As with all fads, we should be wary of the deficit chic that has turned the heads of even the most resolute deficit hawks. It will prompt the federal finance minister, Jim Flaherty, in his “stimulus” budget Tuesday to put Canada on the road to a $64 billion deficit over the next two years – surpassing the record $43 billion deficit of the early 1990s that Canadians sacrificed for years to eradicate.

And it’s unlikely to accomplish much. The main reason for this, I suspect, is that Canada is not in an economic crisis at all.

We are buffeted by a worldwide financial crisis, in which global banks loaded with bad loans are in paralysis and simply cannot or will not lend. That’s what triggered and has maintained the global economic misery. And none of the stimulus packages unveiled around the globe will have much if any impact without a drastic overhaul of a financial system that went haywire beginning in 2007 and plunged the world into recession – and is keeping us there.

One thing we know about government bids to kick-start an ailing economy: If, in the urgency of the hour, the money goes out too quickly, much of it is wasted on poorly thought-out projects and programs. And if instead wisdom prevails in the disbursements, necessitating some time and thought to ensure the funds are well spent, the money arrives long after the economy has recovered under its own steam.

Either way, the legacy is an enlarged national debt and debt-service payments; the prospect of “structural,” or permanent, annual deficits – and the likelihood of runaway inflation, as all that additional spending drives up labour and other costs – the fate of Albertans this decade during the height of the oil-sands boom.

The prescription for what ails a once spendthrift U.S. now confronted with a Great Reckoning is not appropriate to Canada. Our U.S.-dominated media intake has convinced many of us that we completely share our neighbour’s misery. Hence the popular belief that we need to weaken our own fiscal condition in emulating a U.S. stimulus package of unprecedented size and scope to be unveiled next month. Yet, conditions in the two nations are vastly different.

The Canadian employment level is expected to dip 1 per cent this year, with a loss of as many as 250,000 jobs. The U.S. is expected to lose roughly four million jobs in 2009, far higher on a per capita basis than Canada.

The Canadian housing market is comparatively stable, while it’s expected that 13 per cent of Americans with mortgages will default and lose their properties to foreclosure this year. The Bank of Canada last Thursday projected robust GDP growth of 3.8 per cent next year, which would make this downturn of briefer duration than the last two, in 1981-82 and the early 1990s.

Most important, our banks are sound, while the largest U.S. and European lenders either are on government-provided life support or are widely expected soon to be in need of government rescue.

Global banks already have suffered about $1 trillion (U.S.) in writeoffs, mostly on U.S.-originated subprime, junk mortgages taken out by folks who had ample reason to wonder if they could make their monthly payments.

But there’s another $1.2 trillion in so-called toxic waste hidden on the books of the world’s largest banks, according to a recent Goldman Sachs report, that has yet to be accounted for and written off, further eroding, or wiping out, the capital reserves of those lenders in the absence of a government bailout. (A second or third bailout, in the case of the biggest troubled lenders.)

The toxic contagion is so widespread among America’s thousands of lenders that the unlikeliest victims are emerging. Boston’s giant State Street Corp., ostensibly a sleepy custodial bank, discovered early last week that, previous assurances to the contrary, it has several billion dollars in toxic assets that must be written off. It appears no bank is safe from grisly surprises.

The bottom line is that the world financial system remains non-functioning, despite drastic bailout activity beginning last year. As with State Street, whose shares plunged 56 per cent in value in one day last week, the likes of Citigroup Inc., Bank of America Corp., Royal Bank of Scotland PLC (Britain’s largest lender), Switzerland’s UBS AG (Europe’s largest bank) and Italian banking giant Unicredito SpA cannot replenish their dwindling reserves by selling more shares because no investor will go near their radioactive stock.

Most global bankers thus will not lend. They’ve gone from acting as though risk did not exist, in the heady days of the U.S. housing and merger bubbles, to fearing even the most minimal risk in renewing loans to their most creditworthy clients. In order to shore up their reserves, and stave off illiquidity, they are hoarding rather than lending the hundreds of billions of dollars in bailout funds they’ve received from the U.S. and European governments.

