Canada's banks are fine, but that's not the problem

credit crisis canada debt level record high twoPaul Krugman says the lessons of the 2008 crash should be cause for Canada to worry.

When economists and government officials tried to fix the 2008 crash, there was a rush to fix a broken banking system and avoiding a complete credit freeze. The banks were stabilized but the economy remained depressed due to the ". . . broader effects of the collapsed housing and the overhang of private debt."

Debt levels in the US have been falling, notes Krugman, but in Canada debt levels are going the other way.

Nearly one-third of Canadian households are not accumulating any wealth. They are spending money rather than building any sort of nest egg. Canadian debt levels are at a record high, according to the credit bureau TransUnion.

So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

I’m not exactly making a prediction here; but I guess I believe in the debt overhang story enough to be worried, and Canada is certainly an important test case.

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