Today is federal Election Day in Canada. Surprisingly, mortgage investors at the Toronto Stock Exchange did not wait to find out the results before celebrating financial plans made by G7 representatives over our Thanksgiving weekend. The TSX is already up 12% this morning (1096.34 points). The S&P 500 and the Dow have also made gains.
Canadian federal Finance Minister Jim Flaherty was one of the planners seeking to lessen the effects of the U.S. mortgage market meltdown uncovered in August and September. However, his approach was much more restrained than that of other finance ministers. Flaherty assisted Canadian banks with $25 billion. Yesterday, the U.S., U.K. , Australia, New Zealand, and 15 European governments made substantial investments in their countries’ banking sectors, including guaranteeing deposits and mortgage debts – the equivalent of hundreds of billions of Canadian dollars. Investors feel more secure knowing a government guarantees their investments, and will flock to a country offering this security.
Hence, foreign banks may find it less expensive and easier than Canadian banks to raise money to lend to consumers seeking mortgages and credit.
The strong government guarantees offered by foreign governments are called regulatory arbitrage, and they are likely to make investors invest outside of Canada. Our federal Finance Minister Flaherty may have to bow to market forces and extend more help to the banks than the $25 billion he announced last week, which the banks claim is too little.
Otherwise, Canada may find itself like Australia, where Prime Minister Kevin Rudd resisted calls to invest in its banks, and Australia subsequently lost investments. Mr. Flaherty had a problem explaining to Canadian voters why he should prop up Canadian banks with tax money, when the banks already had good financial performance and high profits. Perhaps he would have been quicker to follow suit with other world governments if this mortgage crisis had occurred earlier in his term of office.
A Dalhousie University economics professor told CTV’s Kate Wheeler on Thanksgiving Day that it will probably take a year for Canadian markets to recover from the American mortgage crisis, providing there are no further repercussions forthcoming. Looks like we may be in for a recession, but it won’t be as deep as originally feared. No matter which leader inherits Stephen Harper’s chair, he or she will have an easier economic time than expected because the Canadian mortgage system has good underpinnings
