Economic Master

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CANADIAN BUBBLE, EH?

How real is Canada's housing bubble anyway? More real than any other countries. That is due to the following facts that I will present below, but first it is better to start with a little history. In the year of 2008, as stated on Statistics Canada, the recovery of the recession was much quicker than in other recession period such as in 1981-1982 and 1990-1992. However, was it a real recovery or an illusion? In 2011, Globe and Mail published an article on why Canada’s recession was not as brutal. In summary, Philip Cross explored what factors caused the impulsive slide, and why the downturn was not nearly as severe as in previous recessions, here are some of his findings: * Jobs contracted at only half the rate at which output fell during this recession. * May, 2009, seems to be the low point for monthly GDP, “when widespread plant closures in the auto industry as two major firms went bankrupt depressed output, and the same month was the low in hours worked.” * The initial speed of descent in the last downturn exceeded that in the other two recessions. * Employment bounced back much more quickly than in previous recessions. * Full-time job cuts were heavier in prior recessions than the recent one. Full-time employment at the end of last year is still 64,000 below its pre-recession peak, which explains why total hours worked remain 0.7 per cent below their peak. * Exports plunged at a record rate. “The most striking feature of the 2008-2009 recession was the speed and severity of the contraction in exports,” the report said. * With the fall in exports came a collapse of business investment. Investment in plants and equipment plunged by about 20 per cent in the recession, matching a record plunge. In prior recessions, it plummeted by nearly 6 per cent. This time round, it fell by only 2 per cent over two quarters and has already fully bounced back. He attributes this to several factors: Canadian households had strong balance sheets going into the downturn. Employment didn’t fall as much as in past contractions. Credit wasn’t as impaired as in other countries. “This reflects both a sounder financial system and the massive response from policy makers both to shore up capital and to lower interest rates.” Everything seems legit, however Mr. Cross seems to have no idea, what happened to the banking system during that period and what actually was done in order to keep the “Big picture” as good as it seemed. It is commonly understood, that Canadian banking system is one of the strongest banking system in the world, but it seems that the system is no different than most of its counterparts and a Canadian economic crisis is just as inevitable. What Mr. Cross and some other analytics and reporters didn’t know while analyzing the crisis and the recovery, is that Canadian banks received a bailout in 2009 from the Fed, BoC, and CMHC. (CMHC stands for Canada Mortgage and Housing Corporation) In the analysis (article) published on Wednesday, January 2nd, 2013 by Chris Ferreira there are 6 key arguments about the Canadian Banking System’s unsound economics. One of which is just mentioned “bailout” of the banking system and the others are: * The key reason underlying this bailout was that Canadian banks are actually under-capitalized; * Canadian banks operate under a fractional reserve system, with 0% reserve requirement; * The Canadian Deposit Insurance Corporation does not hold enough cash on hand; * Canadian banks hold the majority of their balance sheets on non-productive assets; * The Bank of Canada has virtually no gold left to back their monetary system “It is true, we have the only banks in western world that are not looking at bailouts or anything like that… and we haven’t got any TARP money.” – Stephen Harper, Prime Minister of Canada. However, it is NOT true, as it turns out after the release of a report with some estimates on the publicly available data from the...
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