Prime Reduced With Government Subsidy

TD threw down the gauntlet and Flaherty’s picked it up.

The Ministry of Finance announced today that:

the Government will take steps to maintain the availability of longer-term credit in Canada by purchasing up to $25 billion in insured mortgage pools through the Canada Mortgage and Housing Corporation (CMHC). This action will help Canadian financial institutions raise longer-term funds and make them available to consumers, homebuyers and businesses in Canada.

This relief to Canadian homebuyers and consumers comes at no fiscal cost to the taxpayer. Indeed, these securities will earn a rate of return for the Government that is well above the Government’s own cost of borrowing. Moreover, as insured mortgage pools in Canada already carry Government backing, there is no additional risk to the taxpayer.

This is, of course, the complete nonsense we have come to expect from government – any government, by the way, not just Harper’s. They will now have to go out and borrow $25-billion, which will – one should expect – push up the government’s cost of borrowing. We are, obviously, a long way from being in as bad a position as Iceland (or as bad as Canada, 1994), but this is the first step down that road.

There is no additional credit risk, to be sure, but that isn’t the only risk that applies to fixed income investment. Will they do the financing with matching term? Will they mark the positions to market?

I’m not saying this is a bad thing, mind, but I am saying that a little less public relations and a little more honest discussion of the issues would be greatly appreciated.

Also, this represents an easing of monetary conditions … remember the last currency debacle?

, the currency decline has more recently developed a momentum that, together with the upper pressure on medium- and longer-term interest rates, signals a diminishing of confidence in Canadian dollar investments. At the same time, the depreciation of the currency has resulted in a substantial easing of monetary conditions.

The Monetary Conditions Index is no longer fashionable, but the Bank acknowledges:

Together, interest rates and the exchange rate determine the monetary conditions in which the Canadian economy operates. Changes in the exchange rate affect spending and demand in the economy just as changes to interest rates can either increase or decrease the level of economic activity.

It will not have escaped notice by Assiduous Readers that:

Canada’s dollar weakened 14 percent since Sept. 26 as turmoil in global financial markets prompted investors to seek the relative safety of U.S. government debt.

That’s a lot of stimulus!

Anyway …

4 Responses to “Prime Reduced With Government Subsidy”

  1. […] Canadas efforts to join the Banksgiving Moneyday rescues have now commenced implementation. The results of the first mortgage reverse-auction have been announced: Auction Date: October 16, 2008 Settlement Date: October 23, 2008 Maturity Date: October 15, 2013 Amount: $5 billion High Yield: 4.679% Low Yield: 4.041% Average Yield: 4.241% […]

  2. […] misplaced their quill pens temporarily, this will be a smooth transmission of the Bank Rate cut – unlike last time. The Bank of Canada also announced today that $4-billion in 3-month money was auctioned off at […]

  3. […] It should be noticed that transmission of monetary policy is an issue in Canada, despite the fact that we do not have a fractional reserve system. There were problems with the transmission of the penultimate rate cut which were resolved with extraordinary measures via the CMHC. […]

  4. […] the penultimate cut, TD threw down the gauntlet by not maintaining the spread; this resulted in a $25-billion liquidity injection, later increased to $75-billion which maintained the historical […]

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