Thread: Why Was There No Canadian Housing Bust? The US Fed Says That

04 January 2010

Why Was There No Canadian Housing Bust? The US Fed Says That They Were Probably Just Lucky Except...



This paper from the Cleveland Fed, which used to shine under the governorship of Jerry Jordan, suggests several reasons why there was no significant housing bust in Canada. Interesting that after each politically correct reason stated, there is an 'oh-by- the-way' in addition that cuts to the heart of the problem.

The Canadians were probably just lucky, according to the Fed, except they actually did things to stem the growth of off-balance-sheet securitization and tightened lending standards earlier on while the US Fed was cheerleading banking speculation and the growing housing bubble even to the point of its collapse.

Chairman Ben struck the party line in a recent speech, blaming the regulators. But in fact the Fed had a significant role to play in both regulation, monetary policy, and in the verbage they put out attacking regulation of banks and enabling their off-balance-sheet vehicles and derivatives speculation at every turn.

Yes, Fannie and Freddie played a significant role in the US. But the Fed set the tone for banking regulation and they not only did not take away the punch bowl, they spiked it with high grain alcohol. The Fed was the 'cop on the beat' and they looked the other way. And they still are.

The Wall Street banks bought the White House, the Congress, and already owned the Fed. It was a failure of stewardship in the US that allowed the bubble then, and the continuing abuses on Wall Street today. And while the US Fed is not the sole perpetrator, it was their duty as the "independent regulator" to take away the punch bowl. And they never did it. And have not done it yet.

From the charts, it is obvious that there is a bubble in Canadian housing, not of the dimensions of the US, but likely a bubble nonetheless. The bubble is partly due to Canada's heavy export involvement with the US, and a certain interdependency implied with the devaluing dollar, and a desire to keep the loon at par with the dollar. The key difference between the nature of their bubble is that it is not founded on the fraudulent securitization of mortages held by their commercial banks.

Will the Canadian housing bubble 'pop' or will the Canadians be able to grow out of it gracefully? That is not quite the issue being addressed here. Certainly the Canadian monetary authority and regulators are not exemplary, but certainly less inept then the US Fed, at least so far.

"Why Was the Subprime Market in Canada Smaller?

Given the key role played by the “subprimeâ€

In Canada it boils down to having to have a down payment to be able to buy a property. When I lived there you needed close to a 25% downpayment to buy a home. That makes it harder for investors to buy with nothing down and then flip it when prices go up. Also it is illegal to artificially inflate real estate prices.