Andrew Willis: Containing the fallout from the U.S. mortgage mess

Money Talks is a collection of daily columns from The Business Network, which airs weekday mornings on CBC Radio One at 5:45 a.m. ET (6:15 a.m. ET in N.L.).

By Andrew Willis, a columnist with the Globe and Mail
(Listen to the original audio)

You knew this credit crisis was getting serious when economists started comparing what's happening today, in U.S. housing and banking, to what happened back in the Great Depression.

As students of financial history know, the American government made the depression far worse than it had to be. Ben Bernanke - the head of the U.S. Federal Reserve - joked about this in a speech back in 2002. He said the Fed was very sorry for turning a reccession into a depression. and they wouldn't do it again.

Now, that line is no longer a joke. The Americans are throwing everything they've got into propping up Wall Street. The risk is that the failure of one bank - Bear Stearns, for example - would quickly cause the failure of other banks, around the world.

A compete financial crash was, of course, part of the depression in the 1930s.

So Bear Stearns gets rescued. And it now looks like the banking system isn't going to collapse. All good.

Think back to the dirty 30s. The depression wasn't really about banks falling apart. It was about millions of average citizens, losing their jobs and their homes.

This credit crunch is rooted in millions of Americans who own homes that they can't pay for - houses that are worth far less than the mortgages they carry.

That's the final leg of this credit crisis. American politicians seem to have bailed out Wall Street. Now they have to figure out how to deal with Main Street's problems, at a time when they've all but maxed out the country's ability to borrow. Watch for a moritorium on foreclosurers as a starting point.

Canadians can take some comfort from the fact that our banks are well capitalized, and our housing market far more sound.

But don't be complacent. If the Americans can't get the mortgage mess sorted out, the social and financial fallout will be very ugly.

-- For the Business Network, I'm Andrew Willis in Toronto

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