On the Hill – A Bigger Shovel

One of the biggest factors underlying the global financial mess was easy credit. For years, banks and brokers made staggering profits by coming up with new ways to get people into mortgages?even people who would never be able to afford the spiralling interest rates on those sub-prime loans.

Even with the depths of the financial meltdown yet to be seen, credit card companies are still pushing easy credit, offering low introductory rates that jump drastically after a month or two.

Consumers by the millions have been all too eager to sign on, and even when they weren’t, some banks and brokers used fraudulent practices to keep hauling in the dough.

In general, we’ve enjoyed a giddy run of buy-now-pay-later?and if Ottawa isn’t careful, the potential $40-billion dollar stimulus package will end up digging us even deeper into that hole.

On January 27, Finance Minister Jim Flaherty will table the government’s budget, and the prevailing mood of Canadians can be summed up in one word: spend. In the US as well, president-elect Barack Obama is talking about staggering deficits as Washington plans to spend its way out of trouble, and he’s warned Americans that the country could well rack up a debt of over $1 trillion. Yes, trillion.

In spite of the complexities involved in finding a lasting, stable solution, the Financial Post reports that the Liberals have accused Harper of moving too slowly. John McCallum, the Liberal party chief of economic strategy, called the Conservatives? reaction ?timid and cautious.?

But here’s a thought: with so much a stake, isn’t a thoughtful, cautious approach exactly what we need?

Clearly governments need to take action, but the danger (especially with so many sectors rushing to belly up to the trough) is that rapid, massive stimulus spending is dangerously akin to the cycle of using new credit to pay off old debt. It solves the problem in the short term, but perpetuates the whole buy-now-pay-later mindset that got us into this mess in the first place.

Some analysts are warning about that danger already, especially when it comes to the possibility of Ottawa putting money into the securitized credit markets to get money flowing through the economy again. There are a couple of options, as Finn Poschmann, vice-president of research at the C.D. Howe Institute, told reporters. Ottawa can either ?guarantee short-term commercial paper? for investors or buy it directly. Either way, Poschmann said, the move would expose taxpayers ?to new credit market risks.?

If nothing else, the credit crisis has proved the old adage that there’s no such thing as a free lunch. And while massive stimulus spending may look like as attractive as a shiny new credit card, sooner or later we’re going to have to settle that tab.