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06/17/2013

Is boring Canada really 'screwed beyond all recognition?'

Paul Krugman
Paul Krugman looked at Canada's economy. And he didn't like what he saw. (Brendan McDermid /Reuters)

Noted economist Paul Krugman was in Toronto last weekend receiving an honourary degree from the University of Toronto.

While here, he eyeballed the Canadian economy and he didn’t much like what he saw. Mind you, Krugman, a Nobel prize-winning columnist at the New York Times, could be called a tough crowd. But are things as really as bad as what he said?

Are our boring banks actually just plain stupid and have they missed the warning signs of a housing bubble about to burst? Did they lend too much money to people who can’t pay it back – like the banks did in the U.S.?

Krugman isn’t the only one predicting Canada’s downfall. On Monday, Business Insider Political Editor Josh Barro posted this blog: “Canada is Doomed: Three signs the country is screwed beyond all recognition.”

Sure, we have a few political issues that challenge the democratic process. Toronto Mayor Rob Ford allegedly smoked crack on video. Montreal’s mayor has just been charged with 14 offences including bribery and fraud. The RCMP is investigating the legality of a $90,000 cheque being passed from Prime Minister Stephen Harper’s former chief of staff to ex-hack Mike Duffy.

But back to Krugman.

In his recent blog, entitled “Worthwhile Canadian Comparison,” he predicted Canada will be “quite vulnerable to a big deleveraging shock despite its boring banks.”

Our housing market is due for a massive correction, both Krugman and Barro point out.

This is evident by the rising level of Canadian household debt, occurring while U.S. household debt levels are starting to decline.

I contacted an economist at one of our boring banks to see what she thought.

TD’s Diana Petramala said it is true one of the measures people use to see if there is a real estate bubble in Canada, such as the home price to income ratio, has risen sharply in the last few years. But, the rise is partly elevated because of demand in Vancouver.

For the rest of the nation, home prices have actually started to slow. In the last year, home price growth has been flat, she adds. “That’s helped improve affordability,” Petramala said.

Regarding debt levels, Krugman compared Canada to other major economies. Yes, household debt is rising here but U.S. banks loaned money to those who couldn’t afford it.

Canadian banks have been far more selective in who gets a loan and our interest rates have remained low.

All this means the Canadian housing market appears to be clearing a soft landing, with sales and prices growing at more sustainable levels than in 2010 and 2011, said Petramala.

So don’t write us off – yet.

 Tanya Talaga is the Star's global economics reporter. Follow her on Twitter @TanyaTalaga

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