Harper says all as well on same day Bush says entire economy is in danger, financial panic possible

Merrill Lynch Canada put out a summary report today (attached) entitled "The tipping point?" which warns the housing and credit market woes being experienced in the U.S. and United Kingdom are unlikely to fully pass by Canadian shores.

I don't accept that conclusion, not at all. Stephen Harper, September 24 2008

Stephen Harper, an economist through education, but a politician by trade, says he disagrees with the Merrill Lynch warning. Of course he disagrees - he's a politician fighting the biggest battle of his career and nothing sinks a incumbent politician like economic upheaval. We've barely had a taste of the problems we shall soon face, but a heaping helping of hurt is on its way. Its only a matter of time.

That my friends is the real reason we are having this election about nothing, today, rather than next year when bleak economic conditions will be as much a part of our landscape as they are in the United States today.

Of the Merrill Lynch report Harper today said: "I don't accept that conclusion, not at all," adding "we have seen the housing market and the construction market much stronger in Canada than in the U.S."

Feel comforted by Harper's election-time soothings? Let me introduce you to the words of a far more powerful economist than Stephen Harper:

"...however fundamental factors including solid growth in incomes and relatively low mortgage rates should ultimately support the demand for housing and at this point the troubles in subprime sector seem unlikely to spill over into the broader economy or the financial system. June 2007, Ben Bernanke, Chairman of the U.S. Federal Reserve

Or how about a former Goldman Sachs CEO, now turned U.S. Treasury Secretary:

"I believe this is going to be largely contained I don't think this poses a serious risk to the overall economy" July 2007, Henry Paulson, Secretary of the U.S. Treasury

Or how about the leader of the largest economy in the world?

"I say the fundamentals of our economy are strong. I'm optimistic about our economy." September 2007, George W. Bush, President of the United States

Yes indeed, these are strong words of comfort. But what of their track record? Lets let Bush sum it up for us. This evening in an extraordinary address to the nation Bush said:

"Our entire economy is in danger ... America could slip into a financial panic." G.W. Bush, Wednesday September 24 2008

Those who follow financial markets closely and are not running for public office have been expecting and warning of the economic risks for some time. Its true that in Canada we've not seen a country-wide real estate asset bubble. But the same is also true in the United States - their real estate woes are regional in scope as are ours.

In Vancouver, for example, its hard to argue that a real estate bubble has not been forming over the past few years. Sky-rocketing listings and growing unsold inventory attest to the air being let out of our bubble.

The clear ‘tipping point’ in the US was the emergence of falling house prices in the summer of 2006, kicking off the vicious circles that have brought the financial system and the wider economy to the brink. We’re just now starting to see house prices fall in Canada, and sharp rises in unsold home inventories increasingly imply that this will not be a transitory phenomenon (see Charts 2 and 3).

Even though the problem tends to be regional in nature, when major markets experience pain, the ripple effect can be substantial. We've seen the entire U.S. economy's feet pulled out from under it by the retreating tide there.

To some degree that will happen here in Canada. Asset bubbles always correct and they always leave behind a world of pain for those who are left holding the bag.

The regional real estate bubbles, and the international commodity price bubble from which certain regions made out like bandits, have been pricked. The air is escaping. Buffeted by our own domestic economic issues and the rapidly deteriorating U.S. economic situation, it is a certainty that Canadian economic performance will suffer, not just in Vancouver but in Calgary and Edmonton and Regina and certainly in Toronto and Windsor and Montreal and elsewhere in the country. Downturns in Canada most often lag those of the U.S. This one is going to be a doozy.

Stephen Harper knows all this, but won't come clean to the Canadian public in this election, just like last year U.S. politicians were smiling and saying all is well.