But Merrill Lynch - whose U.S. parent is one of the biggest victims of a crisis in financial markets that is rooted in the American housing and mortgage meltdown - said Canadians should be wary.
Household net borrowing in Canada amounted to 6.3 per cent of disposable income in 2007 - meaning they're carrying more debt than households in the United Kingdom and not far off the peak U.S. shortfall in 2005 - just before the subprime mortgage crisis erupted.
"This data implies that the Canadian household sector is now overextending itself as much as the U.S. or U.K. ever did, challenging the consensus view that Canadian lenders and borrowers have been far more conservative through the cycle," the report says.
It also says housing prices are now falling and inventories of unsold homes are rising sharply in Canada suggesting that this market turnaround will not be a transitory phenomenon.
However, the prevailing view is that Canada's lenders have issued few of the type of subprime mortgages that sparked the U.S. crisis, which is continuing to ripple through the financial system.
What the report doesn’t say is that before the crises in the US only 5 percent of our homes in Canada could be classified as “subprime”, presently that figure has dropped to nearly zero because of the removal of subprime offerings out of the Canadian marketplace.
Most of what we know about sub prime mortgages is connected to developers selling homes for no money down, but there is another customer for such mortgage companies. People who cannot get a bank mortgage; or people who are living in a geographic area not supported by traditional mortgages. These mortgage companies tend to take more risk in return for reaping a higher interest rate from their customers.
Remove the subprime offer and such lenders out of the marketplace and our economy will begin to support urban areas and only the people who already have financial security. The people who are considered a risk, or living in a place considered a risk will have less of a chance to secure a mortgage.
Not being able to secure a subprime mortgage will result in fewer lower income Canadians, rural residents and self-employed people being able to buy their own home.
So while there is a growing acceptance of bailing out financial institutions; helping consumers and homeowners in crises seems to take a backseat.
In the US, the present bailout of banks, and the proposed elimination of the sub prime marketplace is described by US Senator Tim Johnson as a, “a necessary evil.”
The proposal would involve purchase by the federal government of “toxic assets” held by thousands of financial institutions. A bill will pass, because, as Senator Bob Bennett (R-UT) said, “the economy runs on credit.”
Richard C. Cook wrote an interesting article this past week. Cook is a former U.S. federal government analyst, whose career included service with the U.S. Civil Service Commission, the Food and Drug Administration, the Carter White House, NASA, and the U.S. Treasury Department.
Cook reminisces that not too long ago, officials of the Bush administration, along with Republican presidential candidate John McCain, were telling everyone that economic fundamentals are sound, and that while there has been a downturn, there is not even a recession. One of the architects of financial deregulation, former Senator Phil Gramm, a sometime McCain advisor, chastised the public for being a “nation of whiners.”
Now, suddenly the US is facing a catastrophe. As Senator Jon Tester (D-MT) asked US Treasury Secretary Henry Paulson, “Why do we have only one week to allocate $750 billion?” There was no answer.
But would the bailout really fix the system? Obviously, for it to do so, it would have to address and correct the cause.
So what is the cause? According to Paulson, it’s “defaults on mortgages.” Senator Schumer agreed that,“It’s been mortgages that have brought the financial system to its knees.”
Senator Bennett said, “the housing bubble has burst,” with others pointing out that for many homeowners the value of their homes now was much less than when they bought them.
Paulson agreed that “housing values have been falling,” but he did not elaborate on why millions of Americans could no longer pay their mortgages. Cox blamed it on a “failure of lending standards” and said that the SEC had a number of ongoing investigations of fraud in the mortgage application process. Nevertheless, Paulson made it clear that his proposal was not to help distressed homeowners, saying “every homeowner won’t save their home.”
And that is the crux of the problem, which explains why Paulson’s proposal may keep the financial system alive but won’t help anyone who was hurt by the housing bubble in the first place. Senator Dodd agreed with Paulson that, “the proposal will not help a single family save their home.” And even though he said the plan should “put an end to foreclosures and defaults,” it won’t.
In fact, according to a September 22, 2008, article by Elizabeth Williamson in the Wall Street Journal entitled, “Banks Rush to Shape Rescue Plan”:
“Lobbyists and financial-services executives are working deep connections within the administration to ensure as many institutions as possible benefit from a $700 billion federal mechanism to buy distressed assets, then sell them off in better times. In a particularly controversial move, they also oppose proposals by Democrats in Congress to provide mortgage reductions for homeowners facing bankruptcy. Bankers say such a move would raise rates for mortgage seekers, as banks factor in the possibility that a loan would be restructured in court.”
The article quoted a bank industry lobbyist: “How you publicly oppose loan modifications and bankruptcy law while at the same time advocating a huge taxpayer bailout is beyond me. Pigs get fat and hogs get slaughtered.”
The committee never addressed the issue of why the bankers would oppose homeowner relief. Could it be that they actually favor foreclosures? Could it be that a situation where millions of foreclosed homes across America can be bought today for dimes on the dollar is somehow to their advantage? Or to the advantage of other investors who are now working the U.S. foreclosure markets, such as foreign sovereign equity funds? These questions did not come up at the Banking Committee’s hearing, though they should have.
Nor did anyone talk about why the housing bubble arose in the first place, though the fact is that the Bush administration and Federal Reserve combined to generate it to get the nation out of the 2000-2001 recession. At the time, Bush needed money and could not afford the continued decline of federal tax revenues. He needed the money to pay for his tax cuts for the rich enacted in March 2001 and for his wars in the Middle East, which started with the invasion of Afghanistan immediately after the 9/11 attacks.
So as the economic crises begins to gain a foothold in Canada and as Election Day approaches, we should be asking candidates about how they will offer up a real solution that will offer homeowner relief that considers consumers and regions at risk.
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Don Elzer writes and comments about the future, current affairs, lifestyle and the natural world. He is a director of the Watershed Intelligence Network publishers of The Monster Guide, which can be found at www.themonsterguide.com
He can also be reached by email at: treks@uniserve.com
