If COVID-19 creates an economic crisis, many see stimulus as a chance for change: Don Pittis

As usual, the worst possible time to understandwhat's happening in an economic shakeupis when you are smack dab in the middle of it.

As in previous financial disruptions, the sudden transition from "everything's fine" to "hold onto your hat" comesas a rude surprise not just to ordinary folks at home, but to sophisticated market participants with reams of data and research at their fingertips those who you would think should have known better.

Only weeksago, we were being reassured by U.S.President Donald Trump that the North American economy would be little affected by the coronavirus."The market's in great shape," he then said last Tuesday after the first stock declines.

Who can you believe?

All at once, even before COVID-19 hadmade major inroads into the U.S. (or Canada), markets were in turmoil with businessesdemanding bailouts.

Even for those who preferTrump's predictions,it is hard to know who to believe.

Credible voices are telling investors to sit tight, because everything will bounce back oncethis novelcoronavirusfades away. Other equally credible voices are suggesting we have only seen the beginning of a bear market, triggered by the sudden realization that the world's corporations are seriously overborrowed.

Meanwhile, just like in the 2008 market crisis, critics from all sides are demanding hastyaction from governments and central banks, asking them to wave a magic wandto solve private-sector symptoms that have been repeatedly diagnosed and repeatedly ignored.

But among that diversity of voices, a common thread seems to be emerging: A period of crisis may actually be a time for change.

While Calgary-based stock analyst Martin Pelletierwants Canadian taxpayers to help out the country's oil-producing regions during a periodof incredible volatility, speaking on CBC'sThe Current,he also suggested government assistancecouldultimately be an opportunity to stimulatediversification.

"This is the timethat Ottawa needs to step in with some fiscal stimulus for the western provinces, and then, you know, maybe use that stimulus to not only to try to ... slow down the impact of this oil crisis, but also, you know,help diversify and maximize your dollars that you're spending," he said.

If stimulus is needed, certainly Finance Minister Bill Morneauwill be thinking about lessons learned from the last big market meltdown, caused by reckless investments by giant banks in a bubble of U.S. subprime mortgages and the insurance policies that backed them.

Since the Great Recession, an enormous taxpayer bailout and a sharp cut in interest rates have sent stock markets soaring, withcompanies borrowing money in thebond marketto buy their own shares, creating a new bubble that has largelybenefited the better off.

Critics have suggested such a bubble might havebeen preventedif the handouts instead had been introduced by way of consumers, who would have circulated the cashin the economy from the bottom.

Victims of cheap borrowing

For those who foreseea long bear market rather than a quick rebound, it is the end of that process of bidding up stocks theyfear, where "elevated assetprices have begun to fall back to where fundamentals suggest they should trade," asMohamed El-Erian, chief economic adviser to financial giant Allianzsuggested this week.

The energy sectoris also now a victim of past cheap borrowing.

A fall in demand for oil, combined with an oversupply, means lenders are suddenly less willing to risk their money, especially on smaller U.S.shale producers who need it to keep drilling and pumping.

This week's decision by Saudi Arabia to open itstaps, rather than restrict supply, feels like a specialcase.But it may actually be part of a pattern.

Now, especially with Saudi Aramcotrading as apublic company, the Saudis may want to keep the oil flowing until it damages the competition enough to allow it to reap the rewards of arebound in prices.

If that is so, itis pretty clear that oil will bounce back, just as it did after the 2014 oil price crash. But ifglobal demand for oil begins to decline over the long term, as some predict, like a bouncing ball, each rebound will not be as high.

The federal government hasannounced a $1-billion spending plan for the coronaviruscrisis, one that will include income support for workers and businesses affected byCOVID-19.

Cyclical or structural

Many market observers, including Andrey Pavlov, a risk-management expert at Simon Fraser University's Beedie School of Business, suggest the best way to help an already-battered Albertaeconomyis to invest more in getting oilsands crude to world markets, allowing it togo head to head with Saudi Arabia.

Others, including Dan Woynillowicz, deputy director ofClean Energy Canada, say this is an opportunity tostimulate the economies ofAlberta and Saskatchewan by encouraging change at the same time.

It may be a message many in the oil and gas industry don't want to hearbut it's not a new one.

Woynillowiczpoints to a blue chip panel set upa decade ago by Alberta Premier Ed Stelmach, which ultimately declared that province's relianceon energywas an accident waiting to happensomething shown to be true in 2014 and again today.

Rather than just a cyclical swing, there is increasing evidence that climate change means there will be a structural decline in the demand for fossil fuels.

"This requires a fundamental reimagining of Alberta's economy," saidWoynillowicz.

And while there will no doubt be another bounce in crude prices for companies that survive the Saudi-led price war, any injection oftaxpayer cash still might be most usefullydirected toward a low-carbonenergy transition.

Follow Don on Twitter @don_pittis