Toxic Assets - Part One

This guest article might later be added to our Research Library. In the meantime, here it is in 2 parts (required to fit the size limitation of Forum postings).

While the article is not about student debt, it does add background context to student debt issues.Mr. Welbanks, an authority on debt in Canada, has a bio at the end of this article (Part Two).

                              Toxic Assets, The Family Home and Credit

by Douglas P. Welbanks

May 29th, 2009

Wikipedia defines toxic assets as ‘ a nontechnical term used to describe certain financial assets when their value has fallen significantly and when there is no longer a functioning market for these assets, so that they cannot be reasonably sold. ’’

Great media attention has been placed on toxic assets. So much so they have assumed the inflated role of causing the financial collapse in the US and the global recession. It is somewhat baffling that hardly anything has been said about the millions of debtors who are stuck up to their depreciated assets in what may be appropriately described as toxic debt.

One reason for this may be the focus on investor losses, high risk bonds, overzealous speculation, and the gratuitous lending practices of a wide spectrum of financial institutions (including Canadian banks) that brought the toxic realities of debt to the forefront. Something urgent had to be done to prevent the collapse of the American financial system. Generous rescue packages for lenders and a long list of financial groups were legislated and duly presented to the wounded financial giants of American finance, including General Motors and Chrysler. Occasionally, some faint reference could be heard about people, real wage-earners with families, losing their homes and how something should be done ‘to help these poor people.’

The spectre of families losing their homes is frightening. A family home normally qualifies as the largest and most significant family asset of all. Purchasing a home has a long historical past as a fundamental financial planning concept. Statistics Canada reported in a 2006 that the single most important asset for Canadians was their principal residence, which accounted for one-third of the $5.6-trillion total. The prospect of losing this central family asset contradicts the philosophy, the great promise of the ownership of private property for middle and lower income groups. The family home is at the centre of their financial universe and it is no less catastrophic for their world to collapse due to forces beyond their control, ability to plan for and ultimately to recover from.

When the credit crunch first arrived in the US in 2008 a cavalier attitude was prevalent with many commentators and pundits. They criticized and ridiculed the stupid lenders who lent to all of these unworthy, tainted borrowers who should never have been lent the money to start with. Soon after, ‘toxic assets’ became a convenient label used to leave the less than favourable impression that this was some sort of rare disease that government should fix. If you were a lender and had a toxic asset, you should try and get rid of it. Meanwhile, very little was said about job loss, the mass devaluation of middle class families’ single biggest asset, or that the wage-earning debtor was not stupid or financially irresponsible.

Today, the casualties of a deep, global recession are more conspicuous particularly
with respect to job loss in the auto sector and how this will effect a co-mingled network
of numerous, subsidiary business interests. However, only their status as workers is
highlighted. Very little is said about their role as debtors.

Over the last thirty-five years it has become commonplace to avoid public attention
to debtors and the consistent, unstoppable dependency of individuals and families upon
credit. In Canada individuals and families have been sinking into a troublesome morass
of debt for the last 35 years as the following chart illustrates:

Consumer Credit (excluding Mortgages) Statistics; source: Bank of Canada

1975 $23-billion
1985 $58-billion
1990 $98-billion
1995 $116-billion
2000 $187-billion
March 2009 $ 416-Bllion

There is much more than a mortgage payment on the list of family bills. It’s not
quite so simple to narrow everything down to toxic assets either.

In the same report in 2005 Statistics Canada categorized the debt loads/increases of
Canadians as follows:

Between 1999 and 2005

Total debt in Canada increased by 47.5%. This was largely due to two factors: the
increase in the cost of purchasing a home and the increase in the proportion of
families who owned a home with a mortgage.

Continued in Toxic Assets - Part Two