In June, it will be five years since the beginning of the Wall Street-bred financial crisis that triggered the worst global recession since the Great Depression. Only a handful of people responsible for the meltdown have felt any repercussions for their actions, despite the fact that their financial shenanigans wiped out some $12 trillion in wealth and pushed several countries like Greece and Italy to the brink of insolvency. Just ask Iceland what going bankrupt on a national scale feels like...
While some reporters have done a pretty good job digging into the root causes of the meltdown — Matt Taibi's Griftopia is a must-read in my opinion, and New York Times economist Paul Krugman has written extensively on the issue — the question of why it happened is less important to most people than the question of when it will end. Will 2012 be the year that the world gets back on its feet?
I would argue that it won't end until the economic system is fixed and all the weak regulations and loopholes that made the crisis possible are patched. Seeing some of the men responsible stripped of their wealth and prosecuted would also do a lot to bolster the confidence of the average citizen in the economic system.
I'd further argue that the global unemployment rate needs to drop and private sector wages need to recover before we can close the book on this whole sorry event — and unfortunately that may never happen in an increasingly globalized economy where jobs have never been less secure or workers more disposable. Every time you hear the words "free trade" you should cringe; most of the tariffs and regulations that have been swept away to boost trade and exports for companies and corporations were there in the first place to protect jobs, tax revenues and the environment. As an added bonus, globalism is the reason why Greece's economic troubles can drag our economy down, despite the fact that it's on the other side of the world.
Sadly, I'm guessing we're a long way away from any real recovery — although some economists who only consider the performance of stock markets have already declared the recession over. Millions of young people who took to the streets of New York, Oakland, Vancouver, etc. in 2011 as part of the "Occupy" movement would beg to differ. Despite the media's confusion about what the protesters stand for, most people get that it's all about economic justice and the fair distribution of wealth, and the fact that the banks responsible for the problems were bailed out while all the people affected were left to suffer on their own.
Looking forward to the next year, I don't think we're out of the woods yet. European Union nations will continue to be stressed by debt loads; manufacturing is expected to remain weak along with consumer demand and consumer confidences figures; and the countries that did the best in the financial crisis (including Canada) could have some major issues of their own going forward.
In Canada, we don't have the same subprime mortgage situation as the U.S., but we do have home prices that are well out of whack with inflation and tens of thousands of families that would be severely challenged if the Bank of Canada interest rate climbed by as little as a point. The golden rule is that housing costs should never exceed a third of your overall earnings, but in Canada the average ratio is already over 40 per cent as many people purchased homes at prices they could not really afford — encouraged by low interest rates that will one day go up.
Household debt is through the roof, with the average family owning 150.8 per cent more than they earn annually. Back in February 2011, the average household debt load broke $100,000 for the first time, including mortgages, car financing, credit card loads, lines of credit, etc. There are 74 million credit cards out there, more than two for every man, woman and child in this country.
Nationally, we are taking the issue seriously. A recent poll by CIBC found that paying down debt was the economic priority for a growing number of people (17 per cent in 2011, compared to 14 per cent in 2010), as well as budgeting (14 per cent) and retirement planning (11 per cent). While that's a wise choice, it's also not particularly good for the economy— while personal saving rates do need to increase significantly, the economy depends on spending to keep the gears turning.
Ideally, it should always be a balance where people save a little and splurge a little, but historically we have a tendency to believe that the good times, such as they were, will never end. Everyone is supposed to have enough in the bank to survive for six months if they lose their job, but studies suggest that most Canadians are a paycheque or two away from disaster.
Most forecasters believe that Canada and the U.S. will see some economic growth in 2012, roughly 2.3 per cent for Canada and just over three per cent for the U.S. It could be the start of a recovery, or an overstatement like other projections made in recent years. In the meantime, Canadians need to remember that the crisis isn't over yet. Be prepared — even if the economy takes off, the worst that could happen by taking a cautious approach is to finish 2012 with a little more money in the bank.