The Canadian Imagination

What it means to be Canadian; examining and reworking Canada as a nation.

Sunday, October 12, 2008

Investing in Canadians

Stephen Harper's decision to invest in existing Canadian mortgages is nothing short of ingenious. I wish I could say I had seen this coming, but he caught me utterly by surprise too.

Do not think this is a bailout, in the sense that an increasing number of governments have been dropping large number figures upon their local banks. There is nothing either of grant or loan about this, nor of buyout or nationalisation either. Nor ought the Canadian banking system to need grant or loan, buyout or any degree of nationalisation. We came into this with a federal budgetary surplus, we are the tenth most competitive country in the world, we have the most solid banking system in the world (ranked at 6.8 out of a possible 7.0) with one of the highest percentages of required liquid capital.

Rather, what Harper is done is to purchase mortgage debt from the banks, in the same way as we might purchase a guaranteed income certificate, and in the same expectation that both principal and interest will come payable as the mortgage matures. Essentially, instead of paying off their mortgages to the bank, people will be paying off their mortgage to the Canadian government which has bought their mortgage papers at their existing rates and terms. Thus it is not a payment he has given the banks, but an investment he has made in their judgement and that of the Canadian people to whom the banks had previously extended credit. This investment has the dual effect of releasing the banks from existing debt shackles and simultaneously restoring a significant amount of liquid capital, allowing them to continue to extend the credit upon which all modern economics depends.

This could never work had Harper's government not had a fundamental trust in the fiscal ability of Canadian homeowners. Were the rate of foreclosures to start spiralling out of control, as has happened in the real estate bubble and negative mortgage climate of the United States, this would no longer be an investment but a bailout in truth -- but because we have every reason to believe that the majority of these mortgages will be paid off in full, it is not.

Investing in Canadians. What a concept!

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