[R-G] This financial hurricane will hit Canadian shores

[Anthony Fenton]

http://www.theglobeandmail.com/servlet/story/RTGAM.20080926.wcostanford29/BNStory/politics

This financial hurricane will hit Canadian shores
JIM STANFORD

 From Monday's Globe and Mail


September 28, 2008 at 11:23 PM EDT

In two incredible weeks, the United States has been turned upside- 
down, both economically and politically. Washington is suddenly  
nationalizing big swaths of the financial industry, at massive cost to  
taxpayers. Regulations are being rewritten so quickly that the  
financial rulebook now resembles a gigantic dry-erase board. From one  
trading day to the next, the markets alternate between partying and  
panicking. And in the political realm, John McCain is “wearing” the  
mess (quite rightly, given his personal role in deregulating the  
financial system) while Barack Obama has surged ahead in the polls.

 From our perch not so far away, we Canadians watch this stunning  
drama with growing unease. How is it all going to affect us? Here,  
too, that question has both economic and political dimensions.

Economists have been wondering for months if we can avoid following  
the U.S. economy into recession. But it turns out that we had the  
question backward: In fact, we may be leading the United States into  
recession, not the other way around. Despite the more dire financial  
news south of the border, the U.S. economy still managed to grow (at a  
2 per cent annual rate) in the first half of this year - while  
Canada's GDP shrank. Our national productivity (output per hour of  
work) has declined dismally, and is now lower than at the beginning of  
2006. Fewer Canadians were working in August than six months earlier.  
Among the G7 industrial economies, only Italy is forecast to grow more  
slowly than Canada this year.

Shrugging off the negative indicators, Prime Minister Stephen Harper  
and Finance Minister Jim Flaherty insist we're safe in their hands.  
Mr. Flaherty keeps reaffirming his faith in Canada's economic  
fundamentals: “as solid as the Rock of Gibraltar,” he once put it.

Well, the Rock of Gibraltar doesn't need emergency injections of  
liquidity to stay above the waves, but our banking system apparently  
does. Since Sept. 18, the Bank of Canada has announced $12-billion in  
new low-interest loans to Canadian banks and other financial  
institutions. It has arranged for $10-billion worth of U.S.-dollar  
reserves to be thrown into the brew as well, if necessary. And it has  
even started accepting asset-backed commercial paper (ABCP) from  
financiers as collateral for these loans. (Too bad mom-and-pop  
investors can't convert their frozen ABCP assets into cash so easily.)

True, most Canadian financial institutions didn't jump into subprime  
lending and other dangerous waters nearly as deeply as their U.S.  
counterparts. That was thanks more to their inherent conservatism,  
rather than stronger regulations or clearer foresight. Nevertheless,  
there is growing evidence of financial vulnerability in Canada.

As of the end of June, the debt of Canadian households equalled 107  
per cent of their income - an 11-point increase from the beginning of  
2006. Canadian house prices are heading firmly south: down 5 per cent  
in the past year, with the decline accelerating. Americans have  
already learned the hard way that falling house prices can unleash an  
unpredictable collapse in the debt chain, as assets that were borrowed  
against suddenly lose much of their value. Merrill Lynch Canada  
reported last week that Canadian debt levels were reaching a “tipping  
point,” and expressed concern over the potential for financial chaos  
on this side of the border.

This inconvenient warning elicited a very defensive reaction from the  
campaigning Prime Minister. After all, the Conservative campaign has  
worked hard to ensure that nothing untoward intrudes on their  
ruthlessly disciplined drive for a majority.

It's certain that at least some of the waves battering the U.S.  
financial system are now hitting Canadian shores. What's unknown is  
whether their arrival will have the same political impact on our  
incumbent Conservatives, as they're having on the incumbent Republicans.

Mr. Harper's claim that we're fundamentally stronger than the  
Americans is iffy at best. And lots of Canadians realize that, at a  
gut level. Many have lost their jobs; many more fear for them. Many  
lost money on ABCP. And many are now watching the wealth in their  
homes evaporate, too.

There are two weeks left in this campaign. I predict that concerns  
over the economy, and the success or failure of the opposition's  
efforts to pin those concerns on the Conservatives, will determine  
whether Mr. Harper gets his longed-for majority.

Jim Stanford is an economist with the Canadian Auto Workers union and  
the author of Economics for Everyone.