To spend or not to spend - that is the question

Lana
Lana Payne
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To spend or not to spend; that is the question.

But don't expect a clear-cut answer from Canada's top banker. His advice lately has been a little mixed.

Earlier this month, Mark Carney, governor of the Bank of Canada, issued a warning to consumers. Watch out, he said, household debt is on the rise in Canada.

To spend or not to spend; that is the question.

But don't expect a clear-cut answer from Canada's top banker. His advice lately has been a little mixed.

Earlier this month, Mark Carney, governor of the Bank of Canada, issued a warning to consumers. Watch out, he said, household debt is on the rise in Canada.

According to Mr. Carney, the ratio of household debt to income is now at over 140 per cent - in other words, for every $100 in income, Canadians have over $140 in debt. That's compared with about $88 in 1990.

But it has been consumers and government stimulus that have kept the recession from being an even worse crisis.

This, of course, is Mr. Carney's dilemma. He has deliberately and necessarily kept interest rates low.

He needs Canadians to spend, including Canadian businesses. And low interest rates are needed to spur spending.

But accumulating lots of debt when interest rates are at historic lows and can go no lower may cause problems down the road for a good many Canadians.

At some point interest rates will rise - which means the cost of servicing all that household debt goes up too. And with unemployment levels expected to stay high, incomes and wages will have a tough time keeping up.

In fact, under one scenario depending on how high rates go, the Bank of Canada says nearly 10 per cent of Canadian households will fall into the "financially vulnerable" category. The financial hardship for a lot of Canadians families is not over yet and no one knows what this could mean for Canada's long-term recovery.

But that doesn't change the facts. It is this spending that is driving the economy and, without it, the economic crisis caused by the financial sector would be piling up even more casualties and creating even more problems for governments.

And while low interest rates are critical to get the business sector investing again - something it hasn't been doing much of outside of Newfoundland and Labrador and Saskatchewan, they also entice consumers.

Even though Carney is cautioning consumers, he doesn't really want them to put away their credit cards, or stop accessing loans and mortgages to buy new cars and houses. Because that would be truly disastrous to any economic recovery.

After all, Canada's economic recuperation has been fuelled mostly by consumers and government spending. The question is how long can that last? We need the private sector to do their part. And to a certain degree, the private sector has been doing just that in this province.

In Newfoundland and Labrador, private sector investment and consumer spending continued to increase in 2009, unlike in other provinces. But exports struggled in key sectors like oil and gas, fish, newsprint and minerals.

What all of this really means is the recession might be technically over, but the pain and heartache caused by the financial sector and good-old-fashioned greed will persist.

In other words, Main Street will pay for the mistakes of Wall Street and Bay Street. And while we pay, they carry on with their excess.

You'd have thought the biggest economic crisis since the Great Depression and subsequent government bailouts would have tempered their greed or at least caused a moment of embarrassment. It has not.

Not even a scolding from U.S. President Barack Obama seems to be having an impact. Last week, he told bankers in his country that they had to be part of the solution to the recovery, saying he didn't run for office to help out a bunch of fat-cat bankers.

At least he is criticizing his bankers - which is more than Canadians can say of their federal government. Although Obama has to do more than scold. He needs to develop and enforce stiffer regulations on the banking sector and it's not clear he will do what's needed.

After taking billions in taxpayers' money, even in Canada, the banks are back to rewarding their executives with excessive bonuses. Let's not forget that Ottawa floated $200 billion to Canada's banks to help them through the recession.

And now? Canada's six big banks - who have been patting themselves on their collective backs for not being as bad as their colleagues around the world - will hand out $8.3 billion in bonus pay this year, an incredible 18 per cent increase over 2008. It seems the recession has hit everyone except the bankers.

So what has changed? What lessons were learned from the biggest financial and economic mess since the 1930s?

It appears not much. The people who didn't cause the crisis will pay for it and those who made the mess are still wallowing in their big fat paycheques.

I have one question. Where's the revolution?

(On a personal note, best wishes for a Merry Christmas and Happy New Year spent with family and friends.)

Lana Payne is president of the Newfoundland and Labrador Federation of Labour. She can be reached by e-mail at lanapayne@nl.rogers.com. Her column returns Jan. 2.

Organizations: Bank of Canada, Newfoundland and Labrador Federation of Labour

Geographic location: Canada, Newfoundland and Labrador, Saskatchewan Bay Street U.S. Ottawa

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