentive to work. When the EITC exceeds the amount of taxes owed, it results in a tax refund to those who claim and qualify for the credit.

To qualify, taxpayers must meet certain requirements and file a tax return, even if they did not earn enough money to be obligated to file a tax return.

The EITC has no effect on certain welfare benefits. In most cases, EITC payments will not be used to determine eligibility for Medicaid, Supplemental Security Income (SSI), food stamps, low-income housing or most Temporary Assistance for Needy Families (TANF) payments.

[Thucydides]

When it comes to taxes and budgets, clearly there has to be drastic measures and the work ahead is going to be very difficult.  The US Social Security system is unsustainable. As for other policy matters - FICA and such levies have to increase - or the benefits have to shrink.  Otherwise all that's happening is a massive debt is being accumulated that will simply have to be reckoned with by the next generation.  That's why I don't understand why Republicans claim moral high ground on fiscal conservatism, because it was Bill Clinton that balanced budgets and ran surpluses. George Bush doled out tax cuts while allowing spending to get completely out of control, and that has to be reconciled.  At some point the US will have to pay the piper, after all.

The only problem with this analysis is the proposed tax increases are large enough to provide disincentives to work and earn more income, but are not enough to generate the revenue required for the trillion or so in new spending promised by the President elect. The Speaker of the House is now weighing in with more stimulus packages as well. No cuts to benefits seem to be contemplated. By this point, with everyone holding a tin cup out to the new Administration and Congress, deficits and debt will either go totally out of control, dramatic spending cuts will have to be made or wealth will be confiscated in order to pay for it all (the rumblings about seizing 401K accounts might not be wishful thinking by the Left).

All these approaches entail problems, either dragging the US economy down further (and thus the trading partners like ourselves), igniting inflation or creating social chaos. (worst case, we can see all three). Of course the economic disincentives will create a John Galt "strike", even if it isn't a coordinated action; just millions of taxpayers fed up and adjusting their earnings downwards. I would expect the definition of "rich" to constantly be adjusted downwards, and the IRS deploying armies of accountants and police to try and find the money.

While we can all "hope" the Obama administration will "change" into a pragmatic, centrist administration, history would seem to suggest that will not be the case. The Democratic majority in the Congress will be emboldened to push hard, and there is nothing in the President elect's resume to suggest he will push back. President Clinton also tried to lurch left in his first term (and many of his proposals like Hillarycare are suspiciously like what is being proposed now), but his Presidency's record of fiscal responsibility and growth can be traced to Newt Gingritch and the "Contract with America", which provided a Republican majority in the Congress and essentially forced President Clinton's administration to govern as a (real) Republican administration. Too bad those lessons were lost after 2001....

[Thucydides]

The Wall Street Journal provides some sound historical perspective on the "Great Depression". The new administration and Congress seem determined to repeat the mistakes of the past, so we, as Canadians, need to start thinking about how we will deal with a large economic downturn and how we can "insulate" our economy from the external shocks that will soon be coming our way:

http://online.wsj.com/article/SB122576077569495545.html

OPINIONNOVEMBER 4, 2008
Five Myths About the Great Depression
Herbert Hoover was no proponent of laissez-faire.

By ANDREW B. WILSON
The current financial crisis has revived powerful misconceptions about the Great Depression. Those who misinterpret the past are all too likely to repeat the exact same mistakes that made the Great Depression so deep and devastating.

Here are five interrelated and durable myths about the 1929-39 Depression:

- Herbert Hoover, elected president in 1928, was a doctrinaire, laissez-faire, look-the-other way Republican who clung to the idea that markets were basically self-correcting. The truth is more illuminating. Far from a free-market idealist, Hoover was an ardent believer in government intervention to support incomes and employment. This is critical to understanding the origins of the Great Depression. Franklin Roosevelt didn't reverse course upon moving into the White House in 1933; he went further down the path that Hoover had blazed over the previous four years. That was the path to disaster.

Hoover, a one-time business whiz and a would-be all-purpose social problem-solver in the Lee Iacocca mold, was a bowling ball looking for pins to scatter. He was a government activist fixated on the idea of running the country as an energetic CEO might run a giant corporation. It was Hoover, not Roosevelt, who initiated the practice of piling up big deficits to support huge public-works projects. After declining or holding steady through most of the 1920s, federal spending soared between 1929 and 1932 -- increasing by more than 50%, the biggest increase in federal spending ever recorded during peacetime.

