[Dion]

Nobel prize winning economist Paul Krugman has served notice that Canada may be experiencing a housing and debt bubble.

In a new post on his New York Times blog, Krugman said what’s going on in Canada could be a litmus test for what causes deep recessions and slow recoveries, the type that has plagued the U.S. economy for the past four years.

Krugman explains most economists initially considered the 2009 recession to be the simple byproduct of the financial crisis. Stabilize the banks, the thinking went, and it would all solve itself.

“Yet the economy remained depressed [even after banks were stabilized in the U.S.],” he writes. “As a result, many economists — myself included — turned to a view that stressed nonbanking issues, especially the broader effects of the collapsed housing and the overhang of private debt.”

That’s where Canada functions as a potential case study. Our household debt and home prices keep trending to unnervingly higher levels. At the same time, our banks are viewed as well regulated and conservative in their capital structures — they’re “boring,” as Krugman points out.

In the past, those boring banks would have led Krugman to rest easy about Canada’s household debt and housing. But the non-financial view undermines that.

“Canada ought to be quite vulnerable to a big deleveraging shock,” he writes.

http://www.vancouversun.com/business...490/story.html