Yale economics professor Robert Shiller said Canada’s relatively healthy economy and financial sector is largely due to luck –and that luck came in the form of a random spike in oil prices in 2008.
“It’s a major export for Canada and it went to US$140 a barrel in 2008, right when Canada needed it,” Professor Shiller said in an interview on February 8th, as reported in the Financial Post. “It seems that if the country didn’t have that boost from oil, it would have done worse than the United States.”
While Canada has been blessed with many assets and can indeed be considered lucky in many respects, Professor Shiller may need a bit of a primer on the realities of the Canadian economy.
First of all, the run-up in oil prices in 2008 came prior to, not during, the global financial collapse. Oil prices peaked in July 2008 at $US 147 per barrel, but then crashed to $US 33 by January of 2009—right in the pit of the deepest, darkest days of the global meltdown. Hardly lucky timing.
Also, the temporary run-up in oil prices did help Alberta, Saskatchewan and Newfoundland, but they actually punished the rest of the country. Not only did high oil prices drive up fuel costs for all Canadians, it drove up the value of the Canadian dollar to above par with the US dollar in the fall of 2007. That was decidedly bad luck for the huge economies of Ontario and Quebec, which account for nearly two-thirds of the country’s economic output and rely on exports to the US.
Secondly, Professor Shiller thinks that just because Canadians look like Americans, talk like Americans, and basically mimic the culture of Americans, that our housing sector must be in the same sorry mess as America’s.
“Our countries are like two peas in a pod,” he said, and from this he deduces that Canada’s housing market must crash as well. Maybe Americans think we’re like peas in a pod, but using the fruits and vegetables theme to compare our two countries, most Canadians think of apples and oranges.
Certainly Canada’s housing market has shown signs of wear and tear, and prices in some markets may yet prove to be a bit inflated. But when it comes to mortgage lending, Canada and the US are anything but peas in a pod. The American model practically badgered Americans into home ownership. Adjustable rate mortgages, sub-prime lending, and a barrage of shoddy mortgage lending practices worked to drive prices and new home construction through the roof in the period 2003-2005. And it all ended very badly.
Canadian mortgage lending practices were never this sloppy. And rules and regulations governing Canada’s banking and financial sector were always much more conservative. That not only protected homebuyers from getting carried away with mortgage debt, it kept the housing market more-or-less stable and banks solvent.
So is Canada so lucky after all? The currently high oil prices are once again giving a big boost to the resource-rich western provinces, but are driving the loonie higher and higher. In fact, the oil-pumped loonie is the biggest headache for the Canadian economy, according to the Bank of Canada. As for Canada’s housing and banking sector, both came through the recession with flying colours precisely because we didn’t borrow and lend so recklessly. Prudence, not luck.
Professor Shiller needs to learn a bit more about Canada before he writes off our economy as simply “lucky.” But then again, perhaps it takes a lucky person to see it in others. After all, Shiller is credited with foreseeing both the 1987 stock market collapse and the recent US housing market meltdown. Maybe his predictions were mere fluke as well, which would actually make him the luckiest guy in the world!