Robbing Peter to Pay Paul

Now that Garth Turner is no longer a Member of Parliament, he's been focusing more on economics and real estate than on politics in his blog. Happily, this has resulted in most (but not all) of the more repugnant trolls losing interest, but it hasn't always made for the most fascinating reading for the rest of us political junkies.

Today's post is a notable exception:

Toxic Cash?

Do you know what’s backing your money? You should. Because in the last 90 days this has changed drastically. There’s a big gamble been taken by politicians which was never explained, never debated, never questioned, and yet could affect us all.

Here is the way the system is supposed to work, and until this autumn, did.

* Our money’s printed by the Mint and backed by the Bank of Canada. The central is expected to hold assets equal to the amount of cash in circulation, which is more than $50 billion.
* Because our nation no longer owns gold reserves, our money is backed by the safest of securities, long-term government bonds and Treasury bills. This is what gives our money true value. At least, until recently.

But in the last 90 days, without public notice, the Bank of Canada has sold off more than $11 billion of those secure T-bills, plus cashed in billions more of its bonds. As stock market researcher John Paul Koning discovered last week, the central bank now lists on its balance sheet a stunning $32.4 billion in “other” assets, which comprise a whopping 42% of everything it owns.

That means more than two-fifths of the total assets backing our money supply is – what, exactly?

Well, let’s flip back a month to the middle of November, when finance minister Jim Flaherty announced the federal government was purchasing $50 billion in residential mortgages from the Big Six banks, following an earlier deal to buy another $25 billion in mortgages. “At a time of considerable uncertainty in global financial markets, this action will provide Canada’s financial institutions with significant and stable access to longer-term funding,” he said, adding, “with no additional risk to the taxpayer.”

So, the “other” assets the Bank of Canada has swapped for secure, near-cash holdings appear to be tens of billions of dollars in high-ratio mortgages. The money to buy those assets apparently came from the central bank, through CMHC, and ended up in the vaults of the Big Six banks.

You know, I had been wondering how Flaherty managed to pull $75 billion out of his ass without toppling his little budgetary house of cards. Now I guess we know.

Subprimes to Student Loans: The Next Domino

Just when you thought it couldn't get any worse down south, there's this:

Congress moves to calm student loan turmoil

The House of Representatives overwhelmingly approved a bill to direct federal financial institutions, including the Treasury Department's Federal Financing Bank, to ensure enough money is available to provide student loans.

The student loan business is in disarray because of fallout from the subprime mortgage crisis, as well as deep cuts in federal subsidies paid to federally guaranteed student loan providers that were approved last year by Congress.

The House bill would also let the Education Department buy federal student loans from lenders unable to sell them on the largely paralyzed secondary market, and funnel loan capital to colleges through state guaranty agencies.

...Underscoring the urgency, Bank of America Corp said on Thursday it would no longer offer private student loans in the coming academic year.

And the chief executive of Sallie Mae, the largest student lender, said the system was in for "something of a train wreck" by mid-2008 if the federal government did not move quickly with a stabilization plan.

Dozens of lenders have exited the federal loan program altogether since the cuts in subsidies, prompting some analysts to predict a shakeout of smaller competitors and growth for larger players.

LOANS CRUCIAL FOR COLLEGE

The American higher education system is the world's costliest. Most students, facing soaring costs for tuition, books and living expenses, get some financial aid. As grants and scholarships have dwindled, loans have become common.

Under the biggest loan program, students take out federally guaranteed loans from lenders such as Sallie Mae, Bank of America, JPMorgan Chase & Co and others.

And my favourite part:

...the credit crunch meant most of Sallie Mae's new student loans would lose money. Loan demand was running at $3 billion a month, while it has only been able to access funding of about $1 billion a month -- and at record-setting costs, he said.

Wow. The whole house of cards is tumbling down, isn't it?

No wonder my largely US-based internet sales have largely dried up over the past year. I have a feeling these people aren't going to be spending anything on anything besides food, shelter, and mandatory minimum payments for the foreseeable future.

It remains to be seen how far Canada's going to be following them down the rabbit hole, but if Cassandra Garth Turner is even halfway right, we're in for one helluva ride.