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Finance Minister Jim Flaherty (GEOFF ROBINS/Geoff Robins/Reuters)
Finance Minister Jim Flaherty (GEOFF ROBINS/Geoff Robins/Reuters)

It's time for Ottawa to crack the whip on borrowers Add to ...

It's time for an intervention.



Canadians are unable to shake their enslavement to debt, and our banks are unable to stop themselves from supplying the goods. Warnings to stop living beyond our means from mom and dad, in the form of Bank of Canada Governor Mark Carney, aren't making much of an impression.



Finance Minister Jim Flaherty, help us to help ourselves.



Clearly, we need it. We now owe more per person in consumer debt than those credit-crazy types south of the border who helped bring the global economy to its knees.



Canadian households are in hock to banks, credit card lenders and consumer lenders to the tune of 148.1 per cent of their personal disposable income, while in the United States the tally now is 147.2 per cent. To be fair, the U.S. ratio peaked at 162 per cent before Americans actually started saving when the recession hit, so we have a ways to go before we can truly lay claim to the title of champions of reckless borrowing. Give us time though. On the current trajectory we are only a couple of years away.



Mr. Carney has been hectoring Canadians for months to ease up on the borrowing, amping up the rhetoric in a speech on Monday to say that households are so stretched that they are vulnerable to an economic shock and that "this vulnerability is rising more quickly than had been previously anticipated."



Even the banks want to stop lending to us consumers at a breakneck pace that is endangering our national financial welfare, they really do. We know because they tell us so. From Gordon Nixon of Royal Bank of Canada, to Ed Clark of Toronto-Dominion Bank, to William Downe of Bank of Montreal, chief executives of big banks are all on the record with some version of the same refrain: Something needs to be done to slow the growth in consumer debt.



So who can do it? The banks, you say? They could just turn down customers seeking loans more often. It's not going to happen. Saying no would make the banks the bad guys. Plus, the bank executives are wont to point out, probably rightly, that competitive pressures mean that even if one says no, another will probably say yes.



Mr. Carney? After all, he's the guy who's handing out nearly free money by keeping interest rates low, then turning around and asking us not to take it.



He could raise rates, to put the price of money where his mouth is. But it's hard to justify increasing borrowing costs to slow only one sector of the economy - consumption - when areas such as business investment still need some help. That's especially true given that economic growth is faltering, registering an anemic 1-per-cent annualized reading in the third quarter. Mr. Carney is also bound by a mandate to focus on inflation, which is pretty close to the central bank's target. Most economists expect nothing from him on the rate front before spring.



That leaves Mr. Flaherty and the federal government on the hook once again.



Ottawa has the tools to do something targeted by setting the rules for mortgages, through its market-dominating insurer, Canada Mortgage and Housing Corp. It used those tools sparingly earlier this year, tightening mortgage rules to eliminate 40-year amortizations and toughen up qualifying standards for home loans. Although the central bank said on Monday that those "are beginning to have an impact," the numbers on household debt show there's clearly room for more action.



TD's Mr. Clark has suggested tightening amortizations more, perhaps back to 25 years, or mandating bigger down payments. Policy makers could also seek ways to encourage the use of locked-in rates rather than floating rates. Locked-in rates are generally higher than floaters, limiting the size of a mortgage and increasing the predictability of payments.



Another option is to further limit home equity withdrawals. The government took a small step down that path earlier this year, but Canadians are still going the wrong way on home equity, even in a market where housing prices have been rising in many cities. The percentage of equity in Canadian homes is down to the lowest level since 2001.



There are risks to making such changes. House prices could stall or even decline. Some Canadians might not be able to afford their dream home right away, or the goodies to fill it. There will no doubt be anger from some in housing-related businesses. But none of those risks comes close to what befell countries that let borrowing get out of control.

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