Crawl Across the Ocean

Thursday, December 11, 2008

Asset Sales

One of the many bad ideas in the recent fiscal update proposed by Jim Flaherty and the Conservatives, that I've been meaning to get back to was the idea of asset sales. To appreciate why I consider asset sales a bad idea at this time, consider the following:

Let's say that you think the current economic fears are overblown and that things will be back to good times and growth soon enough. If that is what you believe, then you might suggest, as Stephen Harper did during the election campaign, that this was a good time to buy assets while prices are low. But if Harper really believed it was a good time to buy assets in October, surely it is an even better time to buy them now that asset prices have fallen so much further since he made his initial comments.

But naturally, if buying assets is such a good idea, then surely selling them is a bad idea, no?

Fair enough, let's say that Harper and Flaherty have admitted they were wrong and that they now think the financial crisis really is serious. Well, in that case, with interest rates already approaching zero, if you think a serious financial crisis is coming, then you must be worried about deflation and a possible liquidity trap, wherein the economy remains depressed because there's just not enough money circulating to get it going again.

Given this scenario, it is imperative that government introduce a stimulus package to increase the amount of money circulating in the economy. And indeed, in the countries where people believe this is what is happening, governments are doing just that. Of course, one the primary ways that governments can stimulate the economy is by buying assets. For example, see this story of the U.S. purchasing $600 billion in mortgage backed assets.

So the consensus is that, if the crisis is serious, then government should be out there buying assets, which in turn suggests that the last thing government should be doing at this time is selling assets.

Finally, consider Flaherty's time as part of the failed Mike Harris government, when he tried to hide a deficit by selling assets, including the misguided sale of unlimited tolling rights on a freeway across the busiest corridor in Canada for 99 years, a mistake that will be with the people of Ontario long after you and I are both dead. Is this the person we want selling our assets, given his record?

So, while various establishment pundits spent the last couple of weeks hyperventilating about the damage to our economy that would surely be done to our economy if the NDP were allowed to have a few cabinet seats for a while (without really explaining what damage might actually occur), few have commented on the near certain damage that would occur simply by letting the Conservatives carry out their proposed fiscal plan. I mean, if Flaherty could only get 50% of the estimated value of the 407 when he sold it in 1999 during an economic boom, imagine how much we will get shortchanged if we let him sell off a bunch of assets during a global crash.

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  • Yes Declan, this is the 407 all over again. These guys are total idiots.

    By Blogger Greg, at 7:10 AM  

  • I don't know whether the 407 sale was good or bad, but the tolling was not unlimited, and the timing was right.

    But your main point was spot on: the timing for (real) asset sales right now is very bad, both from the perspective of the price, and (more importantly) from the macro/money/financial stabilisation perspective.

    By Blogger Nick Rowe, at 3:06 AM  

  • True enough Greg.

    Nick, fair point, there are some limits to the tolling based on usage - I believe I meant to include the weasel word 'effectively' but forgot - as in 'effectively unlimited tolling rights' since in practice there are few effective limits on the tolls given the high demand for the highway which means they can meet their usage targets despite very high tolls.

    By Blogger Declan, at 6:22 PM  

  • Hey, now! The best way to pay off your mortgage is to sell your house, right?

    Selling stuff is occasionally necessary, sure: the problem being that transportation is used by the population of area, and has been built with money supplied by them. I sure as hell didn't agree to sell off BC Ferries...

    The worst part is that if the purchasing company can't make a go of what they purchased, people still need to use those services. Which means the government will be buying a failed company that has been slashing what they could and stripping what profits they could for years before failing. Expect a purchased-and-failed company to have lousy morale from abused staff, horrible maintenance records, and massive debt.

    By Blogger Thursday, at 12:20 PM  

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