TSX Loses All Gains for 2013

April 12, 2013 1 Comment

The Canadian stock market was hit pretty hard as oil fell and gold got hammered. At the close, gold was down nearly $75 USD. The TSX lost all of its 2013 gains over the last few days.

I have predicted that North America will face recession this year, so a falling TSX is consistent with that. An economic correction is especially hard on capital goods industries and raw materials.

I also believe it is a reasonable expectation for gold to fall to $1200-$1300/oz as the economic error cycle matures. Then, when a panic hits, and Fed and other central banks will respond with further inflation, and the gold price will rise in response to that.

A commodity broker says: “the argument for gold as a safe haven or protection against inflation just isn’t there . . . It doesn’t look too good for gold.” This assumes there another crisis will not occur, and central banks will not inflate in response. At some point central banks will have to stop inflating to prevent currency collapse and preserve their nations’ banks, yes. Yet, I do not think that time is nigh because we have not yet seen massive consumer price inflation result from the monetary expansion since the ’08 financial crisis.

Read more at Financial Post.

Filed under Banking and Finance, Central Banks, CMR, Commodities, Energy, Gold, Inflation, Investments, Oil, Precious Metals, Stock Market Tagged with , ,

Ron Paul in Calgary

April 10, 2013 Leave a comment

Last Friday, I attended the Ron Paul speech at the “Making Alberta Safe for Capitalism” summit.  This was at the Westin Ballroom in downtown Calgary. I was among approximately 300 attendees, which included financial professionals, publishers, IT nerds, engineers, students, neocons, and more.

I would like to note how this attracted virtually NO media attention. I do not think there is any “conspiracy” here — rather, it is simply due to Ralph Klein’s memorial service being held at the same time. We all know how the media loves to fill its time with the glorification dead politicians whenever the opportunity presents itself. This week, they’ve got Thatcher.

Besides, Ron Paul’s ideas make Canadians uncomfortable. Most people don’t want to talk about such things.

Ron Paul’s speech was basically what you would expect if you’ve been following him for the last few years. I’ve been watching Ron Paul’s political career since 1998, so I was very familiar with all the themes: personal responsibility, free markets, small government, anti-war, and anti-central banking. Still, it was great to pay respects to someone who is more than just an honorable statesman (a contradiction in terms when applied to anyone else), but a man whose efforts have done more for the liberty movement than anyone else in the modern era.

Having retired from politics, this was Ron Paul without any filter that might have previously been imposed by the realities of being in political office. Yet since his message has always been fundamentally radical, there was no difference with post-politics Ron Paul. The message is just as unfavorable to economic, social, and imperial intervention as ever.

At various points throughout the speech, I would look around to gauge the response to certain statements. How delightful to see various attending neocons squirm uneasily when Paul declared there should be no income tax. Some folks scowled at the suggestion to replace government welfare entirely with private charity. Otherwise, the ideas of less spending, less tax, less regulation, and more civil liberties were received favorably. Paul age and manner makes is a kind, wise grandfatherly figure — part of his great success is due to his ability to convey radical arguments in favor of liberty while making them seem completely non-controversial.

The biggest opportunity that was missed in Dr Paul’s speech was HEALTHCARE. If there is a sacred cow in Canadian politics, it’s definitely government healthcare. Without a doubt, government healthcare is a disaster, and Canadians need to learn why it will always be awful regardless of the huge piles of money thrown at it. Unfortunately, healthcare was not covered at all in Dr Paul’s remarks. Too bad. Huge missed opportunity, I think.

He is a medical doctor and an economist who can speak with authority on the failings of public healthcare. He is also old enough to speak about American healthcare system before the government became heavily involved. Before Medicaid, Medicare, the HMO Act of ’73, and so on, there was relatively little government intervention with the provision of healthcare. Basic medical services were cheap and plentiful, and a greater portion of the population had health insurance compared with now. The audience would have greatly benefited from hearing his insights on this subject. He has effectively explained the necessity of free markets in medical care — it is a message Canadians desperately need to hear from somewhere. Virtually no one will touch the issue of public healthcare in this country. We will all be worse off as long as this condition persists.

