Financila Crisis Canada

8/8/2019 Financila Crisis Canada

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The global financial

crisis and its impact onCanada


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Great Depression in Canada Canada was hit hard by the Great Depression.

Between 1929 and 1939, the gross national product

dropped 40% (compared to 37% in the US).

Unemployment reached 27% at the depth of the

Depression in 1933 turned into losses of $98 million

in 1933.

Canadian exports shrank by 50% from 1929 to 1933.

Worst hit were areas dependent on primary industries

such as farming, mining and logging, as prices fell

and there were few alternative jobs. Families saw

most or all of their assets disappear and their debts

became heavier as prices fell.


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Pre-Depression

In the years between 1919 and 1929, Canada had

the world's fastest growing economy, with only a

sharp but brief recession during the First World

War.

The 1920s had been an especially successful

period of growth, with living standards

improving remarkably. Then suddenly, in the

1930s the economy took a severe and devastating

turn for the worse.


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Causes

Over-production and Over-Expansion

Dependence on Few Primary Products

Dependence on the United States

High Tariffs Too Much Credit

The Drought and Dust Bowl Years -

The Prairies were hit extremely hard by several

years of drought.


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Economic results

By 1933, 30% of the labour force was out of work, and onefifth of the population became dependent on government

assistance.

Gross National Expenditure had declined 42% from the

1929 levels

Further damage was the reduction of investment: both large

companies and individuals were unwilling and unable to

invest in new ventures.

In 1932, industrial production was only at 58% of the 1929

level, the second lowest level in the world after the UnitedStates.

Total national income fell to 55% of the 1929 level, again

worse than any nation other than the United States.


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Impact

Canada's economy at the time was just startingto shift from primary industry (farming, fishing,

mining and logging) to manufacturing.

Exports of raw materials plunged, and

employment, prices and profits fell in everysector.

It was further affected as its main trading

partners were Britain and the U.S., both of

which were badly affected by the worldwide

depression.


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Recovery

Canadian recovery from the Great Depressionproceeded slowly.

In Canada employment quickly recovered but

productivity remained well below trend.

In the midst of the Great Depression, the Crown-in-Council attempted to uplift the people, and

created two national corporations: the Canadian

Radio Broadcasting Commission (CRBC), and

the Bank of Canada.


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It took the outbreak of World War II to pull

Canada out of the depression.

From 1939, an increased demand in Europe for

materials, and increased spending by the Canadian

government created a strong boost for the

economy. Unemployed men enlisted in the military.

By 1939, Canada was in the first prosperity period

in the business cycle in a decade.

This coincided with the recovery in the Americaneconomy, which created a better market for

exports and a new inflow of much needed capital.


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The Credit Crisis in Canada

The 2007 credit crisis irrupted in Canadian financial

markets in mid-August.

The immediate backdrop to this was the growing

concern in financial markets about the value ofassets underlying commercial paper, and especially

the extent to which these

assets were connected to a deteriorating real estate

market in the United States. The subprime mortgage sector in particular was

facing increasing degrees of delinquency, and

growing appreciation of the extent of increasingly

problematic mortgages.


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Impact on Canada

Stock market crashed.

240,000 workers lost their jobs.

Canadian households have lost 8% of their networth.

budget deficit of $34 billion in fiscal 2009.

Workers with retirement savings connected to thestock market have suffered double digit losses.

GDP at minus 2.8%.


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RECOVERY

Less debt. In Canada, household liabilities as a percentage of

assets sits at 20% close to the stable, sustainable level it's

been at since the late 1980s. In the United States, the figure sits

at 26%, after spiking radically upwards over the last decade.

Less crappy mortgages. Canada's subprime mortgage market

represents only about one in every 20 mortgages. In the United

States, the peak figure was about one in six. Astoundingly, up

to a quarter of mortgages issued in the 2004-2006 period were

in the subprime category.


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Less debt: In the United States, homeowners' net equity as

a percentage of home value has plummeted from around

65% to 45% over the last two decades. with more than half

that drop coming since 2000. In Canada, on the other hand,

this ratio has remained stable at between 65% and 70%

since the 1980s. The phenomenon of mortgages going "underwater" with

homeowners owing the bank more than their homes are

worth is now tragically common in the United States. In

Canada, it is virtually unknown.


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Smarter bankers, smarter standards. Finally,

there is the fact that Canada simply has a different and more prudent banking culture, they have

always checked, and continue to check, incomes,

verify job status, asks for sales contracts, etc., such

that all those questions your banker asks in Canadahave a purpose that somehow got lost on many

American bankers. The no-income-no-job-no-asset

('Ninja') style, here-are-the-keys-to-your-brand-

new-home lending just didn't take hold in Canada."


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No bubble in the housing market: On average,

Canadian home prices are roughly 200% what

they were in 1989. In the United States, the

corresponding ratio peaked at 260% before

crashing down to 220%.

Fewer foreclosure notices a

lotfewer. Thisis the most shocking stat of all. In the United

States, a full 4.5% of mortgages are in 90-day

arrears. In Canada, the figure is one 20th that

level just 0.27%.


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CONCLUSION

Several factors have contributed to this favorable performance, yet the effectiveness of the strategies

deployed by the Canadian government is not one of

them.

State intervention, in the form of monetary policiesand macroeconomic stimuli, has been massive, but not

significantly different, in qualitative and quantitative

terms, from the strategies deployed by other industrial

countries.


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One explanation for Canada's economic resiliency is the

existence of a European brand of Welfare State, with a

strong presence of the State in the economy and social

programs that play a role of automatic stabilization and can

alleviate the burden of citizens.

A very conservative and regulated financial and banking

system proved to be economically beneficial. Thesystematic rules, often criticized by the industry, limited the

concentration of the banking system and prevented the level

of leverage seen elsewhere.

Canadian financial institutions were thus able to endure the

initial shock of the financial crisis, and the financial systemavoided costly bankruptcies and bailouts.

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Financila Crisis Canada