Public projects undertaken by Hoover included the San Francisco Bay Bridge, the Los Angeles Aqueduct, and Hoover Dam. The Republican president won plaudits from the American Federation of Labor for his industrial policy, which included jawboning business leaders to refrain from cutting wages as the economy fell. Referring to counteracting the business cycle and propping up wages, Hoover said: "No president before has ever believed that there was a government responsibility in such cases . . . we had to pioneer a new field." Though he did not coin the phrase, Hoover championed many of the basic ideas -- such as central planning and control of the economy -- that came to be known as the New Deal.

- The stock market crash in October 1929 precipitated the Great Depression. What the crash mainly precipitated was a raft of wrongheaded policies that did major damage to the economy -- beginning with the disastrous retreat into protectionism marked by the passage of the Smoot-Hawley tariff, which passed the House in May 1929 and the Senate in March 1930, and was signed into law by Hoover in June 1930. As prices fell, Smoot-Hawley doubled the effective tariff duties on a wide range of manufactures and agricultural products. It triggered the beggar-thy-neighbor policies of countervailing tariffs that caused the international economy to collapse. Some have argued that the increasing likelihood that the Smoot-Hawley tariff would pass was a major contributing factor to the stock-market collapse in the fall of 1929.

- Where the market had failed, the government stepped in to protect ordinary people. Hoover's disastrous agricultural policies involved the know-it-all Hoover acting as his own agriculture secretary and in fact writing the original Agricultural Marketing Act that evolved into Smoot-Hawley. While exports accounted for 7% of U.S. GDP in 1929, trade accounted for about one-third of U.S. farm income. The loss of export markets caused by Smoot-Hawley devastated the agricultural sector. Following in Hoover's footsteps, FDR concentrated on trying to raise farm income by such tactics as setting quotas on production and paying farmers to remove acreage from production -- even though this meant higher prices for hard-pressed consumers and had the effect of both lowering productivity and driving farmers off their land.

- Greed caused the stock market to overshoot and then crash. The real culprit here -- as in the housing bubble in our own time -- is the one identified by the economic historian Charles Kindleberger in the classic book "Manias, Panics, and Crashes": a speculative fever induced by excessively easy credit and broken by the inevitable return to more realistic valuations.

In the late 1920s, cheap and easy money fueled a tremendous increase in margin trading and a proliferation of "investment trusts" that offered little in the way of dividends or demonstrable earnings per share, but still promised phenomenal capital gains. "Speculation," as Kindleberger neatly defined it, "involves buying for resale rather than use in the case of commodities, and for resale rather than income in the case of financial assets."

The last thing Hoover wanted to do upon coming to office was to rein in the stock market boom by allowing interest rates to rise to a more normal level. The key to prosperity, in his view, lay not in sound money and rising productivity, but in letting the good times roll -- through government action aimed at maintaining high wages and high stock market valuations.

- Enlightened government pulled the nation out of the worst downturn in its history and came to the rescue of capitalism through rigorous regulation and government oversight. To the contrary, the Hoover and Roosevelt administrations -- in disregarding market signals at every turn -- were jointly responsible for turning a panic into the worst depression of modern times. As late as 1938, after almost a decade of governmental "pump priming," almost one out of five workers remained unemployed. What the government gave with one hand, through increased spending, it took away with the other, through increased taxation. But that was not an even trade-off. As the root cause of a great deal of mismanagement and inefficiency, government was responsible for a lost decade of economic growth.

Hoover was destined to fill the role of the left's designated scapegoat. Despite that, the one place where he and FDR truly "triumphed" was in enlisting the support of leading writers and intellectuals for government planning and intervention. This had a lasting effect on the way that generations of people think about the Great Depression. The antienterprise spirit among thought leaders of this time (and later) extended to top business publications. "Do you still believe in Lazy-Fairies?" Business Week asked derisively in 1931. "To plan or not to plan is no longer the question. The real question is who is to do it?"

In his economic policies and his incessant governmental activism, Hoover differed far more sharply with his Republican predecessor than he did with his Democratic successor. Calvin Coolidge, president from 1923 to 1929, made no secret of his disdain for Hoover, who served as his secretary of commerce and won praise from such highly regarded liberals as John Maynard Keynes and Jean Monnet. "That man has offered me unsolicited advice for six years, all of it bad," Coolidge said. He mockingly referred to Hoover as "Wonder Boy."

With the vitality of U.S. and world economies at stake, it is essential that the decisions of the coming months are shaped by the right lessons -- not the myths -- of the Great Depression.

