Canada's Housing Bubble

Jul 04, 2011 Yasmin Popescu Freeport News Reporter

How could having too much money lead to the world having great financial problems?

The banks had too much money so they mortgaged many homes to persons who, even, could not afford them, leading to the issue of banks lending more money without having the cash to cover potential defaults. When the banks found they had over done it with the lending, it was too late for some.

One such was Lehman Bros. in the United States. They were the second bank to find themselves in deep waters, but the first bank Bear Stearns was sold to JP Morgan Chase for $2 per share.

The day that Lehman's Bros., fell in 2008, so did the market and the entire world shuddered.

According to business article in Rolling Stone, Wall Street's Naked Swindle – "the boom that had ballooned Lehman Bros. and Bear Stearns to fantastic heights was basically a counterfeit economy, a mountain of paste that Wall Street had built to replace the legitimate business it no longer had. By the middle of the Bush years, the great investment banks like Bear and Lehman no longer made their money financing real businesses and creating jobs. Instead, Wall Street now serves, in the words of one former investment executive, as "Lucy to America's Charlie Brown," endlessly creating new products to lure the great herd of unwitting investors into whatever tawdry greed-bubble is being spun at the moment: Come kick the football again, only this time we'll call it the Internet, real estate, oil futures. Wall Street has turned the economy into a giant asset-stripping scheme, one whose purpose is to suck the last bits of meat from the carcass of the middle class.

Not only were other banks affected, but other businesses such as insurance and even car manufacturers.

Countries were in trouble because of the financial fall-out and lead to the depression that was predicted to last only 18 months.

Late last year the United States announced that they were out of the depression, but for smaller countries such as those in the Caribbean, the crisis continues.

This is an interesting backdrop to the present situation where the United States president Barak Obama is now begging the congress to increase the debt limit. If the congress says no, the country will default on loans to other countries around the world. This would put them in a deeper depression than the one experienced in 2008 and may hit the levels of the Great Depression. That depression started in about 1929 and lasted until the late 1930s or early 1940s and it was said to be the longest, most widespread, and deepest depression of the 20th century. In the 21st century, the Great Depression is commonly used as an example of how far the world's economy can decline.

Again that depression originated in the U.S., starting with the fall in stock prices that began around September 4, 1929 and became worldwide news with the stock market crash of October 29, 1929 (known as Black Tuesday). From there, it quickly spread to almost every country in the world.

Well in The Bahamas we have two Bahamian banks and a number of off shore banks but the majority of our commercial banks are Canadian. The economic woes have not been heard much in Canada so it appears that so far our banks are in good hands.

Or are they?

A recent article by TD.com on June 14, 2011, said "Canada's economy has raised eyebrows over the past few years, weathering the global recession in comparatively good shape and turning in a strong growth performance since the world recovery began in mid-2009. How- ever, Canada's economic grow-th rate has likely peaked and an extended period of lackluster expansion appears to be in the cards over the next few years.

"Waning fiscal stimulus and record household debt levels are two notable domestic pressures that are likely to take some of the wind from beneath the economy's sails. Accordingly, the drivers of growth are expected to increasingly shift from the household and the public sector to exports and business investment. But even then, there are limits to how much of a pull can be generated given the prospects for a continued half-speed U.S. recovery, a high Canadian dollar and growing vulnerabilities to growth in Europe and other parts of the world. With this backdrop, short-term interest rates are projected to remain at lower levels than we had envisaged in the last Quarterly Economic Forecast in March.

"Indeed, given the global risks including the on-going sovereign debt problems in Europe, the continued fragility of the U.S. economic recovery and efforts by emerging market eco-nomies to slow their expansions, the Bank of Canada may not raise rates in 2011 and a return to a more normal central bank overnight rate of 3.00 percent now appears unlikely before 2013.

Then on June 29, 2011 the CBA.ca news said that Cana-da's housing market is in a bubble that's set to burst and prices could plunge by as much as 25 percent, a major independent research firm warns.

The report predicts a fall in house prices by as much as 25 percent over the next three years. Also that a domestic housing boom coupled with high commodity prices worldwide have spared the economy the severe recession felt by other developed countries.

It noted the words of economists at the research consultancy Capital Economics, "Housing valuations have lost all touch with fundamentals and household debt is at a record high."

"Our fear is that, with the housing bubble now close to bursting and commodity prices retreating, Canada will go from leader to laggard."

Still in Europe the fight goes on for financial stability as Bloomberg reported on Friday that Euro-area finance ministers will decide on a 12 billion-euro ($17.4 billion) Greek aid payment on Saturday after Jean-Claude Juncker moved up the talks and cancelled a meeting planned for July 3.

The report said that the finance chiefs from the 17 nations using the euro will hold a conference call at 6 p.m. Brussels time on Saturday on releasing the payment, the fifth tranche from last year's 110 billion-euro bailout for Greece, information from the spokesman for Juncker, who leads the so-called eurogroup, by telephone.

Spokesman, Guy Schuller, is then quoted as saying "There was no need to meet physically anymore because the only remaining decision at this stage is on the disbursement of the fifth tranche. Other issues, such as the private-sector involvement, will be discussed on July 11," when the ministers hold their next regularly scheduled meeting.

"I'm certain we now have a sufficient consensus that we can take a decision during the weekend on the fifth tranche of the Greek loan package," European Union Economic and Monetary Affairs Commissioner Olli Rehn said on Friday in a Bloomberg Television interview in Helsinki. "We have now contained the crisis to the three more vulnerable countries."

According to this report Greece may receive as much as 85 billion euros in new financing, including a contribution from private investors, in the new rescue package, Thomas Wieser, head of the Austrian Finance Ministry's economic policy and financial markets department, said at a briefing with Finance Minister Maria Fekter in Vienna late yesterday.