Krugman on Canadian Household Debt

[Pliny]

These examples are weak to meaningless.

The far better example is Confederation Life. That was a failure of our supposed superior regulatory system, and, well, English Canadian conservatism.

Confederation Life was an aberration, showing only that Canada's banking system works not because of regulation, but because of Canadians.

Don't forget Alberta Fidelity Trust

http://www.theglobeandmail.com/report-on-business/article728538.ece

Pocklington endured a particularly turbulent year in 1983, first because the federal Department of Insurance placed his Fidelity Trust Co. on probation. Fidelity, which boasted former U.S. president Gerald Ford as a special consultant, was ailing because of bad real estate loans. The company's ultimate collapse resulted in the federal government's Canada Deposit Insurance Corp.'s bailing out depositors to the tune of $359 million.

[August1991]

Did we look on in curiosity during the thirties?

Most Canadians with bank deposits did.

[Pliny]

Most Canadians with bank deposits did.

Wonder what they thought of the creation of the Bank of Canada in 1933?

[Topaz]

Have any of you ever watch the TV program, To Debt Unto Us Part? Its easy to see why household debt is high, especially in the age bracket of 20`s-40`s. People never knew how to manage a budget or if they know what a budget was. They have a credit card and off they go buying whatever they want until its become a monster! Then there`s the people who were victims of the recession. They loss their jobs, had to pull money from RRSP`s, EI and then welfare for some. Some people lost their homes, families broke up, and some because of their age, can`t find work. So household debt reflects right back to the provincial and federal governments and what polices they bring into law can either help or destroy families.

[Bob]

The problem is if they allowed that price correction to happen the ownership class (middle class and wealthy) would lose billions and billions of dollars. And they have a disproportionate share of political power so its unlikely the government would ever do that.

Youll notice that most measures taken after the meltdown were actually designed to keep the housing bubble inflated, and stop realestate investors and speculators from losing money. In Canada for example, they intentionally made it harder for young people to buy homes by doubling the ammount of money you need to put down on a CMHC mortgage

Nobody gives a fuck if young families can buy a house or not. The ownership class (and their government) would rather see young families renting houses from them.

I smell Marxism. "Ownership class"? Are you joking? Get a job, make some money, and stop crying.

Anyways, raising the downpayment minimums (for CMHC-insured mortgages) reduces risk to the bank. The main reason for the crisis in the USA, if you didn't already know, was irresponsible lending. Many people were issued credit beyond their abilities to repay (this was a fault on behalf of both the lenders and borrowers). Someone's ability to save money towards a downpayment is a positive factor in assessing their creditworthiness. Without going into details, other changes were made towards the assessment of creditworthiness in Canada. These were changes made towards insulating Canada against similar practices of irresponsible lending that we saw down South. Trying to paint this as anything other than what I just described is bullshit.

[Bob]

It is not just the poor that cannot afford these houses in Vancouver, but families solidly in the middle and even upper-middle classes. The situation is, frankly, ridiculous. The problem is with the real estate market in Vancouver: almost anywhere else people earning this amount of money would have large, luxurious, houses (if they wanted them).

It's more of an issue of proportion. "Poor people" can also be owners, but they must not live beyond their means. People of all kinds of incomes can sometimes have credit availability beyond their abilities to repay. This can (and does) lead to big problems.

I think what's happened in Vancouver and many other expensive housing-markets is that housing prices have grown far beyond the average increase in incomes. In other words, the average increase in home prices was X%, and the average increase in incomes was much less than X%.

Cheers.

[Bonam]

I think what's happened in Vancouver and many other expensive housing-markets is that housing prices have grown far beyond the average increase in incomes. In other words, the average increase in home prices was X%, and the average increase in incomes was much less than X%.

Yes, obviously. And it's a problem.

[August1991]

Have any of you ever watch the TV program, To Debt Unto Us Part? Its easy to see why household debt is high, especially in the age bracket of 20`s-40`s. People never knew how to manage a budget or if they know what a budget was. They have a credit card and off they go buying whatever they want until its become a monster! Then there`s the people who were victims of the recession. They loss their jobs, had to pull money from RRSP`s, EI and then welfare for some. Some people lost their homes, families broke up, and some because of their age, can`t find work. So household debt reflects right back to the provincial and federal governments and what polices they bring into law can either help or destroy families.

Topaz, you make it sound as if debt were a bad thing.

I disagree.

What would we humans be if not for debt? As children, we borrow from our parents for life itself. What infant could survive without "borrowing" from someone older? Most children in this modern world are net debtors, and a good thing too. Children should borrow, go into debt, and older people would be wise to lend to them. Would you want a society in which no one ever borrows?

For everyone in debt, there is necessarily someone else who is saving, lending. If you say that debt levels are high, you should also have the intellectual honesty to say that saving levels are also high.

I happen to think that a measure of society is how willing people are to lend and borrow from one another. In a civilized society, people have the mechanisms to trust each other and they lend and borrow.

To say that debt is high is to say that saving is high. IOW, we live in a civilized, trusting society.