I would have also liked to hear more war-related remarks. Essentially, anything that applies to the US wasting lives and money on Afghanistan applies to Canada as well. Paul spoke about Iraq more than Afghanistan — which is fine in and of itself, but Canada was not seriously involved in Iraq. Our participation in Afghanistan is another story. Sadly, Afghanistan is an issue that people barely seem to care much about. If they do, it’s because they are dumb enough to think we have Canadian forces there “fighting for our freedom.” Yuck. The lack of interest is even more critical now, because Obama has declared he is “bringing the troops home” in 2014. This is typical government strategy: declare “victory!” and suddenly no one cares anymore. Just like Iraq, where there was never any “victory”, and as I write this the country continues tearing itself apart.

Ron Paul’s speech included a few “fanservice” parts for the Calgarian audience:

He said, “Ralph Klein sounds like a guy I might have liked.” Fair enough, given the memorial was that day, and Klein actually did cut spending at one point.  So that’s cool, whether or not Klein was a principled friend of liberty.

He also gave his support to the Keystone XL — with the important qualification that one can get the permission of property owners, the government should not stand in the way of pipeline construction. This is an rather critical proviso, because in reality pipeline construction does involve government takings/expropriations. Remember: in Canada, the Crown owns all the land as a matter of law.

Anyone who attended this event specifically for Ron Paul could be described as “cutting-edge.” Canadians are not generally ready for the radical Paulian message. For many Americans, there is the emotional connection to ideas of independence, revolution and decentralization, even these are not embraced in practice. The Paulian message can get its hooks in that. For Canadians, the state is endlessly glorified in subtle and not-so-subtle ways. There is no element within our culture that reinforces skepticism about state power. The closest thing to this is Albertans’ memories of the NEP, but that is a regional sentiment and it is being gradually overwhelmed with the pleas for more government.

I hope that the mere fact that Ron Paul has visited Canada to give pro-capitalism speeches indicates that there is a growing audience for the message of liberty in this country. Just as the 20th century demonstrated communism was a lie, the 21st century will show us that democracy is a lie. Democracy’s death throes will be earth-shattering. Liberty’s natural elite must spread and shine the light through dark times, so that a better age may yet emerge.

Filed under Alberta, Banking and Finance, Central Banks, Economics, Energy, Gold, Healthcare, Housing, Imperialism, Inflation, Philosophy, Politics, Regulation, Taxation, Totalitarian Democracy, War, Welfare Tagged with , , , , , ,

Cyprus: could something like that happen in Canada?

April 4, 2013 1 Comment

Marc Faber contends that at some point, everywhere will become like Cyprus.

It will happen everywhere in the world. In Western democracies, you have more people that vote for a living than work for a living. I think you have to be prepared to lose 20 to 30 percent. I think you’re lucky if you don’t lose your life … If you look at what happened in Cyprus, basically people with money will lose part of their wealth, either through expropriation or higher taxation.”

But in Canada? No way!

Well… maybe. Check out page 144 of the 2013 “Economic Action Plan” (I hate that term):

The Government proposes to implement a “bail-in” regime for systemically important banks. This regime will be designed to ensure that, in the unlikely event that a systemically important bank depletes its capital, the bank can be recapitalized and returned to viability through the very rapid conversion of certain bank liabilities into regulatory capital. This will reduce risks for taxpayers. The Government will consult stakeholders on how best to implement a bail-in regime in Canada. Implementation timelines will allow for a smooth transition for affected institutions, investors and other market participants.

The details are not made explicit in the budget document. But remember, your deposit is the bank’s liability. When the budget talks about “certain liabilities” being converted into “regulatory capital,” it kinda sounds like Canadian government might be willing to enact a Cyprus-esque solution to a banking crisis.

Apparently, this is not what they mean. Instead, Ottawa wants banks to issue “contingent capital bonds,” something Carney has advocated. These bonds would provide an above-average return. The catch is that if the bank gets into trouble, the bond is converted into shares. The bank would then have emergency capital without a taxpayer-funded bailout.

