Will the Flaherty-Harper Ticking Time Bomb be Detonated?

In Jim Flaherty's first budget, he announced that his government was opening up the housing market to  private insurers.  “These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership."

Loosely translated, the sub-prime mortgage industry was heading north, and so was AIG.

On May 2, 2006, in his first budget, Mr. Flaherty announced that not only would Ottawa guarantee the business of U.S. insurers, it was doubling the guarantee to $200-billion.

And despite repeated warnings that Canada's financial system was being exposed to far too much risk, Flaherty locked arms with his boss and said "bring it on".

Tick, tick, tick.

If you remember, AIG was one of the early victims of the Wall Street induced economic crisis, and in fact their "innovation" helped to create the collapse, when with the help of Goldman Sachs, they backed too many risky mortgages.

Of course that was the game all along as what are known as "derivatives" became a popular form of investing.  The way it works is that people who wouldn't normally qualify for a mortgage, suddenly became home owners.  This brought more competition into the housing market creating a bubble. 

The investor then took out an insurance policy on the risky mortgages, knowing that they would fail, and when the housing bubble collapsed, they cashed in and AIG cashed out.  Matt Tabbi called it the "swoop and squat".

Yet again, knowing how risky derivatives are to a nation's economy, Jim Flaherty hired a Goldman Sachs employee to help him get the Canadian taxpayer into the game, even investing some of our Canada Pension Plan funds.

Tick, tick, tick.

When the economic crisis hit, Flaherty knew he was in trouble.  The banks after repeated warnings, let him know that they were not going to shoulder the burden of his mismanagement, so he was forced to buy back all the high-risk debt that he had saddled them with.

Unlike the bank bailouts south of the border, where the banks had to pay the government back, this was an outright transfer of rotten paper, in exchange for $125 billion in cold hard cash.  Our cash, now backed by what could very well be worthless junk.  And since we didn't actually have $125 billion sitting around in a safe, we had to borrow the money, adding to our national debt.

Tick, tick, tick.

The International Monetary Fund is now warning that Canada could be facing the collapse of our housing bubble, something that the government was warned about two years ago.

Canada’s average home price is about 10 per cent higher than models suggest it should be, posing a “vulnerability” to the country’s economic outlook, the International Monetary Fund warns in a new report.  A drop in prices would be a blow to already highly indebted consumers. With household debt at record levels of about 150 per cent of disposable income, the domestic spending boom that helped Canada weather the financial crisis already is at its limits.

When Flaherty bailed out our banks, he said that it was to "free up funds", that could be lent to consumers so that they would spend, and help keep up the illusion of his sound fiscal management.  Now Goldman Sach's Mark Carney, head of the Bank of Canada, is blaming consumers for their personal debt, the result of spending that they no doubt would have curbed, had they known just how shaky our economy really was.

Tick, tick .... TOCK?!

The IMF is now investigating CMHC.  Where were they in 2006?