Saturday, October 11, 2008

Canada Announces Mortgage Purchase Plan During G-7 Meetings

The Star (Toronto) - Canada Backs Crisis Plans
Bloomberg - Carney, Flaherty Pledge to Act if Needed on Credit

The Canadian government has announced a C$25 billion effort for shoring up banks' liquidity. The plan will purchase mortgage-backed securities in an effort to spur Canadian banks to resume lending. The move, announced by the Canadian finance minister, comes during a series of G-7 meetings in Washington where global leaders are trying to develop a coordinated response to the increasingly global implications of the financial crisis.

Although the fundamentals of the Canadian economy have so far avoided the dramatic shocks that have occurred in the U.S., lending in Canada has been stalled and the economy is expected to go into a recession. One of the Canadian stock market indexes fell 16 percent this week. Nevertheless, some indicators of the Canadian economy remain strong. The country added 107,000 new jobs in September, a record.

The C$25 billion comes on top of an already-promised C$20 billion injection into the banking system. The $25 billion plan will purchase mortgage-backed securities that Prime Minister Harper described as solid, government-backed investments - in contrast to the risky subprime loans that the U.S. government will be guaranteeing under the $700 billion bailout plan passed last week.

The Canadian government action comes just days before party elections on October 14. The opposition Liberal leader characterized the Conservative government's action as purely political, criticizing the liquidity injection as too little, too late.

1. How is Canada's economy continuing to add new jobs in the midst of an economic downturn, especially when its biggest trade partner (U.S.) is undergoing a serious financial crisis and shedding jobs?
2. Is the Canadian government move to buy allegedly stable mortgage-backed securities more of a psychological move to encourage confidence, given that the securities are not the risky type of investments now failing in the U.S.?

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