Q: Given the past few decades, how is it that Conservatives and Republicans still have a reputation for fiscal responsibility?
A: It’s a little surprising, because left-leaning governments have a better track record of cleaning up fiscal messes. Reagan came in with an almost-balanced budget and left with a huge deficit. Bill Clinton left a significant surplus, and look what we’ve got at the end of the Bush administration: pretty much a straight line down, though to be fair, economic circumstances played a role. If you think about Canadian economic history, the first province to get out of the deficit problem in the early 1990s was NDP-led Saskatchewan. And despite years of talking a great game, the Conservatives under Wilson and Mulroney and Mazankowski didn’t really accomplish much on the deficit. Yet the Liberals won in 1993 having a very modest objective for trimming the deficit and, four years later, produced a gigantic surplus.
Q: Let’s talk for a minute about the economic situation internationally. How does an entire country like Iceland find itself on the brink of economic collapse?
A: They became overextended. Their financial institutions had an enormous amount of questionable loans on their books, and questionable investments, and they cratered. I suspect Iceland will get a substantial amount of international assistance, and while they will be impoverished, they will survive. We have, unfortunately, this notion that the only problem in the world is the U.S subprime problem. First of all, even in the U.S., it’s not just subprime—there are all kinds of debt problems in other markets as well. Second, in some other countries, there’s been an even more severe housing cycle than in the U.S. Spain was at a point last year where one-third of all the workers in the country were in the construction sector, which is absolutely ridiculous, and it’s all collapsed. Third, countries like Germany—yes, they’re suffering because of the U.S. subprime problem they imported, but they also have every bit as much of this extreme leverage in their financial institutions as the U.S. So the U.S. is a common denominator in a lot of other countries’ problems, but a lot of them also have problems of their own making.
Q: Credit default markets are pricing the likelihood of a national default by Italy or Greece at nine per cent, and Ireland at just a little less. What does that mean, in plain English, and is a European default a real possibility?
A: If you look at the bonds a sovereign country would issue, and people around the world tend to buy them, there’s always some probability that they will not repay their principal. It’s a fairly low probability, but there have been cases: New Zealand, about 20 years ago, Argentina, a couple of different times, and in the early 1980s, a host of Latin American countries defaulted on their loans. So there’s always some probability, but one of the reasons it tends to be fairly low is that governments do have the ability to tax their citizens if they end up with these huge borrowing requirements they can’t sustain. While I think the whole economic union in Europe has been weakened, we do have to remember they have a larger entity, and I don’t think the European Union will allow any significant member to go under. Especially not Ireland. With the U.K. not joining the EU, you have to think they’d be very appreciative of the Irish, and very reluctant to see them go under. And in fact, I think the European economy in total will be more stable over this period than the U.S. economy.
Q: What should we watch for in the next six months?
A: There is going to be an instinctive reaction for everyone to make their regulations on the financial sector more severe. But what body and person will lead? It almost seems farcical that the first meeting, which is on Nov. 15, will be hosted by George Bush. It’s not a promising first step.
Q: Are there any instructive historical precedents for tightening regulations?
A: The one I’ve got my eye on was the response to Enron and the difficulties related to the lack of disclosure by publicly traded companies: Sarbanes-Oxley [the U.S. federal law enacted in 2002 in response to major corporate and accounting scandals], which I would argue has been a disaster. It obviously didn’t help avoid this crisis in the U.S. financial sector, and we’re finding out all kinds of things now that the disclosure rules didn’t produce. So what [the legislation] was really designed to address, it didn’t, yet it put an enormous cost on small- and medium-sized businesses, which had to double and triple their budgets for auditors and external evaluators simply to comply. And it has coerced a whole bunch of companies to go from publicly traded to private, so I would argue that the net result has been less rather than more disclosure. So there’s the history lesson. I’m not that confident that we’ll avoid repeating it.
Pages: 1 2
