Panicking in the face of crisis would devastate Canadian economy: Flaherty

By Kevin Bissett, The Canadian Press

SAINT JOHN, N.B. - Finance Minister Jim Flaherty says panicking in the face of the global economic crisis would be "devastating" for Canada.

In a speech Friday to the Saint John Board of Trade, Flaherty said the depth of the recession can be seen in the United States.

"This is nothing of course to be happy about, this is a very unfortunate tragedy in the American economy," he said.

But Flaherty said Canada is better positioned to cope with the global economic crisis than other countries, including the U.S.

Flaherty, who's visiting New Brunswick for the launch of his pre-budget consultations, says acting too quickly and making the wrong choices would not help Canadian families or businesses.

"We know what we are up against - worldwide economic slowdown, volatility in financial markets, sharp drop in commodity prices - we are living in extraordinary times," he said.

"We also know that panicking and making the wrong choices would be devastating for the Canadian economy."

Flaherty's comments come after the collapse in the U.S. Senate of the bailout package for Detroit's struggling Big Three automakers.

Flaherty described the situation in the car industry as changing on a daily basis and noted that next month the U.S. administration switches to the Democrats when Barack Obama becomes president.

"We'll continue to stay close to the situation there and continue the discussions with the industry here," he told a news conference.

The minister warns dealing with the economic downturn "is not a sprint" and requires thoughtful consideration and consultation from both the federal and provincial governments.

After the speech, Derek Oland, chairman of the board for Moosehead Breweries, warned there is a need for action from Flaherty to ease the economic pain that is coming.

"Despite the fact that he says Canada is in the best shape, we are going to go through some very tough times and he has to realize that despite some of the good news he talked about that they've done, they are going to have to do more," he told CHSJ radio.

Oland said Flaherty has to pressure the banks to ensure businesses are able to get the money they need to start new projects or keep existing enterprises going.

"The banks aren't flush with cash for people and developers. People need money, they need banking, they need loans and advances to get these projects going," he said.

"I hope that he and his department and others keep the pressure on the banks to make sure that liquidity does continue."

Flaherty later played down a report from the Bank of Canada that says a significant number of Canadians are at risk of defaulting on mortgages and other loans if the global financial crisis deteriorates and triggers a deeper recession.

In the housing market, Canada does not have a large sub-prime mortgage sector like the United States, he told reporters.

Flaherty said the federal government has lengthened amortization periods and requires minimum down payments on higher risk mortgages that are backed by government agencies to avoid problems in that sector of the financial market.

But the central bank says the number of "vulnerable households" - the three per cent with a debt-to-income ratio above 40 per cent - could double by the end of next year under a worst-case scenario if the economy continues to falter. That would mean tens of thousands of households could face crushing debt as Canadians lose jobs and family incomes drop to the point where they can't pay their bills.

Flaherty said the federal government is listening to a range of economic opinions on a financial stimulus package, but he didn't give any specifics on the approach he will take.

"There is no uniformity of opinion by various economists," he said.

He said he is meeting his provincial counterparts in Saskatchewan next week and the Liberal finance critics on Monday in Toronto.

The Bank of Montreal says Ottawa should move decisively on a fiscal stimulus package of as much as $16 billion next year to arrest the economy's slide into recession, but Flaherty wouldn't say if he is ready to commit the government to that kind of spending.

Flaherty said he will avoid spending that leads to permanent deficits.

"We are not going back to the '70s, to when Canada ran permanent program deficits," he said.

"Whatever additional stimulus is provided will be finite. So that as the economy recovers, the deficits disappear and we will have balanced budgets automatically as we go forward with economic growth."

Flaherty said he believes spending on infrastructure is a good way to stimulate the economy.

"But it needs to be fast," he added. "That is, we have to get from here's the money, to here's the project, to here's the shovel in the ground, because that's what creates the economic activity, that's what creates the employment."