October 8, 2008

CPP Loss at $25 Billion

It will be February before we know how much the Canada Pension Plan recently lost on the stock market, but a fair guess is $25 billion disappeared between the end of the first quarter on June 30th and October 8th. On June 30th the CPP had $127.7 billion in assets, $79.2 billion of which was in equities. On June 30th the TSX composite index was 14,467; on October 8th it was 10,056, a drop of 30.5%. Of course, CPP's third quarter doesn't end until December 31st, so it will be February before we see a report to the end of the third quarter. We can all hope that the index is above 10,056 by then, but it could be even lower. What is happening to the CPP is also happening to pension plans, RRSPs, RRIPs and investment accounts. That is why it is irresponsible for Prime Minister Harper to dismiss the stock market as something that always goes up and down, and to say that it probably presents good buying opportunities today. Mr. Harper isn't showing the kind of empathy that Canadians expect and deserve.

Many economists are inclined to follow the advice of John Maynard Keynes and dismiss stock markets as glorified casinos. They may be right, but that doesn't mean the markets are unimportant. In addition to determining the asset value of pension plans, they provide an important means for companies to raise money they need for investment in real assets, plant and equipment. Nevertheless, the damage to the stock markets is merely collateral damage in the larger crisis.

The financial disaster rooted in the U.S. subprime housing fiasco is sweeping the world. Some of the world's largest financial institutions gambled by making loans to people who can't repay the loans. The immediate effect is the devaluation of assets on the balance sheets of banks and other financial institutions. When the values that disappear start to equal the net worth of the institutions, bankruptcy results or what's left is grabbed up in a takeover; that wouldn't be such a bad thing if it weren't for the consequences for everyone else. Failing financial institutions cause credit to dry up - no loans for car purchases, home construction, payroll or anything else. If you don't think that affects us in BC, read the financial pages of any paper. The Olympic Village in Vancouver may be in trouble over refinancing. Construction on a hotel at the foot of Lonsdale in North Vancouver is stalled. Municipalities are struggling over financing sewer and water projects. Alcan has put capital plans on hold. BC is not immune from the worldwide crisis, and the effects are not just what you see on the stock markets. Jobs that would otherwise be created won't be, and those that exist now may soon be threatened.

Liberal Leader Stephane Dion's solution for the crisis is to strike a committee and consult the regulatory authorities on ideas like extending deposit insurance from $100,000 to $250,000. Most Canadians don't have $100,000 in the bank, and those that do know that they can spread their deposits around and effectively get over $1,000,000 in deposit insurance. One of the members of Dion's committee would probably be former Premier and Finance Minister Paul Martin, the guy who made the Canada Pension Plan invest most of your money in the stock market.

There aren't going to be any quick fixes to the worldwide economic crisis. The difference between now and the great depression is that governments recognize that they have a major role to play in rescuing financial institutions and stimulating the economy. This crisis could force even the political right to admit that the role of government is essential. The era of the deregulators should be over. The challenge will be to choose political leaders who know how to use the power of government in such a crisis, and who know for whom that power should be used.