Every once in a while an idea comes along that is so bad, you just have to throw out the draft of your regularly scheduled column and start a new one.
Here’s the idea: after the worst global financial crisis since the depression, with private- and government-owned banks blowing up billions of tax dollars around the world, the NDP is proposing that the Yukon government get into banking.
I’m not making this up. It’s in the NDP platform that Liz Hanson just released.
What Hanson says is that she will “bring forward legislation to enable the formation of credit unions in the Yukon and to allow a credit union incorporated in a province to operate in the Yukon.” And also, “direct Yukon Housing to enhance home ownership programs with low down payments and low-interest loans, particularly for Yukoners who can’t get bank financing.” They also say, “interest rates should be at the government’s own borrowing rate” and that YHC should “increase the size of its mortgage portfolio in order to increase the numbers of people who may be eligible for its programs. The mortgage portfolio must be retained by YHC and not privatized.”
It all sounds fine, and it might have sounded harmless a few years ago, but the financial crisis has taught us to be wary – very wary – when politicians put public money on the line by dabbling in banking.
Let’s go through the NDP banking platform bit by bit.
The first bit is about having credit unions in the Yukon.
This would add some extra competition, which many would welcome. But the catch is the deposit guarantees. If a bank or credit union goes bust from bad loans or fraud, which happens, as we know, then the people with deposits lose their money. To protect against this, the federal government insures deposits at banks. That’s what the “CDIC Guaranteed” sign on the door of your branch means. Credit unions are backed provincially. In Alberta, for example, the Alberta Credit Union Deposit Guarantee Corporation backs up Albertan credit unions. It collects fees from credit unions to cover deposits if one goes bust, but is, ultimately, backstopped by the province if too many go bust at once.
Sadly, despite the fact that people tend to like credit unions more than private banks, they still fail from time to time. The Whitehorse Credit Union went bankrupt in 1979, costing the Yukon government a sizeable sum. The Spanish cajas, similar to our credit unions, are imploding as you read this.
So if you have a Yukon or provincial credit union here, either the Yukon government has to guarantee the deposits, or it must ask a friendly province to do so.
Why any province would agree to protect Yukon depositors is a good question.
The risk is that the Yukon government could be left holding the bag for millions. That’s if things go wrong, of course. But with Yukoners’ tax money at stake we expect our politicians to be prudent. I think the NDP is wrong to promise to bring forward enabling legislation on credit unions without some kind of national or provincial deposit guarantee scheme in place to protect Yukon taxpayers.
The second bit is about Yukon Housing making more mortgage loans to more people who can’t get loans from regular banks, and at the Yukon government’s borrowing rate. This suggests the people borrowing have credit issues.
The phrase “sub-prime” sends a shudder down the economist’s spine at this point. As do words like “low down payments” and “low interest rates.” A wave of government-backed mortgage lending pushing house prices even higher. It’s like California 2006 all over again.
Also, lending at the Yukon government’s rate guarantees the Yukon government’s lending operation, let’s call it “Bank of the Yukon” for fun, is guaranteed to lose money.
Consider a typical bank, which borrows at (say) two per cent from depositors and lends to borrowers at five per cent. The “spread” in between covers operating costs, bad loans, taxes and profits (and maybe a few obscene CEO bonuses too). Other government-owned banks in Canada, like’s Alberta’s successful Alberta Treasury Branches, charge a spread to cover their costs.
If the NDP’s Bank of the Yukon borrows at two per cent and lends at two per cent then it is guaranteed to have a loss every year of at least its operating costs. The subsidy to keep it alive will have to come out of Health, Education or some other department.
And that’s the good years!
In bad years, if borrowers don’t pay back their money, Bank of the Yukon will have to seize their houses and sell them.
Since these houses are usually worth less than the loan (or else the owner would have sold and paid back the debt), the Yukon government will have to eat that cost too.
As the financial crisis has shown from Ireland to Las Vegas, these numbers can get very big very fast. It could make the Yukon’s Asset Backed Commercial Paper debacle look small.
If Bank of the Yukon gets big enough, it could be the financial equivalent of the Faro mine: a giant long-term black hole sucking in tax dollars.
Furthermore, you can imagine that as soon as the Bank of the Yukon tried to foreclose on borrowers, they would go straight to their MLA.
Welcome to politicized borrowing.
And once some of the borrowers talked some future cabinet ministers into going soft on their loans, everyone would stop paying.
It reminds me of the Yukon’s business development loan saga of the 1990s, many of which still aren’t repaid.
The final interesting point is how the NDP insists the mortgage portfolio be retained by the Yukon government and not sold off.
Nasty New York bankers would be amazed the NDP intends to originate loans to people with shaky credit and then set a rule that it has to retain them! This ensures the Yukon government will be fully on the hook for 100 per cent of losses.
A person is entitled to not think fondly of the big Canadian banks.
And wanting government to help fix the housing crisis and support Yukoners finding affordable housing is a worthy goal.
If you want to tackle this problem, then have the legislature appropriate some money and spend it.
But don’t risk crippling the government’s financial strength with poorly thought-out banking schemes with potentially huge downside risks.
The financial damage these schemes can do to a government is significant, and when it happens the subsequent austerity can hurt important public programs.
Anyone who wants to be premier has to show that they will be prudent with public money.
Liz Hanson’s banking proposals don’t pass that test. She should junk this part of her platform.
Keith Halliday is a Yukon economist and author of the Aurore of the Yukon series of historical children’s adventure novels.