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Greenspan: Hello, I'm Edward Greenspon, Editor-in-Chief of the Globe and Mail. Welcome to the Globe Roundtable, the place to be for an intelligent discussion of the political issues of the day.

Well, the political world has quieted for now, but the economy, sadly, keeps making a lot of noise. The question of how no longer whether to stimulate the economy is dominating the government as well as the related issue of who to bail out and with how much. And the Prime Minister, previously reluctant to talk about the possibility of a recession, has now used a truly dreaded D-word. I can't even bring myself to say it. So we have plenty to talk about, and I'm happy to say the entire crew is with us today; Jodi White, President of the Public Policy Forum, a non-partisan think tank based in Ottawa, and former Chief of Staff to Joe Clark and Kim Campbell; Doug McArthur, distinguished Fellow in Public Policy at Simon Frasier University, a former Cabinet Minister in Saskatchewan and formerly Deputy Minister to two premiers in British Columbia; and John Manley, Senior Counsel at the law firm McCarthy Tétrault, and Canada's former Minister of Industry, Finance, Foreign Affairs and Deputy Prime Minister.

Greenspon: Hello all.

All: Hi Ed.

Greenspon: Hi, well let's start with Stephen Harper. He spoke the D-word. Nobody has had the opportunity to speak the D-word in a long time and let's hope that it's not a word that we have to learn to get used to. He said depression in an interview. Is that a wise thing to say, depression? Jodi?

White: Well I think there's probably a lot of fear out there, so I think they do have to be careful, but I think they also have to sound like they're paying attention to what's happening because I think the price that is paid on the economic updates that blew apart for them was a feeling that we were not acknowledging what families and working people were feeling across the country.

But obviously it's dangerous. I guess I'm sort of surprised at the wobbly disconnected and mixed signals that we're getting out of the government and so that where they're going next is a who could tell and —

Greenspon: Absolutely, I mean when you said that it was different from the package and the economic statement. I was thinking that very thing, I mean it just sort of seems to go from one extreme to another extreme.

White: Some governments I think sometimes use that to try to be talking to all various sectors in the population. They think you know they can keep giving slightly different messages, because people tend to hear what they want to hear. I think that's dangerous right now and not suitable for Canadians. So, you know that's probably my only reaction at this point to it.

Greenspon: Doug, should the Prime Minister utter the word depression?

McArthur: Well I don't think it's necessarily the wrong thing to do in a particular situation. I think right now it really is a leap into the future, much beyond what anybody has been talking about in terms of the eventual outcome. I mean we have all been talking about in this program before Stephen Harper was even beginning to acknowledge that there were problems, that there are coming problems.

But it is particular that the message that's been coming out of the government first of all starts out with the economic statement and even prior to that that look there's really no particular problem in Canada; we just have to steady as she goes. We had Mr. Flaherty really trying to talk down the negative talk even as recently as yesterday and then Mr. Harper coming out with this the use of this word.

So, I think it's an indication of really how kind of badly organized they are right now. It's funny that a government who has prided itself — at least so they say on controlling the message and keeping the message controlled out of Prime Minister's office — has perhaps done worse than any other government I can remember in terms of messaging about the state of the economy and I think this is bad for the economy. I think to have inconsistent messages, constantly changing messages, an apparent failure to understand what's going on in the economy with that is a bad thing in terms of the overall all the actors in the economy.

Greenspon: John, if you were the finance minister now and you had your prime minister sort of seeming to send different messages than you're sending and your industry minister, you know, hours after you say let's not panic; we have to have a thoughtful response; we got to work on this in coming out with a big bail out package six hours later—would you be feeling a bit undermined in your job?

Manley: Oh totally. You know what, I'm not quite sure that Minister Flaherty has figured out what he ought to be doing about it, but he certainly doesn't seem to be the spokesperson for the government on a on a very serious economic issue. The Prime Minister always is a spokesman for the government on every issue, but you should see no crack of light between the Prime Minister and the Finance Minister and it certainly not giving people, giving Canadians confidence that they have a government that's that knows what it's doing and is in charge.

Greenspon: Jodi, do you have any idea why that is? What's going on there?

White: No, I mean there are such tacticians or think they are I guess on partisan things and this may be you know the rubber is hitting the road on the fact that they have been so focused on really running constant campaigns and not on what some people consider governing, and um you know there were some signs shortly after the last election which seems like ages ago that in fact there were some changes coming and that they were changing all of that, and then it all just flew apart.

