The conservative Minister of Finance, Jim Flaherty, unveiled a plan to nationalize 25 billion of Canada’s 833 billion dollar mortgage market. Basically the plan involves the government purchasing via CMHC existing mortgages from Canada’s large banks so that they can exchange relatively long term and illiquid (but presumably performing) assets for cash. That cash is then in turn to be put out in fresh loans to businesses and Individuals.
That sounds great if there is a liquidity problem. But it proves that there is a liquidity problem and that gives us the first clue that our financial system is not de-linked from global turbulence.
However, Harper is selling this as a no cost to the tax payer play. But that is a little churlish. It may be that citizens do o.k. on this deal: 25 billion in performing assets. Although there is the question of where the government is going to get the 25 billion: presumably they will have to issue new debt which will have to be financed so it is not all clear how much the assets will net out at the end of the day to citizens.
Moreover, all things being equal one ought to get a premium for taking on relatively illiquid and long term assets and giving up cash. As near as I can tell there is nothing in the plan that has the banks paying a premium for this liquidity. It is all fine if liquidity is being treated as a public good but then something above and beyond the assets ought to be coming to the government. The actual wording of the agreement suggests that the government might actually pay above fair market value and a little above notional value:
The settlement amount that will be paid for the purchased NHA MBS will be no less than 95% of the principal amount of the NHA MBS. The price for all of the NHA MBS shall be no more than 101% of the principal amount of the NHA MBS.
Whatever the terms, the Conservatives have just nationalized 25 billion of the mortgage market. A red rose by any other name is still a red rose.