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Monday, February 08, 2010

Canadian Economy Death Watch, part 2

In the United States, the inevitable failure of sub-prime lending threatened to pull down banks and insurance companies directly, and the ensuing recession managed to bring the car industry to the brink. In Canada, our banks may be huge sub-prime lenders, but backed by the government via the CMHC, the bubble looks isolated from the rest of the economy (so long as the massive extra government debt paying off the investors in securitized mortgages isn't considered part of "the economy", even though it's inevitable that it'll result in increased taxes for reduced program spending). When it all spins apart, will only the foreclosed-upon, and the Canadian taxpayer, carry the burden?

Well, the construction industry would certainly struggle - no one will be interested in buying a new home in a deflationary market. That would trickle down into the rest of the economy. So would layoffs or wage rollbacks in the public sector, a possible step toward balancing a CMHC-caused deficit. (Never mind that public sector workers had no part in causing the problem, unless that public-sector worker is Jim Flaherty.)

A few extra mortgage defaults, caused by wage cuts or job losses, will add to the snowball. Alberta is already dealing with the highest rate of mortgages in arrears in the country, adding a hundred a month from under a thousand for over two years now, breaking 3500 in November (the PDF really has to be downloaded to be readable). Many more motivated house sellers makes for a weak and even deflationary housing market. Lather, rinse, repeat. Spread the recession around to the retailers of everything from soup to Nutz.

Short of stocking up on gold and guns, and hiding in your bunker trading recipes for squirrel stew, what can we do, individually and collectively, to protect ourselves from this? I don't pose the question intending to answer it. I also don't pose it rhetorically. I'll be spending the coming days and weeks asking some very smart people. I'll let you know if the answers are useful. Do I need to point out that I think selling your real estate, particularly property you don't actually live in, particularly in the most overheated markets, would be an important step?

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