Canadian Elections Ignored?

By Stephan Zimmermann, on October 6th, 2008

Several questions during the last few days pointed out the obvious: lost in the media coverage of the American financial crisis and the tail end of the presidential election seems to be the fact that there really is news beyond Wall Street and Main Street.

I could not agree more.

For example, how much attention has been paid to the fact that our closest neighbor, Canada, is having its 40th parliamentary election on October 14?

Neither the Liberal nor Conservative Party has a majority in the parliamentary system.

The economy, of course, is topmost on the agenda.

In the Toronto Star, the paper raised the question whether Canada is likely to experience similar problems in its housing boom. The upsurge in housing lasted for more than ten years, although it has somewhat cooled off even before the Bearn Stearns, Merrill Lynch, Lehman Brothers, and AIG debacles.

According to Jim Adair of Realty Times,

Tighter lending guidelines for developers and a lower level of investor participation have reinforced a more cautious approach among home builders. …Households, for their part, are not over leveraged. Home equity as a share of real estate assets has been steadily building this decade, as price appreciation outpaces the rise in mortgage obligations. Canadian households also have little direct exposure to sub-prime lending, which has accounted for only about five per cent of domestic mortgages in recent years, compared to over 20 per cent in the United States. (www.realitytimes.com)

Reflecting the fears and uncertainties of Wall Street, however, the Toronto stock exchange (TSX) on October 2 saw a fall of more than 800 points, following on the events of Monday, September 29.

Further adding to market malaise,

On October 1, 2008, the United States Securities and Exchange Commission issued Release No. 58703 announcing the extension of the temporary easing of restrictions on issuers repurchasing their securities. Issuers listed on a U.S. national securities exchange (U.S. Exchange) are temporarily exempt from the application of certain share repurchase rules under the Exchange Act Rule 10b-18. TSX has granted and is extending similar temporary relief to TSX listed issuers that are also listed on a U.S. Exchange. (www.tsx.com)

That SEC rule extension virtually encourages Canadian companies to repatriate subsidiaries with U.S. exposure.

Other key items on Canada’s election agenda include the environment, the arts, infrastructure, and the nation’s role in Afghanistan.

Unlike the United States with it two-party political system, Canada’ multi-party parliamentary structure assures that dissident or minority parties’ concerns are widely aired. The dual-language nation also airs its major parties in both French and English debates. Interestingly, while some 30% of Canadians didn’t plan to listen to either the Canadian or the American vice-presidential debates, more than 60% of those polled had planned to watch both. The debates were both aired on October 2.

Stephan is a former department chair for economics and taught at various colleges and universities at both graduate and undergraduate levels. If you would like Stephan to answer your economics-related questions, read his post “Got an Economics Question?” and submit your questions in the comments area there.



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Financial Bailout Plan: What Does It Mean for Capitalism and Democracy?

By J.D. Seagraves, on October 6th, 2008

For four shining days last week, it appeared that America was still a representative republic—of, by and for the people. The week opened with the House of Representatives defeating the $700 billion Wall Street bailout by a vote of 227 to 206. But the Senate, the more aristocratic house of the bicameral legislature, quickly drafted its own bailout bill and passed it by a vote of 75-24. Then on Friday, while populists were still celebrating Monday’s bailout defeat, the bigger and badder bailout bill was passed by the House and quickly signed into law by President Bush.

How did it happen so fast? How did we go from beating back this colossal transfer of wealth to an even worse version of the same bill becoming law just four days later? And what does the bailout’s passage mean for the future of capitalism and American democracy?

What Does the Bailout Mean?

First, the specifics of the bill. The general idea is that the federal government will buy up “$700 billion worth” of “illiquid” securities, thereby “stabilizing” the financial and credit markets. The “$700 billion” must appear in quotes because the securities have much lower value on the open market, which is why they’re “illiquid.” And while apologists for the bailout claim that the federal government actually stands to make money as a result of Friday’s legislation, the fact of the matter is that, if this $700 billion “investment” had any legitimate potential to be profitable, private entities would be more than happy to supply the capital.

But the bailout bill that President Bush ultimately signed does much more than just transfer $700 billion from the American taxpayer to millionaires and billionaires on Wall Street: it also grants the federal government unprecedented powers. For example, there won’t be another bailout bill any time soon, and not because this one will have worked so well. One of the provisions of this bill allows the Secretary of the Treasury to use public funds to buy up any financial asset he wants—without congressional approval. All he (or, in the future, she) needs to do is “notify” Congress.

Think about this for a moment: there will be no more debate. The next time a bailout is “needed,” Henry Paulson or his successor can be like Nike and just do it. The Federal Reserve already had that power, but it was reaffirmed in the bailout bill. Thus, not only was wealth transferred from the middle class and poor to the rich as a result of this bailout, but power was also transferred from the legislative branch—that branch most accountable to the people—to the executive branch and the Federal Reserve.

Why Did the Bailout Pass?

