Recession of 2008–09 in Canada
The global financial crisis that began in 2007 dragged
most of the world economy into recession, and unfortunately us, Canada was one
of the countries that was dragged into this storm. Although the Recession’s impact
on Canada were less severe than its neighbor south of the borderline, or the
European countries, the Canadian recession of 2009 was still impactful enough
to cause steep declines in export ,GDP, and employment. Significant responses were taken by our
Canadian policy-makers. But what did they do to weaken and blunt the force of
impact of the recession on Canada? To answer this question, we must first look
into the 2008 Global Recession itself.
While there are many underlying
causes that may have started the global recession, it is most commonly
acknowledged that the global financial crisis was triggered by the rise and
collapse of United States housing prices during the start of the 21st
The Recession of 2001 in the US
motivated the US Federal Reserve to reduced interest rates as a purchasing power booster. Households can
now carry a bigger amount of debt, leaving them extra money to spend
domestically, and so the demand for housing in the States increased. The resulting increase
in prices from the rise in demand stimulated construction of housing and basic infrastructure, and the
jobs created by the growth in the housing market really helped the US get out
of their recession in 2001.
The housing market is well-known for its cycle of
bubbling and bursting, and it became obvious around 2005 that US housing market
is experiencing the growth of a nasty bubble. US investors were make purchases
based on the expectation of the house being able to sell at a higher price in
the future, and not on the actual worth of the land, materials and labor cost
US housing prices finally peaked in early 2006.
Activity in the housing sector slowed, and the US economy began to undertake a
transition of investment and employment to other sectors. This transition would start off a brutal recession starting from the cold
month of December in 2007
One contributor was the collapse in the mortgage underwriting standard: an increasing share of
loans was made to high-risk borrowers who did not have the real ability to actually
pay the loan back but planning on selling the house with the debt at a higher price
in the future. When housing prices fell eventually, these “sub-prime” mortgages
were more likely to go into default.
The price bubble for housing in the state finally burst,
homeowners’ mortgage debts exceeded the value of their homes and went into
default. It soon became apparent to financial institutions and other investors
that many of the supposedly “safe” mortgage-based assets were worth much less
than their book values. Financial market liquidity dried up as institutions
became less willing to make loans, out of fear that the loan takers might
go bankrupt, just like the American home owners. These fears were
made into a real nightmare with the collapse of Lehman Brothers in September
2008, which is the fourth-largest US investment bank.
The US financial crisis in the fall of 2008 affected
global financial markets, and Canada was not lucky enough to avoid its devastation.
The financial crisis caused the price of oil and other Canadian natural
resource exports to collapse, further hurting the economy and compounding the
impact of the financial crisis. Was not long until the Canadian economy fell
into recession in October 2008
The immediate priority of
policy-makers in the United States and other countries was to deal with insolvent
banks and financial institutions. Financial institutions play a key role in
the economy, and governments acted to minimize the disruptions
caused by bank failures. Banks were making reckless decisions in investments
because they realized that even if they were not actually “too big to fail”, because
of the size and importance of their institution to a countries general stability,
that governments would be forced to bail them out if they were ever in trouble.
Canadian policy-makers were spared this problem.
Though all of the “Big Six” chartered banks — Toronto-Dominion Bank, Royal Bank of Canada, Bank of Montreal, Canadian Imperial Bank of Commerce, Bank of Nova Scotia and National Bank of Canada— were considered “too big to fail,” Canada’s
regulatory bank policies prevented them from engaging in the sort of risky
behavior observed elsewhere in the world, especially compared to the US. Canadian
banks were obliged to maintain lower debt-to-equity ratios than most of their
counterparts abroad: Highly leveraged banks are more vulnerable to negative
shocks to the value of their assets.
Instead, the immediate priority of Canadian
policy-makers was to restore stability and liquidity to financial markets. In
addition to convincing investors to accept short term loses by coming up with
investing incentives, Programs such as the IMPP (Insured Mortgage Purchase
Program) allowed banks to exchange illiquid mortgage assets for Canadian Mortgage and Housing
Corporation (CMHC) bonds. This exchange did not affect the
government’s risk exposure to the mortgage market: only mortgages that were
already insured by the government were eligible for the Insured Mortgage
When the Lehman Brothers failed and went bankrupted, it
was clear to policy makers the scale and severity of the financial crisis. The Bank of Canada — joined by other leading central banks —
reduced its target overnight rate from 3% to 2.5% On October 8th, 2008.
This action was followed by a series of rate cuts until the Bank’s policy rate
was reduced to its lower bound of 0.25 per cent on 21 April 2009.
Unlike in the US and the UK, the Bank of Canada did
not see fit to engage in quantitative easing. Quantitative easing is the
policy whereby a central bank buys government securities, or other
securities, in order to lower interest
rates and increase the money supply.
The North American auto sector was troubled and in decline even before 2008,
and the recession pushed General Motors (GM) and Chrysler into bankruptcy (Ford was able to withstand the crisis).
Chrysler was eventually purchased by the Italian automaker Fiat and was able to
GM, on the other hand, was “too big to fail.” The risk
of a brutal collapse of GM’s network of associated industries forced
governments in the United States and Ontario to take an equity stake in GM. GM immediately
restructured, and thanks to the injection of money from the governments, daily
operations was sustained. The federal government of USA and the government of Ontario sold the last of their GM holdings in 2015.
The efforts of Canadian
policy-makers were not the only — or even the most important — factors driving
the eventual recovery from recession. The Canadian dollar had been trading near par with the US dollar in
mid-2008, but it depreciated sharply as the crisis deepened. By March 2009, the
Canadian dollar had depreciated by more than 20 per cent, to less than US$0.80.
This depreciation encouraged Canadian exports
A more decisive factor was the continued strength of
the Chinese economy during the global financial crisis, which
supported a recovery in the price of oil and other resource commodities.
Recovery was slower in the United States and in
Europe, and the sluggish growth of the world economy acted as a drag on
Canadian economic growth after 2011. The Bank of Canada and the other “Big Six” banks were responsible
to keep their monetary interest rates at low levels all the way up to last year as inflation remained weak.