I think this is a stupid idea. Sure, I suppose banks should be able to issue whatever kind of bonds they want. However, Ottawa claims it wants to “limit the unfair advantage that could be gained by Canada’s systemically important banks through the mistaken belief by investors and other market participants that these institutions are “too big to fail.” The contingent capital bond doesn’t really do anything about that. The moral hazard still is there, because there remains an implicit assumption — which seems to permeate all Western nations at this time — that if anything bad happens to a bank that made bad investments, the entire world will explode. So the government or the central bank will have no choice but to intervene to “save the world (banks)”! We don’t even know that the government itself would not buy these bonds. Or, in a serious crisis, why they couldn’t just buy preferred bank stocks, like a Paulson plan style of bailout/bail-in.

If the implicit guarantee is still there (and why would it not be? Canada’s banks were bailed out in the financial crisis), then contingent capital bonds don’t address the moral hazard issue. Instead, they just let the moral hazard continue with a wink and a nudge, while someone gets a higher yield bond out of the deal. Meanwhile, the explicit generators of moral hazard, like the BoC, CDIC, and the CMHC, continue to exist without change.

Canada’s Big Five banks hold nearly $3 trillion in assets. Their capitalization is about 8%.  So their leverage is so great that they would not withstand even a moderate crisis on a “bail-in” of converted contingent capital bonds. A 20-30% hit on assets would crush them. The idea is a joke.

Yet, the Canadian government, for all its ineptitude, must reasonably fear that a critical Canadian bank failure is a plausible situation. Whatever their “bail-in” plan entails, you must remember that CDIC insurance covers only $100,000 of your chequing and savings deposits, and short-term GICs. It doesn’t cover your stock account or your RRSP accounts. Don’t count on the ‘geniuses’ in Ottawa to regulate the economy so effectively that all your money will be safe.

— Read more at CBC —

Filed under Banking and Finance, Central Banks, Inflation, Intervention, Investments Tagged with , , , , , , , , , ,

Investing: Silver vs. Gold

March 6, 2013 1 Comment

Many people want to know about silver. They want to know how it compares to gold as an investment.

Some call silver a “poor man’s gold.” In other words, the average man on the street is more able to go to a dealer and buy a few ounces of silver than he is a few ounces of gold. Yet “poor man’s gold” is not a fair characterization, because it assumes silver and gold belong in the same category simply because they are both precious metals. The reality is that silver and gold are different in important ways.

I recommend that one’s precious metal holdings be MAXIMUM 25% silver. 15% is probably better. Gold should make up the rest.

First, I invite you to check out the Kitco charts and look at recent price behavior.

In April 2011, silver reached a high of $49. But by June 2012, it hit $27. As I write this, it is $29. Measured from the 2011 highs, this is a massive loss. Nearly 50%.

Now look at gold. In September 2011, gold hit a high of $1895. In May 2012, it bottomed at $1540. As of right now, it is $1580. Measured from the 2011 highs, this is a moderate loss. Nearly 20%.

The idea reflected here is that silver is much more volatile.

Look back to 1980. Silver fell from $50 to $3.60 in 1991. Gold, at its worst, fell from $850 in 1980 to $255 in 2001. It’s like losing your house and all your money, instead of just all your money.

So when gold sells off, silver will sell off  harder and faster. Silver bulls will argue that the potential gains are much, much higher with silver than with gold. This is plausible, if only because silver is 40% down from its all time high and gold is 17% down from its all time high, and there are strong reasons to believe that both will move upwards.

Why the volatility? The primary reason is industrial demand, which for gold is very small. It is significant for silver, however. During a panic, the price for raw materials plummets.

Gold is different. You could say it commands a premium. This is essentially because gold is regarded as a monetary metal even though it is not money. Central banks buy and sell gold. They have it in their vaults. Central banks don’t stock silver. Wealthy people want gold in a crisis, and silver is much less interesting. Indian families buy it when their daughters get hitched. Asians use it to protect against inflation.  Silver really doesn’t serve that purpose, and I do not believe it will in the near future.

Silver will probably have a bigger bull market than gold by the time Great Depression 2 hits. But if you want to buy precious metals because you are afraid of people like Bernanke and Carney, then you want gold. Silver is a higher risk trade. Gold will perform better in a panic, which is when silver will perform horribly.

