Comment
Cliffhanger
I saw The Big Short at the Regent Theatre over the weekend. The movie, based on Michael Lewis’s book, purports to tell the story of the collapse of the housing market bubble in the US in 2007 and 2008 which very nearly took down the world’s banking system with it. As entertainment, it was mildly diverting. As an account of real world events, it missed the mark badly—clunking from cliché to cliché toward a confused misreading of recent events. In fairness to the filmmakers, perhaps you can’t be both entertaining and true. Movie audiences need a tidy fable with heroes, villains and a sunset at the end.
That so little of this film rings true or accurate is not my concern today—other folks have laid bare the frailty of this story much more thoroughly than I could. But I did want to touch on one of the key mistruths of this story—and why I find it troubling in the current context.
First, let me explain that a short (as in The Big Short) is simply a way to describe how investors bet against a stock, bond or, in this case, the broader market of mortgage-backed securities. In this way, they seek to make money when the market price of the underlying security falls.
Why is this important? Because in my view, if this province didn’t enjoy the protection and backing of the federal government and Bank of Canada, the shorts would be circling Ontario bonds right now. The smart money would be betting against Ontario’s ability to pay back its debt.
The central conceit of The Big Short is that all but a handful of opportunistic folks failed to see the coming of the collapse of the housing market bubble in the US. That is simply false.
It is flat out wrong. There were hundreds upon hundreds of stories going back a decade or more describing, in fine detail, the looming failure of the housing market—the risk of subprime loans and the hazards of adjustable-rate mortgages.
There were also counter stories, often in the same pages, soothingly explaining how this time, things would be different.
If there is one single message to emerge from the financial mess of 2008 it is this: don’t believe people who tell you, “this time is different.”
Similarly, today, there are hundreds of stories— likely dozens today alone—warning of Ontario’s massive debt.
When the Liberal government came to office in Ontario in 2004, the province carried a debt load of $138 billion. It had taken more than a century to accumulate this burden. In the 12 years since, however, Ontario’s debt has ballooned. This year, it will crest $300 billion.
In 1991, Ontario’s debt as measured against the output of the economy (gross domestic product) was under 14 per cent. Today, the province’s debt load is equal to 41 per cent of GDP.
We taxpayers fund this debt with about $11 billion in interest payments every year. Interest payments gobble up more taxpayer dollars than every government department except health and education. And today, interest rates are at historic lows. They will rise again. That is a certainty. And we will have to pay much, much more.
No one can predict when this will happen, but it will. And then, Ontario’s interest payments will surely fuel even deeper deficits—adding to our already bloated debt burden. It’s a trap. A trap we are sleepwalking our way into.
Some take comfort in the alternate view—that deficit financing is necessary now to stimulate growth in the overall economy. That when this engine kicks up a few gears, we will pay down our debt lickety split.
This may have been a reasonable argument when Ontario’s debt was half the size it is now. It seems madness, however, to continue to dig this hole deeper—knowing the cost of paying it back may well bankruptus. Yet we keep on digging.
There is a scene in The Big Short where a money manager, played by Steve Carell, realizes that for his bet to pay off, the American economy must collapse—that millions will lose their homes, their jobs and their savings.
The movie wants you to believe that no one saw this coming. The fact is, many, many people saw it coming.Many sounded the alarm years before. But it made no difference.
I worry we are doing the same as we watch our governments pile on more debt, year after year. We are complicit in our undoing. We’ve become accustomed to it.
We want more money from the province for roads, bridges and infrastructure. We want our social serv-ices strengthened and broadened. And, surely, if the province is handing out money, we would be foolish not to take it. On the other hand, we certainly don’t want tosee increases in our taxes or a reduction of services.So Ontario’s debt burden piles up.
A pile so high even Canada’s credit rating may notbe strong enough to protect Ontario’s bonds from the shorts.
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