And so I don't disagree with anything John or Doug said and I'm not sure I know why. It's obviously there's some inadequacy. I think there is an awful lot of disarray here and I guess they all badly need a break. But, there's an awful lot of work for all of them to do to prepare a budget and to ensure that they've talked to Canadians satisfactorily and to figure out what they're going to put in that budget, because we even still have them going from you know it was only a few weeks ago in the economic statement they were going to have a surplus and now we're back to a deficit, and you know it's so there is, there are a lot of signs of disarray.

Greenspon: I want all of you to reflect on this for a minute, and I'll start with you Doug, okay? You know John said there shouldn't be a crack of light between the finance minister and the prime minister. I've heard the expression over the years said that you know a finance minister and a prime minister hang together, they hang separately. And I take it that it's different from other portfolios. It's something special here.

So, what does it mean to a government, what does it mean inside a government when you see this kind of lack of coherence?

McArthur: Well I think what it says to me — and I agree entirely — it's always a fundamental rule, well understood that the minister of finance and the prime minister must speak with one voice and that they in particular coordinate their messages, because of the critical importance of financial and economic matters.

So, when you see this distance starting to develop between them, yes I agree there's a certain it shows a certain kind of disarray and a breakdown in the communication coordination which is very surprising in this government, but I think there's something deeper going on here and that is that I think the government itself is making this up as it goes along.

It shows that there is some fundamental problems in this government in terms of being able to anticipate and plan for the future around the economy. I don't know how deep into the Department of Finance one should go to look at those kinds of failures and how deep one should go into the PCO and PMO. But, all of them are responsible. You can't have this happening without there being on a continuing pattern as we've seen — without there being some more fundamental problems about them being on top of this.

And while I agree they probably need a rest and that sort of thing, one these kind of questions they're not subject to the same kind of political to-and-fro around more less important subjects. These kind of questions your government has to be on top of them; you have to be working with expert opinion and expert advise; you have to be moving forward in a deliberate and coordinated way, or you just cause more trouble than you than you cause good.

So I think we've got a sign here of something pretty fundamental and you know it's interesting as well that Mr. Flaherty is really caught up in this and you know in my days in politics if you were caught up like that you'd resign. Mr. Flaherty has apparently no inclination to resign and that also indicates a sense that this government really doesn't follow the kind of standard rules about things as we've seen in the last little while.

Greenspon: I'm going to take it your day and government was some honorable years ago perhaps.

McArthur: Yes.

Greenspon: John, maybe you can reflect on this and maybe you can tell us if you think the Department of Finance has somewhat lost its skill or if its lost its clout?

Manley: It's really hard to know what's going on over there right now. I think it would be for finance veterans it would be a great concern that they seem to have lost control of the message and the game plan. The fact that the Clerk of the Privy Council is you know a veteran of finance would suggest that there ought to be a better than ever level of co-ordination between the message coming from PCO and the Prime Minister and that from Finance.

So I find this very mysterious. I think it does though reflect the fact that they're in waters that nobody has sailed through before, and literally nobody does know what to do. It's usually best in a critical situation there should be two rules to be followed; one is you should not you should not attempt to mislead the public. You should be frank with them, but the second thing is that your job in government at a critical time and I compare this to the time following 9-11 when people were quire concerned about security — the critical thing is to convey not a sense of panic or chaos but a sense of competence and that's where the government right now is falling short.

I think in the economic statement they failed to be transparent and truthful. They basically said everything's still fine, when Canadians knew that you know whether they were economists or not they knew it wasn't. And now they're not conveying a sense of being in charge and having a plan for what to do about it.

White: I think we shouldn't lose sight of the fact that this is a government that doesn't believe that a government has a role in economy really down at its core. I mean if you look back and I think that some of the problem here that they're struggling with and the Prime Minister's also been one of those people who um has been very much uh you know the markets can handle this and so I think that's part of the struggle that's going on. There's just no doubt about it, and it may add to the fact that perhaps they don't know what they're going to do you know and they really are scrambling.

Manley: But it would be surprising if they did know quite frankly —

White: Yes.

Manley: -- 'cause out there in the real world nobody quite knows what to do.

White: No, and also it's all over the world that the role of government is changing profoundly. I mean in the United States you know they now own the banking system almost so.

Manley: It's an old NDP promise!

McArthur: It seems to me that we're the last couple of comments are letting a government off a little to easy. I mean the economy is fundamental. There is very little excuse to be found in saying, well other people don't know what we should do, so the government can be floundering and blundering and moving on inconsistent plans and inconsistent messages. The government has huge resources. As we've seen throughout the world, governments are working hard to anticipate what's happening to make plans and to take measures.

