Recession of 2008–09 in CanadaThe global financial crisis that began in 2007 draggedmost of the world economy into recession, and unfortunately us, Canada was oneof the countries that was dragged into this storm.

Although the Recession’s impacton Canada were less severe than its neighbor south of the borderline, or theEuropean countries, the Canadian recession of 2009 was still impactful enoughto cause steep declines in export ,GDP, and employment.  Significant responses were taken by ourCanadian policy-makers. But what did they do to weaken and blunt the force ofimpact of the recession on Canada? To answer this question, we must first lookinto the 2008 Global Recession itself. While there are many underlyingcauses that may have started the global recession, it is most commonlyacknowledged that the global financial crisis was triggered by the rise andcollapse of United States housing prices during the start of the 21stcentury. The Recession of 2001 in the USmotivated the US Federal Reserve to reduced interest rates as a purchasing power booster. Households cannow carry a bigger amount of debt, leaving them extra money to spenddomestically, and so the demand for housing in the States increased. The resulting increasein prices from the rise in demand stimulated construction of housing and basic infrastructure, and thejobs created by the growth in the housing market really helped the US get outof their recession in 2001.

.The housing market is well-known for its cycle ofbubbling and bursting, and it became obvious around 2005 that US housing marketis experiencing the growth of a nasty bubble. US investors were make purchasesbased on the expectation of the house being able to sell at a higher price inthe future, and not on the actual worth of the land, materials and labor costUS housing prices finally peaked in early 2006.Activity in the housing sector slowed, and the US economy began to undertake atransition of investment and employment to other sectors. This transition would start off a brutal recession starting from the coldmonth of December in 2007One contributor was the collapse in the mortgage underwriting standard: an increasing share ofloans was made to high-risk borrowers who did not have the real ability to actuallypay the loan back but planning on selling the house with the debt at a higher pricein the future. When housing prices fell eventually, these “sub-prime” mortgageswere 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 intodefault. It soon became apparent to financial institutions and other investorsthat many of the supposedly “safe” mortgage-based assets were worth much lessthan their book values.

Financial market liquidity dried up as institutionsbecame less willing to make loans, out of fear that the loan takers mightgo bankrupt, just like the American home owners. These fears weremade into a real nightmare with the collapse of Lehman Brothers in September2008, which is the fourth-largest US investment bank.Transmissionto CanadaThe US financial crisis in the fall of 2008 affectedglobal financial markets, and Canada was not lucky enough to avoid its devastation.

The financial crisis caused the price of oil and other Canadian naturalresource exports to collapse, further hurting the economy and compounding theimpact of the financial crisis. Was not long until the Canadian economy fellinto recession in October 2008 The immediate priority ofpolicy-makers in the United States and other countries was to deal with insolventbanks and financial institutions. Financial institutions play a key role inthe economy, and governments acted to minimize the disruptionscaused by bank failures. Banks were making reckless decisions in investmentsbecause they realized that even if they were not actually “too big to fail”, becauseof 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’sregulatory bank policies prevented them from engaging in the sort of riskybehavior observed elsewhere in the world, especially compared to the US. Canadianbanks were obliged to maintain lower debt-to-equity ratios than most of theircounterparts abroad: Highly leveraged banks are more vulnerable to negativeshocks to the value of their assets.

Instead, the immediate priority of Canadianpolicy-makers was to restore stability and liquidity to financial markets. Inaddition to convincing investors to accept short term loses by coming up withinvesting incentives, Programs such as the IMPP (Insured Mortgage PurchaseProgram) allowed banks to exchange illiquid mortgage assets for Canadian Mortgage and HousingCorporation (CMHC) bonds.   This exchange did not affect thegovernment’s risk exposure to the mortgage market: only mortgages that werealready insured by the government were eligible for the Insured MortgagePurchase Program.When the Lehman Brothers failed and went bankrupted, itwas 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 ratewas 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 didnot see fit to engage in quantitative easing.  Quantitative easing is theunconventional monetarypolicy whereby a central bank buys government securities, or othersecurities, in order to lower interestrates 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 tocontinue operations.

GM, on the other hand, was “too big to fail.” The riskof a brutal collapse of GM’s network of associated industries forcedgovernments in the United States and Ontario to take an equity stake in GM. GM immediatelyrestructured, and thanks to the injection of money from the governments, dailyoperations was sustained.  The federal government of USA and the government of Ontario sold the last of their GM holdings in 2015.

The efforts of Canadianpolicy-makers were not the only — or even the most important — factors drivingthe eventual recovery from recession. The Canadian dollar had been trading near par with the US dollar inmid-2008, but it depreciated sharply as the crisis deepened. By March 2009, theCanadian 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 ofthe Chinese economy during the global financial crisis, whichsupported a recovery in the price of oil and other resource commodities. Recovery was slower in the United States and inEurope, and the sluggish growth of the world economy acted as a drag onCanadian economic growth after 2011.

The Bank of Canada and the other “Big Six” banks were responsibleto keep their monetary interest rates at low levels all the way up to last year as inflation remained weak.

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