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Debt is not Bad, just too Much of a Good Thing

28 May 2012

Just this morning we talked about how sometimes, debt can be a good thing – despite all the warnings from the Bank of Canada and the federal government telling us to stop taking on Ottawa mortgages and second mortgages. But is all debt really that bad? We already know it’s not, and that some type of debt is definitely “good” debt because it helps you in your financial future. But CIBC deputy chief economist Benjamin Tal says, it’s time to stop seeing debt as the end of us, and start changing the way we think about it.

Mr. Tal aptly points out that without debt, it would be extremely difficult to keep our economy churning and that people will probably always need to borrow from the future to get something they need today. This is a sound strategy, says Mr. Tal, and one that’s extremely important. But, he also warns, we are not to overdo it.

“There is nothing wrong with the concept, debt is not a four-letter word,” says Mr. Tal. “You draw the line when you cannot afford it and you are too sensitive to interest rates. What we have seen is you take a good thing, make it too much of a good thing and it becomes bad.”

But while these remarks from the chief economist might not shock anyone, his next comments might. Mr. Tal also went on to say that there’s nothing wrong with a sub-prime mortgage market – something that sunk the United States during the recession of 2008, and something that is now nearly non-existent in Canada. Again, it’s all a matter of balance. He says that while the States could have handled a sub-prime market that covered five per cent of the mortgage market, “At 30 per cent, it’s a problem.” And that’s just about where the States sat, if not a bit higher and where Canada could be hired.

And Mr. Tal’s not the only one that thinks Canadians need to find a delicate balance between just enough debt, and too much. Jeffrey Schwartz, executive director of Consolidated Credit Counseling Services of Canada Inc. also touched on the subject of whether or not people should take on more debt. He says, “The easy answer to that question is when it is going to improve your financial situation. There is a huge disclaimer or caveat and that’s only if you can handle it and use it wisely. If there’s a sense you can’t handle additional debt, then don’t.”

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