In either case, your objective is to hold until the error cycle reaches its final moments before we enter a deflationary depression. Because at that point, you want to unload all your gold and silver and get currency and bonds from institutions that won’t go broke. It’s a trade that would be harder to time correctly with silver than with gold.

All this being said, there is one other important advantage gold has over silver: your wife or girlfriend will like gold jewelry more than silver jewelry.

Filed under Banking and Finance, Central Banks, Commodities, Gold, Inflation, Investments, Precious Metals Tagged with , , , , , , , ,

A Lesson from Poseidon Concepts: It’s a Jungle Out There

March 5, 2013 1 Comment

So I’ve talked to a several people now who were burned bad by Poseidon Concepts (symbol: PSN).

Check out the chart:

psn chart

Ouch

I used to own shares in this company, as part of a sub-portfolio of above-average dividend-paying stocks. I sold them September last year, because I anticipated a serious lack of growth from their competition being too intense. The dividend just wasn’t interesting enough to care.

When shares started tanking in November, a concerned friend asked me, “Do you still own PSN?”

“No,” I said.

“That’s good!” he told me, then he showed me the chart. I laughed. I made some small gains and got a dividend out of that. I got out at the right time based mostly on intuition.

And that was before the big reveal — Poseidon had to to write-down $100 million of non-existent revenue from 2012. Trading was halted on Feb 15 and the stock price is $0.27.

I have spoken with some sources close to this fiasco. The most interesting thing I heard was that their Controller was really some sort of “fitness model,” as if that was the source of the problem. This seems like a random frivolous remark. But then again, her Facebook page lends a bit of credence to the idea. And it seems weirdly credible when you consider what happened. I mean, really: $96-$102 million in revenue should not have been recorded as revenue? Out of $148 million… over three quarters? How the heck does that even happen? In any case, somewhere along the way their former CFO Matt MacKenzie committed an epic fail. Someone was either dishonest or incompetent.

Overall, whether it is due to incompetence or fraud, this is a huge scandal. There is now a $700 million lawsuit against National Bank for its sloppy underwriting. Lawyers are lining up to investigate possible fraud. What is the lesson to be learned? Picking stocks is hard and you will often lose. Most people will mostly lose. Forget about the art of financial modeling and valuing companies. Most people have no idea what is really going on at any given company. There might be idiots in charge. There might even be fraud. Think Bre-X. Think Enron. Think PFG.

Think Poseidon.

If even the analysts and even the bank underwriting the company’s stock are clueless, how can you trust anyone?

The answer is: Don’t trust anyone. I like to speculate in high risk stocks, and I have a golden rule: “I am financially and psychologically prepared for any stock I own to fall to $0.” I sleep well at night.

Filed under Banking and Finance, Crime, Energy, Investments, Stock Market Tagged with , , , , , ,

WHOA — here comes QE3

February 4, 2013 Leave a comment

There’s been a lot of talk on QE3 and not a lot of action. At least not in what was reflected in the net expansion of the monetary base.

That has changed quite dramatically. Check out the short-term monetary base at the Fed now:

Fed AMB feb 2013

That is a very notable change, because last year the Fed’s policy was actually deflationary. For the first time since the end of QE2, we are seeing Bernanke and the gang really firing up the presses, without a corresponding sell-off in other assets.

The Fed is expected to add about $1 trillion dollars to the economy this year. It is unlikely to cause a surge in monetary prices. It will help bolster the price of US debt and mortgage-backed securities. But as with previous QE’s, I expect commercial banks to stockpile this newly created money in their excess reserves.

This will not help the economy — it will merely sustain the grossly distorted world economic system a little bit longer.

Filed under Banking and Finance, Central Banks, Inflation Tagged with , , , , ,

The myth of the “independent” central bank

December 18, 2012 Leave a comment

The theater of Canadian politics never ends. Its inanity would be more embarrassing if every other country’s mainstream media were not basically just as bad.

The Canadian media was making a big deal yesterday about Bank of Canada GG Mark Carney hanging out with his friend, Liberal MP Scott Brison. OMG, was he going to join the liberal party? Was he arranging special favors?

