Canada escaped relatively unscathed, through a combination of good luck and sound, conservative regulation of banking and consumer debt in which “it is not so easy to use your house as an ATM,” Mr. Krugman told the Canadian Bar Association.Now this is where Krugman is wrong. Jim Flaherty did get us caught up in the "euphoria of banking innovation". The only problem is, he didn't bother to tell us that he was doing it, and the few in the media who reported on it, were pretty much ignored.
“Canada is an example of the virtues of a relatively traditional approach, a country that did not get caught up in the euphoria of banking innovation,” he said in a speech to hundreds of lawyers.
According to the Globe and Mail
In the first half of this year, as the subprime mortgage crisis was exploding in the United States, a contagion of U.S.-style lending practices quietly crossed the border and infected Canada's previously prudent mortgage regime. New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.And when the economic crisis hit, Flaherty secretly bought up 125 billion dollars of what is being called "rotten paper". We still own them, and yet the media is more worried about what plays Stephen Harper is watching than the fact that he has us in deep water.
The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.
And with more people losing their jobs and our unemployment situation the worst since 1938, we need to start paying attention.
Here's the inevitable other side of the story. The banks were actually "bailed out" to the tune of $125 billion just before and after the 2008 election -- in the form of a massive purchase of questionable mortgages and other "rotten paper," in the words of one economist, held by them. This was done through the Canada Mortgage and Housing Corporation, a federal agency. The taxpayer is now on the hook for these mortgages, 40 per cent of which are considered at risk, with more to come if interest rates rise and the economy dips again.
But the kicker is this: Hardly anybody noticed. It wasn't an issue in the election, and the financial press said nothing. A few tried, and are still trying, to raise the alarm. Michel Chossudovsky, a retired University of Ottawa economist and head of the Montreal-based Centre for Research on Globalization, pointed out that Finance Minister Jim Flaherty had announced a $2.3-billion surplus in the offing before the election, then quickly changed it to a $64-billion deficit. He argues that the entire deficit was for the first installments of the bailout, which the prime minister described as "not a bailout" but a "market transaction."
There's something else that's interesting from Krugman's comments:
However, he warned that Canadians’ lavish spending habits, stubbornly high unemployment, and rising housing costs are potential trouble spots that could potentially turn a good news story into a bad one. “There are a few aspects of Canada that are not scary but a little disturbing,” warned Mr. Krugman, a Princeton University professor.And even Frank Lutz, the Republican pollster and buddy of Stephen Harper's blamed the economic meltdown on:
“Canada is by no means insulated. It’s by no means a sure thing that everything is going to be OK.” Despite better banking regulation, Canadians tend to “spend and borrow and awful lot like Americans,” Mr. Krugman said in his speech.
"Government policies caused the bubble and its ultimate crash. Fannie Mae, Freddie Mac, the Federal Reserve, and the Community Reinvestment Act all had a role in the catastrophe. The government inflated economic bubbles with easy credit policies. Interest rates were kept intentionally low. Low-income families were encouraged to become homeowners despite the knowledge that many would never be able to pay them back. Government bought and backed these subprime loans, essentially encouraging brokers to find more subprime clients – risk be damned."