JAN 27 BUDGET MUST PREVENT JOB LOSSES, AND CANADIAN BANKS MUST EASE LENDING RATES!!

Canadians from all walks of life are rightly worried about the economic health of the country in coming weeks and months. And as such, various suggestions are pouring in for Prime Minister Harper about what kind of budget should it be on Jan 27.

Meanwhile, to put to rest speculations about the likely deficit, yeah deficit there will be, official leaks to the media put the deficit figure at 64 billion over the next two years.

Now, let me weigh in on the directionality of the budget. Yeah, the budget should contain stimulus for growth of economy and so on, but my fundamental submission to PM Harper and Finance Minister Flaherty is: in as much as the Jan 27 budget will be geared towards creation of jobs, it must also focus on another critical aspect – towards prevention of job losses.

Reason is simple: if two new jobs are created but if at the same time two jobs are lost, the net result will be zero. Therefore, the budget must encompass steps that will help in job retention in sectors specific to provinces, like, farming, energy, fisheries, lumbar, etc. and for small and medium industries.

Just by focussing on one sector will be of little help. Let us say, auto sector is provided necessary succour and they continue to produce vehicles but if the people are not employed, if they don’t have the purchasing power to buy those vehicles, what good would have been achieved at the end of the day?

Therefore, in very concise terms: the budget and the government have to ensure that people who have jobs don’t lose them, and at the same time new jobs are also created. With creation of new jobs the currently unemployed will finds means to earn, consequently they will have disposable incomes which in turn will help in causing higher demand for goods and services. The usual economic multiplier will come in to play. This is what the economies in recession want to happen.

However, for the growth of demand it is absolutely necessary that there is adequate money supply in the market. At the moment liquidity is a problem as the banks are being too conservative regarding their lending policies. In other words, the Canadian Banks are opening the money supply valve slowly.

Bank of Canada reduced the overnight rate to 1.0% on Jan 20 thereby bringing cumulative easing to 350 basis points since Dec 2007. BoC is doing this to stimulate the credit market which is so very vital for sustainment and growth of durable and non-durable goods, and services.

But if you look at the interest rate table provided in Bank of Canada’s Monetary Policy Update of Jan 2009, you will find that the variable mortgage rate dropped till 17 July 2008 as the Prime Rate dropped. But all of a sudden on 23 Oct 2008 the variable mortgage rate went up even as the Prime Rate declined. Since then the banks have not passed on fully the benefit of overnight rate cuts to the consumers.

The consequence of this is evident, there is drop in sales of houses which in turn affected the demand, which led to less starts, which meant job losses and initiation of one of the many downward spirals strangulating Canadian economy.

Latest numbers (including December 2008 numbers) from the Bank of Canada indicate Canadian banks' residential mortgages stood at $452.5 billion, off by 0.7 per cent from November, extending a declining trend since July's peak as realtors reported sharp drops in home prices and sales volumes.

There is also news that some banks are quietly increasing interest rate on lines of credits too. When the market is crying out for more consumer demand, the banks are insidiously trying to dip in to the pockets of the consumers and snatch some more dollars!! It seems the banks are adopting a penny wise pound foolish policy.

Obviously this is a desperate but a stupid way to improve their revenue and the balance sheets which got screwed up because the banks were putting their funds blindly like gargantuan idiots in the disastrous mortgage lending frenzy initiated by Freddie Mac and Fanny May. These banks didn’t even bother to check whether the bubble they were putting the money in to was the right thing to do or not.

So, the important question is: why are banks not passing on the full benefit of cuts being effected by BoC in overnight rates? The variable mortgage today stands at 3.8% whereas it could have been easily anywhere around 1%+0.8=1.8%. Why the hell are banks not giving the benefit to the potential customers?!!

As per Bank of Canada’s Monetary Policy Update of Jan 2009, Canada is in recession, and its real GDP is 2009 is expected to contract by 1.2% (An aside: ‘decline’ is the word used in BoC’s document which is confusing, it is poor English; decline connotes a decrease relative to something – e.g. there can be a decline of 1.2% from, say, a previous figure of 3.5%).

BoC projects that Canada’s GDP will rebound in 2010. But how the hell can it rebound when the banks are making things difficult for people? Why can’t the BoC kick on the posterior of these banks and ask them to help in a ‘real’ and ‘effective’ manner in bringing the Canadian economy back on the rails?

It is pretty darn clear that simply resorting to deficit budgets is not going to suffice unless it is backed to the hilt by the banks that showed utter callousness and incompetence which resulted in their funds getting entangled in toxic assets (consequently the banks had to resort to massive write-offs).

PM Harper and Finance Minister Flaherty have to do whatever it takes to get the Canadian banks to fall in line with BoC’s measures. If that requires adopting extraordinary measures, cracking the whip, so be it – whether through any ordinance or whatever it is. When President Obama can go to extraordinary lengths, why can’t Canada, which, fortunately, is not in such a deeper hole as US is? It is time Canadian leadership showed that it is not made up of sissies!!