Big Cheques

Steve Saretsky -

As expected, the monetary and fiscal bazookas are getting bigger every day. Ironically, after an era of zero interest rate policy which punished households and businesses for saving cash, there’s now a shortage just when everyone needs it.

For those who didn’t practice a healthy habit of saving for a rainy day, policy makers are determined to plug the hole in the sinking ship, promising big cheques and “unlimited QE.”

Policy makers in Canada dipped into their toolbox this week. First, Trudeau conjured up the Canada Emergency Response Benefit which will offer $2,000 a month in direct support to Canadians who have lost their job and don’t qualify for employment insurance.

Meanwhile, the Bank of Canada hammered interest rates into the floor, effectively hitting the lower bound at 0.25%. At the same time, they began their own version of QE. Governor Poloz, announced the banks intentions to start buying a minimum of C$5 billion a week in government securities. For context, that’s $240B per year, which exceeds the expected amount of issuance by the Government this year and next, resulting in net negative Government of Canada issuance. In other words, the Federal Government has been given the green light to spend into oblivion.

Not to be left out, the BoC is also offering up support for provincial Governments. Announcing, a new program to support the liquidity and efficiency of provincial government funding markets. The Provincial Money Market Purchase (PMMP) program will purchase up to 40 percent of all newly issued provincial debt.

BC’s premier John Horgan wasted no time, offering a one time cheque of $1000 to those who have been impacted by COVID-19. He also gave tenants the option of taking a pass on their monthly rent by halting all evictions and implementing a mandatory freeze on any rent increases. Any landlords on the short end of the stick will be mailed a cheque for $500 for the inconvenience and are encouraged to seek a mortgage deferral from the bank.

Of course, now the banks are overwhelmed. In the first week alone, more than 213,000 requests to defer or skip payments have been completed or are being processed by the big six banks. Scotia Bank’s CEO noted, “Last week, our contact centers in Canada received close to 80,000 calls per day, with calls to our mortgage and loan teams up 500%.”

This program wouldn’t be possible without the support of the taxpayer aka CMHC, a crown corporation. CMHC is providing massive relief to the banks, upping their IMPP program from $50B to $150B. Under this program, banks can effectively offload some of their unwanted loans onto CMHC. Some pundits, including myself have criticized it as a quasi stealth bail-out of the too big to fail Canadian banks/ housing market.

There’s no question some of these programs are necessary, although they reek of moral hazard. For example, many banks are allowing mortgage payment deferrals of up to four properties. Should someone with four properties really be granted financial assistance? Where exactly do we draw the line?

Yes, this is a global pandemic that nobody saw coming, hence extraordinary measures must be taken. However, exogenous shocks are like busses, there’s always another one coming.

Three Things I’m Watching:

1. Canada has done a good job so far of mitigating COVID-19 cases. Here are the number of cases on a per population basis.

2. Bank of Canada balance sheet to surge in the next 3 months.

3. As Poloz cut rates to near zero, he quipped, “Some may suggest this is using a lot of firepower, But I think a firefighter has never been criticized for using too much water.”

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The Saretsky Report. December 2022