The original bailout bill was just three pages in length. The one that passed on Friday was several hundred pages long. In addition to added powers being given to the executive branch, the new bill was greased with enough pork to build a million bridges to nowhere. And of course, the pork was directed at those House members who had voted no on Monday but were of fungible-enough integrity that a little lard thrown their way could easily sway them. It worked, as the vote went from 206 for and 227 against, to 263 for and 171 against—a swing of 57 votes.

Another cause of the bailout’s easy passage: Barack Obama, a supporter of the bailout, called on black legislators and urged them to change their no votes to yeses. It should be noted that Obama’s top contributor is Goldman Sachs, and that Citigroup, JP Morgan, UBS and the now-bankrupt Lehman Brothers are also in his top ten. But if voters want to express their disgust with the bailout, they’ll have to look outside of the two-party system, since John McCain and Sarah Palin support the bailout and oppose laissez-faire just as steadfastly as Obama-Biden.

What Was the Immediate Impact?

When the bailout first failed, the Dow Jones Industrial Average fell by a record 777 points. Financial pundits were nearly universal in blaming the House’s brief showing of fiscal restraint as the cause of the market’s woes. But when the new bill passed the Senate on Wednesday night, the markets crashed on Thursday, with the Dow falling by 3.2% and the S&P and NASDAQ faring even worse. And then on Friday, after the House passed the bill, the Dow swung from +3% to -1.5%, and the S&P and NASDAQ also turned gains into losses.

For the week, the three major indices lost 7.3% (Dow), 9.4% (S&P) and 10.8% (NASDAQ)—these are all much greater than the one-day losses of Monday. Clearly, the failed bailout wasn’t the cause of the market’s decline, as the bill’s successful passage caused stocks to drop even further.

Where Do We Go From Here?

This is a critical time in American history, in which we must reevaluate what it means to be a democratic republic built on the principles of private property and free enterprise. As one Republican congressman put it, what we really have now is “capitalism on the way up and socialism on the way down,” meaning that we let corporations privatize profits in good times and then socialize losses when times are tough. What’s more, we allow our representatives to thwart the popular will and redistribute wealth from their constituents to their campaign financiers, while the mainstream media mis-reports and distorts all along.

Libertarian columnist Bill Huff characterized the recent events as a “run on the state.” Much like a “run on the bank,” when people race to withdraw their deposits before a bank goes belly up, Huff says the bailout is the last ditch effort for the rich and powerful to extract wealth from the federal government before it goes bankrupt. With the national debt soaring this past week, and the Federal Reserve expanding the money supply at an unprecedented pace, one has to wonder when people are simply going to refuse to accept U.S. dollars anymore. And when that happens, then what?



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More Troubles for Fannie Mae and Freddie Mac

By G.L.C., on October 6th, 2008

The Federal takeover of Fannie Mae and Freddie Mac has not put an end to the woes of these two companies. The two companies have now received subpoenas from federal prosecutors in New York seeking information on the companies’ accounting, disclosure, and corporate governance. The two companies have also received requests from the Securities and Exchange Commission that they preserve documents.

The investigation focuses on activities starting in 2007. The bookkeeping practices of the two companies have always been questioned by critics. In fact, a Fortune magazine story said new accounting procedures at Fannie Mae masked potential losses on bad loans.

Accounting irregularities are nothing new to Fannie Mae and Freddie Mac. Both have had to restate earnings in past years following discoveries by federal regulators of irregularities on the companies’ books. Few years back, both companies were forced to restate billions of dollars in earnings after federal regulators discovered accounting irregularities at both companies. The scandal led to the replacement of the companies’ top executives. Freddie’s former chief executive, Gregory Parseghian, was ousted in December 2003. Fannie Mae CEO Franklin Raines and Chief Financial Officer Timothy Howard were swept out of office a year later.

Fannie Mae has also paid a record $400 million to the SEC in 2006 to settle charges that senior executives fraudulently used “cookie jar” reserves and other accounting gimmicks to hide $10.3 billion in losses from 2002 to 2004 to maximize bonuses.

Freddie Mac paid $125 million in fines in 2003, while earnings between 2000 and 2002 were restated after it discovered derivative-related errors after replacing one of its former auditors, Arthur Andersen. At the time, regulators charged that the company manipulated its accounting to push about $5 billion in earnings to future quarters.

The two companies have been in the conservatorship of their regulator, the Federal Housing Agency, since the government seized them. There is increasing pressure on the administration to hold accountable the companies and top executives. Both companies have said that they will cooperate fully with the prosecutors. The Federal Housing Finance Agency, which controls the companies, said that it will work with the companies to assure a smooth and efficient process and will work with the government agencies as they undertake their inquiries.

The Federal Bureau of Investigation is already looking at potential fraud by these two companies and insurer American International Group, Inc. The inquiries will focus on the financial institutions and the individuals who ran them. A number of members of Congress, including several on the Senate Judiciary Committee, have urged the FBI to be more aggressive in pursuing possible criminal charges against major players in the crisis. If the top executives of these companies were cooking the books, manipulating, doing things they were not supposed to do, then every American taxpayer would want them held responsible.



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