Edited September 14, 2010 by August1991

[Bitsy]

This so-called economist continues to claim there's no problem with social security. Even though the program now takes in less money than it pays out.

This so-called economist is highly respected, and has a track record that rivals most present day economist. As far as our social security is concerned, this is the first time in 30 years that SS will pay out more in benefits than it receives in payroll taxes. This is due to the great recession and early retirement taken by many because of the bleak employment picture We have weather this storm before, 1970 thru 1983, 13 years of benefits out pacing revenue.

[dre]

What would we humans be if not for debt? As children, we borrow from our parents for life itself. What infant could survive without "borrowing" from someone older? Most children in this modern world are net debtors, and a good thing too. Children should borrow, go into debt, and older people would be wise to lend to them. Would you want a society in which no one ever borrows?

This stuff is getting a bit silly. Debt is neither intrinsically good or bad. It can be either. And certainly debt beyond a certain level is unsustainable.

Nobody is saying that its a bad thing that you can borrow money

[PIK]

Then how did Canadians come to have the highest rate of personal debt?

Canada ranks first among a list of 20 countries of the Organization for Economic Co-Operation and Development — including the United States — when consumer debt-to-financial-assets ratios are compared. That’s just a taste of the dour revelations in a report released earlier this month by the Certified General Accountants Association of Canada.

http://www.thestar.com/news/insight/article/815836--canadian-debt-the-1-4-trillion-hole-we-re-in?bn=1

What I see in my area ,is young people building big homes, nobody builds a small home anymore,it is like everyone is trying to out do the other and it is going to catch up.

[RNG]

What I see in my area ,is young people building big homes, nobody builds a small home anymore,it is like everyone is trying to out do the other and it is going to catch up.

Fourteen years ago, our children were gone and my wife and I decided to move down to a small, two bedroom condo apartment. I had some medical issues that made shoveling snow and mowing lawns a bit of a hassle, and my wife was developing knee problems so cleaning a 2200 sq ft four bedroom house was a chore. Makes sense so far.

Well I was amazed by the reaction of my friends and aquaintinces. Nobody moves to a smaller place, they all told me. I must be crazy. I invested the left-over money into really good dividend paying equities and am smiling like a you-know-what. Silly them, IMHO.

[Topaz]

Topaz, you make it sound as if debt were a bad thing.

I disagree.

What would we humans be if not for debt? As children, we borrow from our parents for life itself. What infant could survive without "borrowing" from someone older? Most children in this modern world are net debtors, and a good thing too. Children should borrow, go into debt, and older people would be wise to lend to them. Would you want a society in which no one ever borrows?

For everyone in debt, there is necessarily someone else who is saving, lending. If you say that debt levels are high, you should also have the intellectual honesty to say that saving levels are also high.

I happen to think that a measure of society is how willing people are to lend and borrow from one another. In a civilized society, people have the mechanisms to trust each other and they lend and borrow.

To say that debt is high is to say that saving is high. IOW, we live in a civilized, trusting society.

A BAD debt is some item to go charge that you only WANT asnd NOT NEED. As far as savings, it depends on how much money is coming into the household and there's a lot of people living pay cheque to pay cheque and can't save.

[Michael Hardner]

A BAD debt is some item to go charge that you only WANT asnd NOT NEED. As far as savings, it depends on how much money is coming into the household and there's a lot of people living pay cheque to pay cheque and can't save.

To point out - a bad debt can also be something you need but can't afford - such as governments spending into deficit to support social programs and infrastructure. Of course, that assumes that governments and people aren't spending money on things they only WANT...

But, yeah...

[dre]

To point out - a bad debt can also be something you need but can't afford - such as governments spending into deficit to support social programs and infrastructure. Of course, that assumes that governments and people aren't spending money on things they only WANT...

But, yeah...

That depends. Infrastructure can often be seen an investment because it encourages transactions between individuals which form the basis of the economy. Obviously you cant just build bridges to nowhere though but I would say there is a sound case to be made for defecit financing infrastructure development at times. The US interestate system would be an example of that. Its probably paid for itself many times already. Same goes for the publics investment in telecommunications or postal infrastructure. These things facilitate and encourage transactions.

[Bonam]

That depends. Infrastructure can often be seen an investment because it encourages transactions between individuals which form the basis of the economy. Obviously you cant just build bridges to nowhere though but I would say there is a sound case to be made for defecit financing infrastructure development at times. The US interestate system would be an example of that. Its probably paid for itself many times already. Same goes for the publics investment in telecommunications or postal infrastructure. These things facilitate and encourage transactions.

Any investment which gives a positive return and outweighs the potential positive returns of other investments can be financed with a loan and still be a good investment. Simple cost-benefit analysis. Improved transportation systems produce a tangible economic benefit, even if that benefit is hard to exactly quantify in the end, and so making the argument for deficit spending on such projects can have some valid economic justification. On the other hand, a household going into debt to buy a bigger TV or a fancier car does not (usually) gain any tangible economic benefit.