And this is what keeps us mired in a global economic recession. Every chief financial officer of a major U.S. or European corporation – along with everyone else who deals with banks, from art galleries and orchestras to the millions of corner grocers and beauty salons – is understandably fretful of being turned away in attempting to renew financing for day-to-day operations, never mind expansion plans.

Many firms count themselves lucky to have renewed their bank financing at steeply higher rates. (You’ve noticed that the most layoff-prone Canadian firms are branch plants of foreign companies, whose fate is in the hands of troubled foreign banks.)

It doesn’t help that alternate credit suppliers – hedge funds, private equity, venture capital, pension and other institutional investors – have gone into turtle mode.

The fact that banks now are additionally girding for the usual recessionary uptick in soured credit-card debt and car loans adds to the pressures on lending.

So, just as banks are hoarding rather than lending, employers as varied as Intel Corp., Sony Corp. and Microsoft Corp. – which on Thursday announced layoffs of 5,000 employees – have been engaging in pre-emptive, anticipatory layoffs in desperate bids to save cash and become self-financing until the global credit crisis is somehow resolved.

This in turn results not only in income loss for laid-off employees, but fear among remaining workers that their jobs will be the next to go. Naturally, both categories of Americans have closed their wallets.

With both U.S. business and consumers fearful of sudden loss of credit or income, all of the fiscal stimulus in the world won’t lift the world economy out of its malaise. Recovery will happen only when global banks have been well and truly rescued and made to resume normal lending operations.

This will occur through short-term nationalization, or the Obama administration’s suggested new “bad bank” to acquire all toxic assets from troubled banks, presumably accompanied by regulatory oversight to ensure the assisted lenders are back to conducting business as usual.

The red herring of stimulus packages is a distraction from the central front in the economic crisis – the need to purge the banking system and to force lenders, if necessary, to resume providing the credit that is the lifeblood of capitalism.

In the one corner is the tough guy team of Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney (do I hear a chorus of boos?). And in the other corner is the masked duo of the Rating Agencies (read S&P, Moody’s, DBRS), and the Regulators (read OSFI), both of whom believe in sound lending practices, and the banks’ fiduciary responsibility to its depositors. At stake in this morality play are nothing less than the banks’ independence in assessing risk, and the shareholders’ confidence in the responsible operation of the banks’ day to day lending activities.

The guys in the dark trunks want the banks to step up their lending activities to jump start the economy. Lend, lend, lend they say. Get that money out the door as fast as you can. That way people and companies will have lots of borrowed money to spend, and borrow and spend, and get this house of cards going again.

The other team says hey wait a minute there you villains! Isn’t that what got us in all this trouble in the first place? Namely granting loans at a breakneck pace to every Tom, Dick, & Bernie(Madoff) who could fog a mirror? We think you banks should exercise a little old fashioned judgement, prudence, and due diligence. Where’s the ref? These nasties want us to break the rules, compromise our good guy status at serious risk to shareholders and depositors alike. No way Messrs. Flaherty and Carney. We’re not knuckling under to your submission hold.

And so it goes. The fact is that the rate of growth in bank lending has far exceeded the rate of economic growth in Canada for years. Additionally banks are beginning to feel the sting of loan losses that accompany any recession. Loan delinquencies and defaults have begun to show a remarkable upsurge, and the banks have rightfully re-examined their credit assessment and lending practices in an effort to restore a stronger risk profile to their books of assets. Depositors and shareholders expect banks to lend, but only to those from whom they expect a reasonable prospect of being repaid in a timely fashion.

The pressures the banks are now experiencing from politicians and bureaucrats in this country are simply a knee-jerk spillover from the bailout program for U.S. and European banks, many of which have now to a large extent been nationalized. Canadian banks must stand their ground against the forces who do not understand the old horse to water parable. The Canadian Bankers’ Association has recently come out in support of the chartered banks and agreed that lending standards should not be relaxed simply to artificially jumpstart another round of reckless lending and another asset bubble of the future.

The Canadian banks have not been the cause of the lending freeze. They are more than willing to make good sound loans to Canadians and their businesses. Politicians and bureaucrats should stay out of the business arena especially in this tag team match where their nefarious motives are so transparent to the paying customers.

Richard G. Scott. January 6, 2009.