Uh, maybe I’m missing something, but the whole thing just seems to be “business as usual”. High-level bureaucrats hang out with high-level legislators and high-level businessmen who are politically connected. They are often buddies. They hang out at dinner parties, or golf together. Their wives get together to gossip. Their kids go to the same private schools. Whatever. Seriously, follow any central banker around, and see who their friends are. It’s the same story for all of them.

Why does anyone care? Because it anything that threatens the myth that central banks are “independent” is a threat to the Establishment’s most important tool — the monopoly on money creation. So a story is created where there is none.

Well, much to the relief of mainstream economists, governments, and the sycophantic media everywhere, Carney has been cleared of any misconduct. He wasn’t seeking political office when he was staying at Brison’s summer home, smoking cigars, drinking scotch and discussing the best ways to exploit the rabble. So it’s cool. I guess.

But let’s be serious — does anyone who doesn’t have a PhD in economics and write economics textbooks really believe in the idea of “independent central banks”? I know a lot of people like to think the central bank only has the public interest at heart. They like to think none of the normal monopoly problems apply to central banks because central bankers are just so noble and wise. At least that is what the textbooks say, and the idea is key to the ultimate scam of monopolized money supplies.

So now the knaves who support central banking can say to anyone ignorant enough to listen: “Hey! Don’t worry! The central bank is totally independent! It’s looking out for us!”

Central banks are not independent, by any stretch of the imagination. Central banks exist to manipulate money supplies. If you think they do this for the “public interest,” you may also believe in things like Santa, decent highways in Saskyland, or the pantheon of Greek gods. To anyone who thinks “outside the box” in regards to this for two seconds, it becomes clear that the central bank benefits their scandalous stakeholders, like inefficient export industries, debt-laden governments, and inherently insolvent financial systems.

Talking about whether Carney and Brison hanging out together constitutes a conflict of interest is just so outside the realm of importance, there is no surprise that the national media focuses on this “scandal” — rather than the scandal of central banking as such. This is theater. It pretends to be newsworthy when it is truly pointless theatre for government and media to put the shucks on the Canadian rubes.

Filed under Banking and Finance, CMR, Economics, Mainstream Media Tagged with , , ,

Recession will come to Canada in 2013.

December 17, 2012 Leave a comment

Oh Carney. What a wacky guy. He seems convinced we will only enter a recession if the US falls off the fiscal cliff. Err, I’m sorry, not a “recession,” but a “near-recession.” Central bankers don’t like to use the word “recession” in their predictions, because that serves as a confession that they are not “managing” the economy effectively.

If the fiscal cliff is resolved, he says, Canada will surge with the resultant economic relief!

So… is it the case that Canada’s only economic threat is idiots in the US Congress? (That’s redundant — I should just say “US Congress.)

Sorry, Carney. That is nonsense.

What about recession in Europe? Asia? Not to mention the general problems of the US, out biggest trading partner.

First there is Europe. The European recession is spreading, evidenced by slowing price inflation and rising unemployment (at 12% for the Eurozone). This deeply aggravates the existing European crisis. Even Germany, the ‘good’ (cough cough) part of Europe, is grinding into economic slowdown. Its central bank predicts a pathetic 0.4% for next year. It could very easily be less. As long as everyone over there relies on Keynesianism to solve their problems, they will never escape the financial death spiral.

Japan is in a recession. Other Asian export markets are slowing down, because the weight of China’s economic distortions are turning into a brutal yoke and necessitating slowdown there.

And what of the US? The perception is that if “something” is done about the fiscal cliff, everything will be rosy. Shockingly, the US is still considered a safe haven. But foreigners are not scooping up US debt like they used to. China is reducing its exposure; Japan’s purchases are slowing. Bernanke’s surprise announcement to expand the Fed’s balance sheet by an additional $45 billion a month to buy US debt is a telltale sign that he understands the problem, at least to some extent. Yet I do not believe that Bernanke’s action will deflect the recessionary pressures coming from both sides.

Then there is Canada. Everyone here thinks we are special. “Well, if the world goes into recession, we will be okay — we’re CANADA!” they say. The myths spawned during the 2008 financial crisis have sunk deep into the nation’s collective unconscious. Canadians feel invincible. That is dangerous. So the debts continue to grow. Harper continues growing the government, thinking it’s perfectly acceptable to do so because Canada is not as bad as other countries (ignoring the fact that it is still bad).

