A9

By James Mallory

Stumble Upon

del.icio.us

Digg

Facebook

Print

Email

Speak Up

The next few months should produce considerable turbulence in this part of the world when it comes to the financial markets, according to a senior economist with TD Bank Financial Group.

Derek Burleton said the recent United States led global financial market meltdown is a sign of dire times ahead for the U.S. and Canada.

"It's just been a very tenuous house of cards that has been toppling," said Mr. Burleton in a phone interview with The Northern Light from his Toronto office. "The view is that we're still probably about half way through and there's a lot more bad news to come. Despite this U.S. rescue package, it doesn't deal with the root of the problem which is a really weak U.S. housing market."

Last week, U.S. legislators approved a $700 billion bailout package for the American financial system in the wake of a financial market meltdown. However, Mr. Burleton said that won't be the end all, be all.

"This U.S. government rescue package which we're going to be following is not a panacea. They're talking about something like $700 billion allocated to buying some of these toxic securities. That may not be enough and of course this is a global crisis that's mainly targeted at the U.S. based banking operations."

The root of the financial carnage is linked to run-away lending bank practices in the U.S. housing market. The peak of the housing cycle was in 2006 but it wasn't until the summer of 2007 that the roots in the financial sector became well understood.

Mr. Burleton noted that the housing market hasn't even bottomed yet.

"What happened was you had...investors who were holding on to these toxic mortgages begin to panic and we've been dealing with this ever since," explained Mr. Burleton. "You've got the credit markets freezing up because nobody, none of the major banks and a lot of corporate clients that purchased these toxic assets that were tied to the housing market, they really didn't know what kind of risk there was. These assets couldn't be priced so they had to write down a lot of the debt and the write-downs got investors nervous.

Continued Mr. Burleton: "It certainly is a major cloud over hanging not just the U.S. economy but the global economy right now. Credit is the life line of many businesses and economies and when it freezes up the resulting impact can be quite dire."

Mr. Burleton said banks in the States are worse off compared to Canada but financial institutions north of the border are feeling the effects of what's taken place.

"Obviously it's having profound implications on the Canadian economy, (although) not so much through the banking sector directly because our banks are well capitalized and just a very different structure up here in Canada. We didn't have the same run away lending practices as the United States but we get hit. Some of that flows across the border because our banks are facing increased costs of funding and just shortages of funding.

"It has implications for the Canadian banks but I think it's more indirectly through the U.S. direct trade with the United States is a major concern as that economy weakens and into a lesser extent, the global economy."

For Canadians with investments in areas such as RRSP's (registered retirement savings plans), Mr. Burleton said the best thing to do is try to wait out the storm.

"The worst thing you can do is panic...You stay diversified, choose good value companies."

Mr. Burleton said people should expect the Canadian economy to suffer over the next two to three quarters. He concluded that while the situation is very concerning, it's one that Canada should be able to fight through.

"We're heading into this whole problem in reasonably good shape. We're not expecting a disaster here but certainly a period of tougher times economically than what we've been facing."