Earlier this month, Flaherty announced the government's $25-billion takeover of bank-held mortgages to ease a growing credit crunch and free up money for financial institutions to lend to Canadians.

On Thursday, Canada’s Finance Minister Jim Flaherty announced that the federal government will provide a "backstop" to the country's banks, offering insurance on their wholesale term borrowing.

In layman’s terms, this is a loan guarantee that permits this country's banks to make loans to each other without risk. In theory, it also removes a competitive disadvantage in global markets as relates to the global credit squeeze. By providing this insurance or guarantee, Canada is following the actions of more than a dozen countries, including the U.S., the U.K., Australia, Spain, Ireland, Germany and Sweden.

How strange that just a few weeks ago, our Prime Minister assured us that Canada was in great shape, our banking system was sound and Canadians should not be concerned with the meltdown in U.S. financial circles and the resulting crisis in global markets.

Mr. Flaherty rationalized his intervention on the grounds that "Our actions will help Canadian financial institutions secure access to longer-term funds so that they can continue lending to consumers, homebuyers and businesses in Canada". Flaherty said the insurance will be offered to federally-regulated deposit-taking institutions on commercial terms, with no expected cost to taxpayers. He told reporters that the program is only temporary, lasting from November to April.

The measures are aimed at helping Canadian banks weather the storm during the global financial crisis sparked by the collapse of the credit market in the United States. Flaherty continues to insist that Canada's financial institutions are still healthy. "The government of Canada will never allow Canada's financial system, which has been ranked as the soundest in the world, to be put at risk by global events," he said.

On Thursday Canada's Bank of Canada Governor Mark Carney said Canada’s economic performance is expected to be sluggish through the first quarter of next year. Asked if Canada was headed for recession, Carney would only say that economic performance will be sluggish for the next few quarters. Meanwhile the Canadian dollar fell below 80 cents U.S., pushed down by a drop in oil prices and a rally in the U.S. dollar.

Finance Minister Jim Flaherty characterized the Bank of Canada’s assessment as "near the line" of a recession. Bank of Nova Scotia economist Derek Holt believes both the finance minister and central bank governor are overly optimistic. He says the Governor’s prediction is not credible in current market conditions, that Canada is not an island in the global economy and that if the world goes into recession, Canada will feel the impact.

TD Bank chief economist Don Drummond said the state of the economy is far too fluid to put much faith in anybody's forecast.
To hedge against a downturn, the Government of British Columbia has embarked on a tax-cutting and investment spending binge. With declining revenues, Ontario has decided to run a deficit to maintain government spending.

Meanwhile, Prime Minister Harper will attend a “Meltdown” summit (a “fitting metaphor” for the Bush Administration) in Washington to be hosted by the U.S. President. Meanwhile the federal government braces for a deficit. According to Canadian Press, the Conservatives are looking for ways to share the blame with opposition leaders.

During the election, the Prime Minister said he understood the consensus among economic theorists that running the occasional deficit is not a bad thing in tough economic times. He also said that deficits are addictive – once you start, they can spin out of control. The post-war Keynesian economic model subscribed to the notion of deficits in hard times and surpluses in good times.

I remember the great deficits of the 1970s and 1980s. Canada was spending almost a third of its revenues on interest payments related to a swelling national debt. Conventional wisdom is to spend your way out of difficulty but I don’t believe we should go back to the days of huge deficits and runaway inflation – the kind that destroys the value of saving accounts and drastically reduces the purchasing power of people on fixed incomes.

In my view, that would be irresponsible. I have to agree with Prime Minister Harper, deficits are addictive and deficits are debilitating. In my view, the federal government should restore the federal sales tax (GST) to its pre-election (2006) level of 7%. This would add tens of billions of dollars to government coffers and create a surplus that could be directed to segments of the economy that stimulate growth. It could also provide support for those most vulnerable to recession or economic slow-down, whether they are provinces or individuals.

W.E. (Bill) Belliveau is a Shediac resident and Moncton business consultant. He can be contacted at bill.bellstrategic@nb.aibn.com Atlantic Insight is a published Blog inventory of opinion articles published weekly in New Brunswick's print media as written by W.E. (Bill) Belliveau, who is a resident of Shediac, New Brunswick, and small business owner, operating his Moncton-based marketing consultancy, Bell Strategic. He can be reached by e-mail at mailto:bill.bellstrategic@nb.aibn.com