I frequently speak with executives in the oil industry. There are big deals being made, plenty of excitement as usual. But I’ve noticed people seem strangely oblivious to even the prospect of slowdown in 2013. We are largely a resource based economy, so if the entire world is slowing down, they are not going to buy as much of our stuff. It’s a fairly easy prediction to make. Myanmar and Laos are not going to make up for lost demand from China. Canada’s slow growth will drop mid-to-late 2013 unless some new crisis speeds the world’s decline. Canadians should get ready for this. Hold cash. Get ready to use it when prices fall.

Filed under Banking and Finance, CMR, Economics Tagged with , , , , ,

Carney is off to the Bank of England — Pray for England

November 26, 2012 Leave a comment

Bank of Canada Governor and ex-Goldman bankster Mark Carney was selected to become the next Governor of the Bank of England. He will now be overseeing a central bank with nearly ten times the assets of the Bank of Canada. That is a big promotion in the world of central planners! Carney will now be able to create even larger disturbances in economic systems.

Truly, the worst rise to the top.

Good riddance, I say. Not that I expect him to be replaced with anyone much better. But there is always a chance.

I feel bad for England, though. They have no idea what they are getting themselves into (from Bloomberg):

Carney, who holds an economics degree from Harvard and a doctorate from Oxford University, swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout for one which slipped back into recession in the second quarter and required multiple bank rescues.

Did you see what they did there?

Carney … swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout for one which slipped back into recession in the second quarter and required multiple bank rescues.

…

Carney … swaps oversight of an economy which bounced back from the global recession without witnessing a single bank bailout … 

…

an economy which bounced back from the global recession without witnessing a single bank bailout …

…

without witnessing a single bank bailout …

Excuse me? The banks that pushed for Carney to be their man in England have surely put the shucks on the rubes.

Of all the deleterious myths that persist about the Canadian financial system, none are more harmful or obnoxious than the bogus story that its banks never needed and/or never got a bailout.

Anyone who says this is simply lying or has no idea what they are talking about. Those are the only real possibilities. We have covered this at CMR previously, but let us quickly review.

The mainstream news doesn’t even try to deny it anymore. The Canadian banks got a bailout. Now they simply try to play down the significance of it. Even though it is was much bigger than anyone was led to believe.

So is this “no bailouts in Canada” proposition challenged by anyone in the UK? Carney is being sold on the pretense that there were no bailouts?   

(Side note: We could also mention that Canadian banks received assistance from emergency Federal Reserve lending facilities, which by itself is very interesting. We could also mention that rather material fact that Canadian banks are basically in a state of “perma-bailout” by virtue of the Canadian Deposit Insurance Corporation. The existence of the CDIC amplifies the level of risk banks are willing to engage in — it is classic “moral hazard.”)

So it would seem one is more likely to see bank bailouts with Carney, rather than less. That is precisely why the UK banking cartel wants Carney in this position.

Yet that is not the only reason citizens of the UK should worry.

Mark Carney is not only a believer in bailouts — he is a believer in Keynesianism and mercantilism. This means nothing more than this: he sees a connection between depreciating the currency and growing the economy. This he shares with nearly all central bankers (except, perhaps, those in Singapore): he regards a strong currency as harmful to “the nation”. Because when he talks about “the nation,” he is not talking about the consumers (i.e. everyone) who use their stronger currency to buy and invest in more goods. For men such as Carney, “the nation” instead refers to politically-connected export industries that are benefited by making it cheaper for foreigners to buy their stuff.

That being the case, Carney will tend to increase the money supply by adding assets to the central bank’s balance sheet whenever he thinks it’s a good idea. But this means prices must rise and debts will deepen. Britain already has big problems in these areas.

This should be the last thing someone in the UK should desire. The British pound has plummeted in value the last five years against stronger currencies like the yen. Here in Canada, it seems Carney’s manipulations have been obscured by strong demand for Canadian commodities, yet with the slowdown in Asia, Europe, and soon the US, I doubt this will persist. The Bank of Canada has been growing its balance sheet for nearly two years now, since offloading some of its emergency acquisitions during the financial crisis.

