Only one way to go! Up!

For decades governments have been telling us about the evils of government debt and deficits only to find out that the most dangerous debt to our long-term prosperity and economic growth is personal debt.
Moody’s credit rating service downgraded all six of our big banks this past week because of our record high debt levels, the red hot housing market and mortgages being our bank’s primary collateral.
For years, Canadians were some of the best savers in the world with a $0.98 debt for every dollar of income. But today we are dismal savers with a debt of $1.67 for every dollar of income. Individual defaults on loans are often less than a one percentage point increase away.
It surely doesn’t help either that our non-prime mortgage lenders are in trouble. Home Capital on April 30 would have gone under without a last minute $2 billion line of credit.
In early, May the big six banks extended a $2 billion line of credit to another non-prime lender, Equitable Group, to keep it solvent.
We’re starting to look an awful lot like the United States prior to its massive housing collapse.
Like the United States it will be home owners and indebted individuals who will have their lives turned upside down, it won’t be the Bay Street boys.
When banks go belly up, it’s the taxpayer-funded, Canada Deposit Insurance Corporation, that insures deposits. In turn a large percentage of mortgage defaults are backed by the federal government through the Canada Mortgage and Housing Corporation.
Then there are the social costs that skyrocket when people lose their homes and livelihood all of which is paid for by governments.
The Bank of Canada under Mark Carney and subsequent governors failed Canadians. Their monetary policies always stressed keeping inflation rates below two per cent, yet took so little regard for the long-term consequences of low interest rates that encouraged debt-induced consumerism and the purchase of too-much house for so many families.
But now the chickens are coming home to roost. Building economic growth on personal debt, which is what we’ve done the last 30 years, was foolhardy and will be destructive for many families.
People with a large debt load would be well advised to radically change up their personal finances and get their debt to savings ratio back to a sustainable level.
When banks have their credit ratings downgraded, consumer and mortgage interest rates will only go one way, up.

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ECA Review

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