Mr. Wilson, a former Business Week bureau chief, is a writer based in St. Louis.

[E.R. Campbell]

Here is more, on the Canadian front, reproduced under the Fair Dealing provisions (§29) of the Copyright Act from today’s Globe and Mail web site:

http://www.reportonbusiness.com/servlet/story/RTGAM.20081112.wflaherty1112/BNStory/Business/home

Ottawa pushes to get credit markets working

RICHARD BLACKWELL and HEATHER SCOFFIELD AND JOHN PARTRIDGE

Globe and Mail Update
November 12, 2008 at 9:52 AM EST

TORONTO — Ottawa has announced three new aggressive measures to get Canada's credit markets back in working order.

Finance Minister Jim Flaherty said Wednesday in Toronto the government would add $50-billion to its mortgage purchase program. He has also agreed to slash the price the government is charging to Canadian banks to insure their wholesale lending.

At the same time, the Bank of Canada is injecting another $8-billion into money markets over the next few weeks, in one-month money, through a new Canadian-dollar term lending facility it is setting up.

Mr. Flaherty said the government has already made significant moves to support the financial sector, and credit markets have recently improved, but “we have to expect an extended period of stress in global credit markets.”

This could limit the availability of credit to households and businesses in the months ahead, he said.

Mr. Flaherty said he met with senior bankers Wednesday morning, and his message to them was that “we each have an important role to play. It is up to private sector lenders to keep on doing their job, making loans to credit-worthy people and enterprises of all sizes. It is up to governments to step in when markets are profoundly disrupted, so that private sector lenders can maintain access to the funds they need to keep lending and supporting economic growth.”

The move to buy up more mortgage pools should make consumer and mortgage loans “more affordable and more available,” Mr. Flaherty said. “At a time when GDP growth is slowing down, it will help companies to invest in the new productive technologies we need to move our economy forward.”

Gordon Nixon, chief executive officer of Royal Bank of Canada, the country's largest lender, welcomed Wednesday's changes.

“Mr. Flaherty's announcement was a constructive step in improving the functioning of the financial markets,” he said, through a spokeswoman. “It helps ensure consumers and businesses have access to credit and Canadian banks continue to operate from a position of strength.”

Eric Lascelles, chief economics strategist at TD Securities said the moves should help ease the crunch.

“Canada has stepped up to the plate in a major way this morning, announcing three major new actions today, all designed to crack the nut that is the credit crunch,” Mr. Lascelles said in a note to clients.

Mr. Flaherty's announcement means the government will now buy up to $75-billion of insured mortgage pools from the major banks, up from $25-billion.

He told reporters he made the move because he now expects an “extended period of stress in global credit markets.” The extended mortgage purchase program will earn a “modest” rate of return for the government, but there will be no addition risk for taxpayers, Mr. Flaherty added.

In addition to increasing the amount of money available to buy mortgage debt, the Department of Finance also slashed the price it will charge banks for guaranteeing their loans.

The change in the fees on bank lending insurance will ensure that Canadian banks “are not put at a competitive disadvantage by policy actions in other countries,” said Mr. Flaherty, When he looked at pricing of similar programs in other countries, it became apparent the Canadian program had to be changed to be more competitive, he said.

The two changes in pricing will effective cut the fees for the lending insurance by half a percentage point.

Commercial banks have complained loudly that the loan guarantee program designed by Ottawa a few weeks ago was too expensive to be of much use.

While other countries' banks could buy what amounts to insurance at a low price, Canadian banks were paying higher rates. The program was only useful for banks in dire trouble, and was putting the Canadian financial institutions at a competitive disadvantage globally.

In Ottawa, the Bank of Canada said it will put the additional $8-billion into one-month money markets, spread out in four auctions over the next few weeks, through a newly created Canadian-dollar term loan facility.

The Bank of Canada has hinted heavily in recent weeks that it had further measures in store, to make sure financial institutions have cash on hand to finance their transactions.

Financial institutions can post almost any kind of loan on their books as collateral, in order to take part in the auctions, the bank said.

“By providing greater flexibility for liquidity provision with respect to eligible collateral, the [new facility] will facilitate further improvement in money and credit markets.”

Canadian banks have been pressuring Ottawa to boost their help for the sector, and all countries have been urged, in a series of international meetings, to do much more in order to get the global economy back on track.

While lending spreads in some markets have edged down gradually in the past few weeks, Canada's key spreads have not moved much for a month, suggesting a lingering risk aversion among banks in Canada.

