Canada's shining bank regulatory system cannot be counted on to shield the country from an impending economic buffeting, renowned U. S economist Paul Krugman told the Canadian Bar Association on Sunday.
Mr. Krugman said that Canada cannot be complacent in the face of disturbingly bleak global conditions, because Canadians spend too much relative to their household incomes and the country's housing bubble has yet to burst.
Canadian housing prices did not take off in the mid-2000s the way they did in the United States and Europe, Mr. Krugman said, but neither did they come down sharply during the recession, as they did elsewhere in the Western world.
As a result, real estate values in the U.S. have a "green light," while those in Canada, are "verging on red."
These shortcomings are "not scary, but they are still disturbing," Mr. Krugman told the CBA annual convention.
"Canada is by no means insulated," he said. "Canadians borrow an awful lot. Savings rates have been very low. Household debt relative to income is very high here."
Mr. Krugman, an influential author and Nobel Laureate, expressed grave concern that the world economy is "drifting" along with high unemployment rates and low consumer spending instead of steadily recovering.
He said that prospects for the U.S. economy are dismal: "I don't see when it will end."
"Interest rates are as low as they can go, yet the economy is depressed," he said. "This is a very weird place to be. … When everyone decides that they want to save more and spend less, the economy shrinks. And when the economy shrinks, businesses see even less reason to invest and so investment falls."
He said that interest rates are getting so low that it will soon be impossible for central governments to use them as a lever to stimulate borrowing and spending.
"The traditional response has run out of ammunition. It's about as low as you can go," Mr. Krugman said. "So we have depressed economies that need a solution."
At the same time, Mr. Krugman heaped praise on Canada's tight system of regulating banks and consumer debt, as well as its generous social safety net for insulating Canadians from the current recession.
By all rights, the Canadian economy would have been expected to be sucked into the vortex, yet it "was spared the real horror. There is now a level of trust in the system."
The Canadian economy also benefited from the fact that the country has its own currency. "The U.S. dollar soared against every other currency [in the 2008 crisis] which meant that during those really, really awful months when the world was coming apart at the seams, Canadian industry suddenly became much more cost effective.
"Canada is an example of the virtues of a relatively traditional approach to regulation," Mr. Krugman said. "Canada is also in a position to maintain itself competitively on costs; to pursue a relatively independent monetary and fiscal policy, even though it sits next door to a much, much larger economy that's in trouble."
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