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Lessons from the Great Recession

By Derek DeCloet, Globe and Mail
July 04, 2009

Looking back, the first week of July, 2008, was the last act in a boom without precedent.

For 17 years, Canada's economy had been in expansion mode – an uninterrupted streak of growth, vanishing deficits, prosperity and wealth creation on a huge scale, especially in the West. By last July, in the streets of downtown Calgary, the richest city in the richest province, you could feel the optimism and see the prosperity in the bustling restaurants and party tents of Stampede.

That the United States was already in recession, that lenders were making foreclosure filings on the homes of a quarter of a million Americans every month, appeared to some people to be barely more relevant than, say, a monsoon in India – the kind of thing you read about and quickly forget because it doesn't affect your life. The TSX composite had smashed through 15,000 to a new record, and if that wasn't a sign that our economic fortunes no longer moved in lockstep with the United States, then the price of oil, at around $140 (U.S.) a barrel, surely was.

It took some experience to see trouble coming. Jim Davidson did. “I don't think the world can sustain $150, $170 oil,” warned the veteran financier and chief executive officer of FirstEnergy Capital Corp. “We understand that we're in a bubble here.” That was July 10, 2008. He didn't know it – no one did – but a historic crash had already begun for oil, natural gas and every other commodity of importance to the country's vast resources industry. The Canadian recession was under way.

Today, Mr. Davidson isn't sure whether his remarks were prescient or lucky. But one thing he's quite sure of is that the recession has proved the world to be far more interconnected than was believed by the cheerleaders who thought India, China and Europe would keep the global economy moving, even as the United States choked and sputtered on trillions of dollars of excess consumer debt.

“We got a licking and we probably deserved it,” he says. “But we'll survive.”

That could be the country's mantra after year one of the Great Recession. We got a licking. But we'll survive. And maybe we've learned a thing or two – like to be wary of economists and investment strategists peddling bogus theories that America's problems are isolated and don't matter so much to the rest of the world.

“I think we found out in the past year that there was a lot less to this global decoupling view than met the eye,” says David Rosenberg, the star economist from Merrill Lynch who recently returned to Canada to join Gluskin Sheff + Associates in Toronto. “Whether it was housing or autos or commodities, everything that was cyclical – and remember that Canada is a play on the global economic cycle – was linked in some form to the credit expansion.”

For investors, some of the most important lessons of the recession were simply the ones that had been lost and forgotten after six years of excellent gains. Prices – of stocks, houses, oil, corporate bonds – can go down as well as up. If you can't understand an investment, it may be because the sellers don't want you to understand it. Even if you think you understand the risks, you still can get sideswiped. Who would have thought a year ago, amid all the talk of energy scarcity, that there would be such a surplus of natural gas that the price could drop 75 per cent, or that a big-name stock like EnCana's could be carved in half in the space of four months?

The crash ate such a hole in Alberta's finances, which are more dependent on royalties from gas than oil, that the province broke a string of 15 years of surpluses (and now projects a deficit of nearly $5-billion this year). Lesson delivered: Government finances are more vulnerable than many of us realized.

The bigger surprise is that the torrent of red ink is greeted with little more than a shrug. In Ottawa, the same Finance Minister who vowed to never put Canada back into deficit stepped into a media scrum and casually announced a $50-billion deficit – and there's not much real debate on the subject. Like the famous line attributed to Richard Nixon, we are all Keynesians now.

That, too, has been a recession eye-opener. Our political priorities are, to put it kindly, more flexible than we might care to admit. In 2007, Canadians told pollsters that their most important issue was the environment. Then the economy went sour and saving the planet didn't seem so important. In 2008, Liberals and Conservatives did everything but sign an oath in blood not to run a deficit, because that's what the voters wanted. But the votes had hardly been counted before we'd tossed aside our unshakeable belief in balanced budgets, the first time it was seriously tested.

What next? Embracing the seal hunt? Supporting bank mergers? Probably not – but the recession has at least taught us to grant a grudging respect to Canadian financial institutions. The reason so many consumers loathe our banking system is, paradoxically, the very reason to be grateful for it. It's an oligopoly that acts like one. (Stock markets and even tax rates can decline, but what never does? Bank service charges.)

Don Coxe, the investment strategist who recently left Bank of Montreal's brokerage unit, recalls the time a few years ago when he was going through U.S. customs in Ottawa before boarding a flight home to Chicago. On hearing the name of Mr. Coxe's employer, the border agent went into a tirade. “He exploded. He said, ‘Canadian banks are the worst. They charge you for everything'”

Too true. But they also insist that you put some money down and prove your income before they'll lend you $300,000 to buy a house. Or turn you down when you apply for a fifth credit card. It isn't that Canadian bankers are so brilliant. It's that they decided that the old standards for loans were just fine, thanks very much; there was no need to cast them aside and follow the likes of Washington Mutual on the road to financial disembowelment.

“This is the first downturn where it makes it look as if the Canadian business model might be better than the American,” Mr. Coxe says. “Even compared to the Swiss, we look good.”

If so, perhaps it's a quintessentially Canadian victory. Win by not losing. Create value by not destroying it. Royal Bank was the 10th most profitable bank in the world last year; it earned more than every U.S. bank. And what is Gord Nixon's genius? He resisted the pressure to spend big on a major acquisition in the eastern U.S. before the credit bubble had deflated. He saved the money.

Canadian bankers are not alone in proving the virtue of thrift. Though many Canadian households still have too much debt, or mortgages they can't handle, we didn't overdo it the way the Americans did. In the United States, there are more vehicles than licensed drivers; about one in five U.S. families has three cars, Mr. Rosenberg says. Rates of car ownership, credit card usage and consumer indebtedness are all lower here.

“We speak the same language, we share some of the same values, we enjoy each other's company,” the economist says. “But there is a subtle cultural difference between how we approach our finances and how they do it south of the border.”

“I wouldn't say we were virtuous. But there's an old saying: ‘In the land of the blind, the one-eyed man is king.' And we were the one-eyed man.” That may be Canada's saving grace in the recovery, which is certain to be a slow one as the U.S. cleans up its “epic” debt mess, Mr. Rosenberg says.

Yes, it was quite a licking, and most of us are poorer for it. Poorer, but wiser. We'll survive.

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