“At a time of considerable uncertainty in global financial markets, this action will provide Canada's financial institutions with significant and stable access to longer-term funding,” Mr. Flaherty said in a statement. “This extension of the program to purchase insured mortgages will further support the availability of credit, which will benefit Canadian households, businesses and the economy. In addition, it will earn a modest rate of return for the government with no additional risk to the taxpayer.”

Mr. Flaherty indicated last weekend that he understood the banks' complaints, and would consider acting. But Bank of Canada Governor Mark Carney said in an interview that Ottawa had carefully designed the program, and suggested Canadian banks weren't at a global disadvantage because they are in far better shape than other banks around the world.

Mr. Flaherty told reporters Wednesday that the government is still on track to report a small budget surplus for the current fiscal year, “and I emphasize small.”

The fall economic update coming in the next few weeks will provide updated numbers, he said.

He also said Ottawa is “monitoring” the automotive industry, but it has not yet decided what action can be taken to support that sector. He said Industry Minister Tony Clement is talking to the auto companies “and we'll see what we're able to formulate for the industry.”

While I am, philosophically, inclined towards a ”hands off, let the market solve itself” view, we are caught in a subsidize everything spiral – approaching the point where well regulated, well managed Canadian banks are being subjected to unfair competition by the high level of US and European subsidies that, de facto, reward incompetent and dishonest management and poorly regulated systems. American and European banks that ought to be in the garbage dump - would be on the garbage dump if the national governments had been even modestly competent – are being given money that will allow them to grow and prosper in markets that would be, in some cases are, improperly, ‘closed’ to Canadian banks by virtue of too much 'easy money' in US and European markets.

[Thucydides]

Ayn Rand was right all along.....

http://corner.nationalreview.com/post/?q=YmEzNzFjOTVlM2I2ZmFiYjhjN2U0NzFmYThjY2FkYjU=

At What Point Does Atlas Shrug?    [Peter Kirsanow]

During the presidential election campaign many were dumbfounded upon hearing for the first time that at least a third of Americans pay no income taxes whatsoever. The Tax Foundation notes that in 2006, 45.6 million filers (33%) paid no income tax whatsoever. Under current law, in 2009 47 million filers—representing approximately 96 million individuals— will pay no income tax.
 
The Foundation maintains that under Obama's tax plan 63 million filers— representing 44% of all returns— will pay no income tax. In contrast, in 1985, just 16.5% of filers paid no income tax. 
 
It appears Obama wasn't kidding about redistributing the wealth, although he appears to be somewhat late to the game.
 
At the other end of the spectrum, IRS data show that in 2006 the top 10% of all filers ( $109,000 and above in taxable income) paid 71% of all income taxes. The top 25% ( $65,000 and above) paid 86% of all income taxes.
 
Exempting huge swaths of the populace from the income tax burden while piling that burden on a shrinking cohort is a prescription for economic, political and social dysfunction.
 
Eventually, even fans of steeply progressive taxation might be compelled to ask, "Do the top 25%  of filers really access/consume 86% of all government services?" Obviously, the relationship between government and citizen isn't a retail one, but we shouldn't be surprised if the imbalance displayed by the above figures begins to prompt such unvarnished questions around kitchen tables across the country.
 
Sure, many of those who don't pay income taxes still pay excise, payroll, etc. taxes. But income taxes represent the biggest tax bite by far. The anger and resentment at bailing out Wall Street, Detroit, etc. isn't going to be dampened by the belief that nearly half of Americans won't be doing much bailing at all.

[chanman]

One reaction to a putative Obama administration might be a John Galtian "strike" (read Atlas Shrugged). If this happens, the economic slowdown will have serious reprecussions, especially for us, since 85% of our exports go to the US. A permanent recession will make life tough for us (and the US recession will hurt all world economies, so there will be no one to take up the slack):

http://pajamasmedia.com/instapundit/

No strike.  Expect a boom in the underground economy though as the rewards for participating 'off the books' will be higher than before.

[Thucydides]

No strike.  Expect a boom in the underground economy though as the rewards for participating 'off the books' will be higher than before.

Chanman, that is the practical unfolding of the strike.

