It is cliché to say we are living in extraordinary times. Comparisons with the Global Financial Crisis doesn’t work, although monetary madness is again afoot. For Alberta, there are comparisons with the 1980s when homes were sold for a dollar, allowing mortgagors to walk away. And of course, there is the Great Depression, which devastated all of Canada and left lasting resonance on how people related to others, to governments, and to money.
So now, we are in a time of both crisis and reflection. Should governments (national and sub-national) be co-operating or competing? We know the beggar thy neighbour policies of the Great Depression did not work, but our next-door neighbour seems intent to draw up the bridges on the castle.
In Canada, we are in in a period of inter-governmental co-operation on many fronts including public health, government borrowing, massive income support, and supports for business. These initiatives are all designed to ensure that people do not starve and are not thrown out of their homes.
Alberta, like Quebec, has often been the moody adolescent of Confederation never getting what it wants and occasionally wanting to go it alone. Now with enormous borrowing requirements necessitated by the partial shut-down of the economy, we are hearing less about Alberta’s energy demands. Indeed, Alberta politicians have been seemingly reticent to criticize the federal government. Perhaps this is because Edmonton realizes its refinancing requirements and new borrowing will be a huge challenge without federal assistance.
Over the past three weeks. the Bank of Canada has launched unprecedented measures to add liquidity to provincial securities’ markets through purchasing short-term money market and provincial bonds up to 10 years. Such a measure will assist provinces to borrow at reasonable rates. Unfortunately, for some provincial borrowers like oil-dependent provinces, the spreads above Canada’s rates and the “Big Three” provincial borrowers (Ontario, Quebec and B.C.) have widened considerably.
In a candid appeal for federal help, and sounding eerily like that of western provincial premiers during the depths of the Great Depression, Premier Pallister urged the creation of a Pandemic Emergency Credit Facility. This proposal would empower the federal government to borrow money at low rates and on-lend the money to provincial governments to fund their constitutional responsibilities. The measure is remarkably similar to the mid-1930s notion of a Dominion Loan Council. This idea, borrowed from Australia, would have involved the setting up of loan councils consisting of representatives from the Dominion Government, the newly created Bank of Canada, and the provincial government. Such an arrangement was attractive to the Dominion government, which was facing enormous fiscal pressures, unemployment rates of 20 per cent, concerns about monetizing debt, and fears that international capital would be withdrawn.
At the end of 1935, it looked like provincial governments had all fallen in line with the Loan Council concept, including Alberta’s newly formed Social Credit government. Alberta’s government was at this time a loose collection of monetary reformers and a more orthodox cabinet. However, at the last minute, as interest payments and bond maturities were coming due, Alberta pulled out of the project because it learned that Dominion assistance to meet debt payments was conditional on agreeing to surrender of provincial borrowing powers to a super-national body. According to Major C.H. Douglas, father of Social Credit theory, the federal move would “filch away” the Province’s financial autonomy. Douglas recommended the Alberta government break away from the stranglehold of “orthodox finance.”
Today, there is nearly a trillion in provincial debt and provincial government guaranteed debt outstanding in the Canadian market and overseas markets like Japan, Switzerland, the U.K., U.S. and South Africa.
According to Governor Poloz, the Bank of Canada’s decision to buy up to $50 billion in provincial bonds was made without federal government direction. In the 1930s, the central bank was very plugged into the thinking of the Dominion government’s finance deputy W. Clifford Clark. Is that true today? Perhaps, but does it make a difference to financial markets whether or not “political interference” took place? Probably not. Rating agencies have always assumed there was a federal backstop available to provinces that got into “trouble.” The question today is how much longer can the federal government sustain its own fiscal firepower while tacitly guaranteeing the debt of all provincial governments (directly or through the central bank), not only western provinces.
On top of the provincial needs, there are strong signals from the mayors of Canada’s largest cities, suggesting the cities are also looking to the support of both the provinces and the federal government.
Are we in the earliest stages of a financial reset on Confederation? At Confederation, it was said that the only thing uniting the four provinces in 1867 were debts to the Baring Brothers. While this reset could be temporary, the longer this pandemic lasts the more stretched become fiscal resources of local and provincial governments. Is it then not inconceivable to envision profound constitutional changes in the near future?
Co-operation or competition- let’s hope our politicians make the right choice.