Was the ‘Credit Crunch’ a Myth?
This is an important story and has quite a significant impact on what I have been writing about recently. If there is a “credit crunch” it means that qualified borrowers could not get credit. The banks – and other lenders – would not be lending to anyone, and this would have a very significant drag on the economy. Now no-one is arguing that the economy has tanked – it is more about why, because that then determines what should be done about it.
Economist Dean Baker … explains the situation in simple terms: The media, he argues, “are blaming the economic collapse on a ‘credit crunch’ instead of the more obvious problem that consumers just lost $6 trillion of housing wealth and another $8 trillion of stock wealth.” It’s a commonsense argument: much of the economic growth of the Bush era existed on paper only, built on the rise of a massive bubble in real estate values rather than growth in productive industries. When all that ephemeral wealth vaporized — and with the economy shedding jobs like a dog with dermatitis — consumers stopped buying, and businesses, anticipating a long slowdown, stopped seeking the loans that they might have otherwise tapped to expand their operations.
This is the first time I have seen this argument. There has been quite a bit of controversy over the bailout. Most of it is anger that the banks seem to have been rewarded for their irresponsibility, that the public sector now has to bear the brunt of the bad mortgage loans and bankers continue to enjoy their private jets and huge bonuses. Mneanhwile the automakers – who actually build things – were treated to very much closer scrutiny and are expected to report back on how they use the money. This was not the case for Wall Street.
If good projects cannot get regular financing then P3s become unfinanceable even if they are backed with taxpayer’s money. But it now seems the banks not only have money – they are also willing to lend it but no one has been asking to borrow. Furthermore banks need to lend – since that is how they make most of their money – gouging customers with transaction fees being only a small share of their highly profitable business. The amounts they are now paying depositors are negligible but the interest rates they levy on loans are fabulous. Especially credit cards.
But I have been so far taken in by the “credit crunch” story – and believed that this would make getting P3 financing both difficult and expensive. Well it now seems that it will be easier than I thought. Though still expensive compared to what governments can borrow at – since the credit ratings of those who can dip at will into the taxpayers’ pocktes are much better than any private sector consortium. P3s have proved to be much less rewarding for taxpayers than their promoters like to pretend, and many of the supposed benefits – particularly greater efficiencies and risk transfer – failed to appear.
There is now a marked shift in governments’ willingness to incur indebtedness. Even Stephen Harper concedes that deficit spending will be necessary to fight the current recession. And most economists now agree that the reason FDR did not cure the Great Depression with his New Deal was that he did not spend enough, and his deficits prior to the war were at about the same level as his ineffective predecessor, Herbert Hoover.
But increasing public spending only boosts the economy in the construction phase. The project itself has to be worthwhile for there to be continuing benefits. If the project does not meet a real need, and provide genuine benefits to the community as whole then paying of the loans (whoever took them out) just becomes a drag – as the benefits have to exceed the costs for the project to be considered worthwhile. This is why cost benefit analysis remains central to project appraisal, and why it must be done properly and objectively.
Whatever else anyone says about the Gateway project, the CBA was certainly not objective – and it is very difficult to take any of the claims made for it seriously. It is based on a series of assertions and projections which seemed dubious at the time they were made but now seem wildly improbable. So the fact that the government will probably be able to build these projects may seem a good idea now, but won’t for very long. Not only will we be paying for this mistake for a very long time – but we will also have lost, once again, the opportunity to invest in a sensible measures to improve transit in this region. Which always should have been the first priority but has always fallen behind the mega-project ribbon cutting opportunities which so obsess our politicians.
So I will concede that I was probably wrong to state that the P3s will not get funded by the banks. But that does not mean I was wrong about anything else about this daft idea. Pointless public works – like digging holes and the filling them up again in earlier government make work projects – are bad enough. Willfully wrong headed projects which encourage the use of private cars and the further sprawl of the suburbs are much, much worse. And frankly, the current projections of increasingly rapid climate change and the coming crunch of peak oil mean that the Gateway is going to be seen around here as a disaster. Unless some cataclysmic nature event overtakes it.