Sure, some of those might not work but you don't see this kind of floundering and this kind of confusion when I hear Jodi talk I mean this government is going to become if that's their view then they're going to become accidental interveners in the economy. They're going to accidentally be subsidizing the auto industry and bailing out the forest industry and they're going to be accidentally falling into deficit and they're going to accidentally become Socialists on the banking system.

This is not what you expect from a government, even if we are in uncertain times.

Greenspon: Okay well let's talk about the activity in the economy for a couple of minutes. On Friday we heard from Minister Clement that he was going to put up the Government of Canada was going to put up 20 per cent of anything the Americans put up on bailing out the auto industry. Now we'll also get into discussions on Sunday he talked about the forestry and mining industry as well. Well let's just stay with auto for a moment.

Twenty per cent is a much higher proportion of the money than is our auto production. I think we have about 14 or 15 per cent of the auto production. Is that kind of getting in front of it and open cheque book you know 20 per cent seem like a good idea to you? John, again with you.

Manley: Well I first of all I think that the auto sector is critically important, especially in the short to medium term in terms of employment and economic activity. The worry that I have is who's going to buy the cars? You know the focus seems to be on on repairing to some degree the balance sheets of the Big 3, giving them the capacity to continue in business um when they might otherwise be forced into Chapter 11 in the U.S.

But it's not clear to me that gets at that fundamental problem which is that they've been building the wrong cars for too long, and right now nobody out there in the real world wants to buy a car. Everybody's just waiting. Now, I think this makes it devilishly difficult because you're not just dealing with repairing the balance sheet of a company that miscalculates and can be fixed up and put back on the rails. You're actually dealing with a situation which is a lot more fundamental in terms of their failure to be responsive to consumers who are now out of the game.

And furthermore you're going to have I suspect a bunch of smart lawyers looking at any of these packages from a trade law perspective, certainly if you were Toyota or Honda or Hyundai or somebody else offshore — you'd wonder whether WTO rules were being respected. So, I think this is very very tricky.

Greenspon: Jodi I mean is it open season on the Treasury?

White: Well we can't afford that and I think you know what I'm seeing and watching in the media I think Canadians do know that we're about to reward failure. I worry about that, but also the trap that maybe we have to this time. But this whole you know have we learned enough to sort of look for the drivers of the success in that industry? I mean I frankly look at it and say so was the auto industry the industry of the last century and we shouldn't be doing this. But I don't think there's a choice for the government right now.

But you know your question about does that open the gates for everyone else and the forestry industry has had its problems and mining and it will go on and on. It is so fraught. I am far from an expert on any of this, but and that's where is politics driving this or good economic judgment and I'm probably not entirely convinced good economic judgment is driving anything in Washington these days and there's some evidence to indicate that; that they keep doing things and there's no response and you know if the consumer has shut down as John was talking about it, where does that lead us?

So I don't have answers to that, but they are going to have to be very careful about what how much they open these gates, because now that they are believers in the deficit I mean we all know where that leads so.

Greenspon: I guess (unclear) it's not I guess you know whether they're going to open the gates; that's clear now, but how they open the gates and do bail outs and bail outs for the auto industry and 20 per cent of that, does that seem like the right way to be opening the gates and I know we've discussed this before but again, is there a coherence here that's going on?

McArthur: Well that's what worries me is the coherence. I don't oppose assisting the auto industry to make the transition adjustment to a new sustainable basis of operation and I think given the importance of the auto industry it's probably it is justified and I think you know one of the things here people are struggling with this is it really is a new time; we have to rethink our whole approach to governance and the economy and people are just playing catch-up.

I mean now we're accepting a deficit. We're accepting government ownership in banks. We're accepting changing economics. Most of the people who are now managing all of this a few short months ago would have just been would have held these things to be abhorrent.

So there's a real catch-up, but again on the auto industry I think the problem here is this is a lot of money, a huge amount of money, and the danger is that they're not going to look at it and say, how do we use this money — and I suspect that they could do it with less money — how are we going to use this money to ensure that it's managed well and it's used to ensure that there is an effective transition and transformation of the auto industry.

I saw one writer saying with these public funds in North America that are being offered for the industry you could buy all the shares and the government could take over the whole industry and redirect it and then and then re-privatize it. And you know are those kinds of ideas being though about? Probably not, but these are still too dangerous for people to think about.