Also, it should be known that Carney likes to troll citizens whose currency he manages by blaming them for behavior that is strongly encouraged by his own central bank policies. What a jerk.

I am happy to see Carney go. While I am happy he no longer oversees the Canadian dollar, I am apprehensive about who his replacement will be. Most of all, I must also bemoan the lack of justice. Carney should be serving a prison sentence for counterfeiting, rather than getting $1 million a year to manipulate huge economies.

Filed under Banking and Finance, CMR, Economics, Foreign Affairs, Intervention, Mainstream Media, Monopoly Tagged with , , , ,

Will “tougher mortgage rules” hurt the economy? Don’t listen to the shills for the mortgage industry.

November 19, 2012 Leave a comment

The folks in Canada who sell mortgages are complaining about the federal government reducing the subsidy to its business.

From the Financial Post:

The Canadian Association of Accredited Mortgage Professionals says since new rules went into effect in July, 2012, resale housing activity is 8% lower between August and October than a year earlier. Among the changes instituted by the government was a lowering of allowable amortization from 30 years to 25 years for consumers borrowing with mortgage default insurance which is backed by the federal government.

Let us think about this for a moment. By providing insurance against default, the Federal government provides a huge benefit to the mortgage industry. It insulates them against potential losses. This causes them to extend loans to to submarginal borrowers who would not be otherwise creditworthy. I can tell you I would make much riskier investments if someone would pay me back for any money I lose.

Jim Murphy, chief executive from CMAAP, is not happy:

“My concern is that a policy-induced housing market downturn creates unnecessary risk that directly affects not just housing but job creation and the economy as a whole.”

This guy really is clueless. First of all, what is this about “a policy-induced housing market“? The “policy-induced” aspect of the housing market is, clearly, the availability of government backed loans for houses and the inflationary policies of central banks, not the reduction in the subsidy to his friends.

More importantly, it is simply false that reducing this subsidy will hurt the economy.

A great deal of resources are shifted into the housing industry that would otherwise be used in a different way because of federally backed mortgage loans. If you are a mortgage lender, a 30-year amortization increases the amount of interest you will take in. On an $375,000 house, you are talking about an extra $65,000 in interest. If more loans are made, housing prices will be bid up. Money flows into the financial industry and the construction industry. More people will be employed at banks, mortgage brokerages, and home-builders, and related businesses.

As resources shift into some sectors, they are necessarily shifted away from others. Everyone now has to pay more for houses than they would without so many buyers, who are effectively subsidized to a greater or lesser extent. But beyond the price of the home itself, for the guy buying a house, he is paying an extra $65,000 in interest to the bank. Assuming that is about equal to his annual salary, he basically has to devote an extra year of his life to pay the bank. He likes this, because “Pay less now, more later” is the mantra of our age, but he would pay less overall with the shorter amortization. $65,000 is not chump change — it would buy his wife a new car and send his kid through university. More money and jobs goes into housing, but less money and jobs are produced elsewhere as a result.

So we can understand the impact of this sort of intervention in the mortgage market. Resources are allocated not according to how the market would most efficiently allocate them, but rather are diverted to profit from the government’s protection of the financial industry. Therefore, the elimination of this subsidy would represent a favorable change to the overall economy. This means that some people would be unable to get low mortgage rates that are backed by the taxpayers. Housing prices would fall. It means homebuilders would have fewer homes to build. Lenders would make less money.

To some people, these consequences are bad. To the economist, these consequences must be considered good, because they represent the economy re-allocating resources according to efficiency, rather than government intervention. Resources will have a greater tendency to shift to uses consumers actually need.

Unfortunately, the insurance still exists. It has not been eliminated. The government will merely provide less of a subsidy than they did before. Therefore, the market will be distorted relatively less than it was previously. The economy will be slightly better, because fewer resources will be shifted to inefficient uses (i.e. housing and Jim Murphy’s summer home).

The best thing that could happen would be for the Canadian government to eliminate taxpayer backed mortgage insurance completely, which would do a great deal to restore a free market in housing.

Filed under Banking and Finance, Economics, Intervention Tagged with , , , ,

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