If US political culture is changed because of the Obama Administration, then our and the world's long term prospects are much bleaker. Without the creative drive of the US economy to power the rest of the world, the global economy will stagnate (and us along with it)

http://www.usnews.com/blogs/capital-commerce/2008/11/21/how-tom-daschle-might-kill-conservatism.html

Money & Business

How Tom Daschle Might Kill Conservatism
November 21, 2008 02:00 AM ET | James Pethokoukis | Permanent Link | Print

The GOP strategist had been joking about the upcoming presidential election and giving his humorous assessments of the candidates. Then he suddenly cut out the schtick and got scary serious. "Let me tell you something, if Democrats take the White House and pass a big-government healthcare plan, that's it. Game over. Government will dominate the economy like it does in Europe. Conservatives will spend the rest of their lives trying to turn things around and they will fail."

And it turns out that the fearsome harbinger of free-market doom is the mild-mannered ex-U.S. senator with the little, red glasses, Tom Daschle. He'll be the guy shepherding President Barack Obama's healthcare plan through Congress via his probable role as secretary of health and human services. At the core of Daschle's thinking on the subject is the creation of a "Federal Health Board that would resemble our current Federal Reserve Board" and ensure "harmonization across public programs of health-care protocols, benefits, and transparency." (Forget secretary of state, Hillary Clinton should shoot for chairman of Fed Health and run one seventh of the U.S. economy.) And the subject of that "harmonization" would be a $100 billion to $150 billion a year plan that would let individuals (and small businesses) buy insurance from private companies or from a government plan.

Daschle and the Obamacrats certainly have the momentum: a near-landslide presidential election victory, at least 58 Democratic votes in the Senate, and a nasty recession that will make many Americans yearn for economic security. Already the health insurance companies seem set back on their heels. The industry's trade organization now says it would accept new rules requiring them to cover pre-existing conditions as long as there was a universal mandate for all Americans to have health insurance. On top of all that, Obama clearly wants to make healthcare reform a priority in his first term, as evidenced by the selection of a heavy hitter like Daschle. And even if he wasn't interested, Congress sure is, with Max Baucus and Ted Kennedy readying a plan in the Senate. A few observations:

1) Passage would be a political gamechanger. Recently, I stumbled across this analysis of how nationalized healthcare in Great Britain affected the political environment there. As Norman Markowitz in Political Affairs, a journal of "Marxist thought," puts it: "After the Labor Party established the National Health Service after World War II, supposedly conservative workers and low-income people under religious and other influences who tended to support the Conservatives were much more likely to vote for the Labor Party when health care, social welfare, education and pro-working class policies were enacted by labor-supported governments."

Passing Obamacare would be like performing exactly the opposite function of turning people into investors. Whereas the Investor Class is more conservative than the rest of America, creating the Obamacare Class would pull America to the left. Michael Cannon of the Cato Institute, who first found that wonderful Markowitz quote, puts it succinctly in a recent blog post: "Blocking Obama's health plan is key to the GOP's survival."

2) Shrinking government would get exponentially tougher. Republicans would face the same problem with healthcare that they currently do with Social Security, persuading people to trade one in the hand (the current system) for two in the bush (a reformed system). And we see how well that has worked out. Combine Obamacare with plans to take away the tax-advantaged status of 401(k) plans and IRAs and you would end up with government responsible for both healthcare and retirement. The big-government constituency would grow and deepen. And remember that fewer and fewer people are paying the incomes taxes that would help pay for increased government services. That breakage of the linkage between taxes and government "benefits" creates toxic incentives for more of both — and an economy more shackled than ever by taxes, debt, and regulation.

3) Republicans better earn to competently talk healthcare. John McCain's healthcare plan was perhaps the most provocative policy proposal of the entire 2008 campaign. Too bad he could neither fully explain how it worked nor persuasively argue why it was better than Barack Obama's plan. Also too bad since his plan would have smartly reduced healthcare costs by getting companies out of the healthcare benefits business and empowering individuals to buy insurance on their own. This would have helped fix what economist Arnold Kling calls the insurance vs. insulation problem: "Insulation relieves the patient of the stress of making decisions about treatment. The patient also does not have to worry about shopping around for the best price. The problem with insulation is that it is not a sustainable form of healthcare finance."

Another interesting healthcare reform option is highlighted by Ross Douthat and Reihan Salam in the book Grand New Party. Uncle Sam would require individuals and families to put 15 percent of their income into health savings accounts. If you run out of money before year-end, the government steps in. If you don't, you get the money back or it rolls over into a retirement account. Of course, any conservative alternative would be easier to implement if it doesn't first have to kill an existing nationalized health plan. But thanks to Tom Daschle, that is just what might have to happen.