But throwing money at it without clear thought-out strategy of how it's going to be used and how it's going to achieve the goals is a mistake. The other thing is you expect for me to say is I don't think you can just simply deal with the auto industry and not accept that there are other industries — mining isn't one of them, mind you — but other industries like forestry that have had a forced transition placed upon them by government policy and by trade relations and other things and they too, need a rational, considered approach to transition.

Are they thinking about this? They don't seem to be; they just keep throwing out well now maybe we'll throw some money at the forestry industry as well. This is I think the problem; we don't have a good strategy for how we're doing this. We're breaking new ground. It's time to really think hard about how to do it effectively.

Greenspon: Okay, let me touch on one last issue before we go, and let's maybe bring it closer to home for our listeners which is their homes, which is houses, which is housing. We've seen housing fail. We're at a 20 year low. We've seen a strong decrease in the value of homes and most expectations of economists is that that will get worse before it gets better. We also saw in a story, I think a rather extraordinary story, if I can say this (unclear) in the Globe and Mail on Saturday that more than half the mortgages that have been given out over the past year and a half under Liberal eyes uh rules that were implemented, were mortgages with 40 years amortizations, many of them not all of them had 0 per cent down mortgages.

Have we got a ticking time bomb here, John?

Manley: Well I guess the answer to that depends on what happens to housing prices in Canada over the next period of time. I don't think first of all I don't think even with those rather poor underwriting practices that Canadian mortgages are non-recourse in the sense that if you abandon your property you can be pursued for any deficiency if the property is sold and the mortgage isn't paid off. That's been that has not been the case with the U.S. mortgages which are largely non-recourse.

So there's that the discipline in the system, on top of the fact that people truthfully don't like abandoning their houses if they can avoid it. So I think to answer your question if house prices fall sharply in Canada, yeah we've got a problem. It's never going to be as severe as in the U.S. where they really treated their real estate as an ATM machine you know with lines of credit you know that you could access even your credit card could be could be security against your property and you can then deduct the interest on their mortgage and interest deductibility law.

So we don't have as critical a problem, but you know we know well when things start to go array in the U.S., sooner or later it's going to affect us to perhaps a lesser degree in this case, but it will affect us.

Greenspon: Doug, I was struck I must say by the fact that you know the government's been lauding itself on getting rid of these 40 year mortgages and these zero down mortgages and to discover that they actually were introduced in Mr. Flaherty's first budget. Do you think that perhaps this is a good idea because it opens up home ownership to more people? Or, has it been a lack of prudence do you think?

McArthur: I think it's been a lack of prudence. Again, they seem people seem to have forgotten an old rule about housing policy and that is that if you simply open up credit and let it flow and this has been known for a long time — it will translate itself quickly into increasing house prices. This is contributed to as well as earlier credit policies has contributed to what we have in Canada. Let's talk about the elephant in the room.

We have a housing bubble. We're not any different in that sense than the United States. It may not have blown up as high, bubbled up as high as the U.S. We have a housing bubble. The credit markets are going to lose interest now in the housing market. Lending is drying up. I think of the headline in the satirical magazine The Onion saying that troubled economies seeks new bubble to invest in. You know this was a bubble. The housing sector experienced a bubble and it was because of government policy and there's quite a bit of price going to be paid for it. How much it will be? I don't know, but people's house values are going to drop.

Greenspon: So Jodi I'll leave last question to you; I guess it's a good time for Michael Ignatieff just to lay low, huh?

White: Well I think he's got his finance people out there trying to work constructively with the government and I think some of that looks productive to most people as they are trying to engage in a conversation. We'll see how that goes, but yeah I think a lot of it will be waiting to see what happens in the budget in some ways. The government's got an awful lot of work to do as I said. But for the Liberals uh they will have some (unclear) to input.

I do not believe that anybody wants an election and so I think they will both sides will work very hard to avoid it, and um and the Liberals even more probably don't want an election. So, but time will tell how that goes.

Greenspon: Okay Jodi, you also told us that you thought the government probably needed a break and perhaps the Globe Roundtable — I don't think it needs a break — but we're going to take a break anyway, aren't we. So um the three of you I want to wish you a happy holiday season. Thank you for all the insight that you've offered us and we'll get together again in early January. Listeners can watch globeandmail.com to see precisely when we will be back to tackle with I imagine more economic issues and political ones as well.

White: Great, thank you.

Manley: And an exciting time.

McArthur: All the best to you.

Manley: Bye-bye.

The Globe Roundtable podcast will return Jan. 7.