This was reflected in the high persona bankruptcy filings in both United States

This was reflected in the high persona bankruptcy

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dn’t have equity to fall back on. This was reflected in the high personal bankruptcy filings in both United States and Canada, where there were about 2.7 filing per thousand in 2003 versus about 8 filings per thousand in the United States. Meanwhile, the U.S. had a non-trivial number of low-income borrowers prior to the crisis that were not servicing debt. Table 7 below depicts two different measures of the debt to income ratios (Canadian average debt to average income vs American aggregate debt to aggregate family income). These minor discrepancies in the depiction of data is mainly because of the unavailability of the exact matching series in the U.S data, and while the levels are different, we are more interested in how these levels changed over time. As shown by the breakdown of the debt distribution in Table 7 below, even though the U.S. debt to income ratio is higher than the Canadian ratio in every income class, the debt to income ratio of the lowest income class in the U.S is shockingly high. This is because these mortgages were issued primarily to low income borrowers without performing any test of ability to repay. Some of these mortgages did not even require payments for a year or more. Interest owing was accumulated and was to be paid in future. The assumption that house prices would keep rising was the basis for most of these pseudo loans. This kind of reckless lending seems to fit nicely with Setterfield’s scenario of consumption first then debt servicing, second.
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83 Table 7: Canada Av. Debt to Average Income Ratio U.S Aggregate Debt to Family Income Ratio Year 1999 2005 2012 Year 1998 2004 2010 All Quintiles 1.08 1.32 1.72 Lowest Income Quintile 1.54 1.97 1.92 Lowest Income Quintile (20%) 18.8 18.2 23.5 Second Income Quintile 1.66 1.93 2.77 Second Income Quintile (40%) 16.6 16.7 16.9 Middle Income Quintile 1.74 2.15 2.73 Middle Income Quintile (60%) 18.7 19.4 19.5 Fourth Income Quintile 1.09 1.4 1.7 Fourth Income Quintile (80%) 19.1 18.6 19.3 Highest Income Quintile 0.67 0.76 1.11 Highest Income Quintile (80%-90%) 16.8 17.4 18.0 Highest Income Quintile (90%- 100%) 10.3 9.3 9.4 SOURCE: FEDERAL RESERVE SURVEY OF CONSUMER FINANCE AND STATS CANADA (CANSIM TABLE # 202-0701 & 205- 0003) AND AUTHOR’S OWN CALCULATIONS Since income inequality was and still is greater in the U.S. than in Canada, one could surmise that wage-led growth may be relatively more important in Canada while profit-led growth was more important in the U.S., especially that Canada's housing 0 5 10 15 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Percent SOURCE: STATISTICS CANADA (CANSIM TABLE # 380-0061) AND FEDERAL RESERVE ECONOMIC DATA (FRED; TDSP) AND AUTHOR'S OWN CALCULATIONS Figure 23: Seasonally Adjusted Debt Servicing Payment as Percent of Personal Disposable Income U.S Canada
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84 sector survived the crash as did Canada's banks. We keep hearing from market analysts that Canadian debt is too high, yet no problems have arisen. Canada's main economic problems, it is commonly argued, are currently due to low resource prices, and surprisingly despite these low resource prices, we do not hear of large-scale financial distress. That is not true for some other resource-exporting nations.
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