How Ottawa should have handled the recession

It’s a tragedy that Canada’s federal government followed the Obama administration’s gallop into increasing the National Debt in their attempt to cope with the 2008 market collapse that was brought on by the implosion of a derivatives market based on sub-prime mortgages.

Granted, Canada fared better than the U.S., because our banks are more conservatively regulated. But the burden of debt imposed on future generations of Canadians is now worse than it’s ever been in history. If we take our eyes off the $14 trillion debt Obama has burden the U.S. with, we can see that Canada’s half-trillion-plus debt is going to be a drag on our economy for decades and decades to come.

And it wasn’t necessary.

The principal economic problem caused by the market collapse was that banks tightened their cash-sphincters and began retaining cash; the economy suffered a liquidity contraction that threw people out of work, and consumer demand shrank, further constricting the economy.

What Ottawa should have done would have involved a four-step revolution in fiscal policy:

1. stop “renting” our money from the chartered banks in the form of debt, and instead have the Bank of Canada create debt-free money;
2. loan that money, interest-free, to provinces, municipalities and local public authorities for infrastructure projects—highways, roads, bridges, ports, public buildings like schools, water and sewer treatment facilities, rapid rail urban transit, etc.;
3. as construction soaks up unemployed workers and boosts the economy, local authorities will see increased revenues that will enable them to repay the loans;
4. as the loans are repaid, the Bank of Canada retires the money it injected into the economy, thus preventing inflation.

The result: no debt burden on future generations; no inflation; unemployment virtually disappears; the economy is stimulated; and in the end, the nation’s crumbling infrastructure is renewed.

It’s a plan similar to what Ottawa did at the end of World War II, to prevent unemployment caused by the return to two million soldiers from pushing us into another Great Depression. It worked then; it can work now.

It’s not too late to try it again