Carney indulges fantasy about cause of housing bubble

Few things are more aggravating than these central bankers who come out with pabulum-fed bullshit observations about the economy while being treated like the Oracle of Delphi. as if mere words will decidedly shape economic outcomes.

So Mark Carney is warning about housing prices again. He alludes to nothing concerning interest rate policy, which is no surprise, but he does indulge in a fantasy about “greedy speculators and investors” and desperate families driving up prices such that there are “excesses” in some markets. And in this wacky bubble-fueled markets, like Vancouver,  home ownership creates special  “financial vulnerabilities.”

Oh come on. I understand the whole public perception issue, and how Carney cannot admit that he has any role in this housing bubble. Still, Carney’s statements are amazing in the way they must reveal either his ignorance of reality or how he simply pretends not to know. You see, in this world, there are always greedy speculators and investors. Always. By itself, the existence of greedy people does not account for asset bubbles.

No one has ever been able to show with real economic reasoning how greed systematically creates distortions. Neither does greed’s foil, fear, systematically create distortions. Greediness and fear are answers to the question of why people do things, which is an issue for psychology. When we wish to understand economic law, we build upon the fact that people do things as such, rather than why people do things.

What can be shown with economic reasoning is that manipulating the money supply causes interest rates to change. If the central bank expands the money supply, then interest rates will fall and more money will be lent than before. This new money is used to bid up the prices of goods and services, especially capital goods, to higher levels than would otherwise be the case.

Carney probably knows this, and thinks his mighty words alone will help assuage bubble. He does not want to raise interest rates. But the damage has been done. While the BoC’s balance sheet has contracted to pre-crisis levels and been relatively stable for some time now, Canada’s economy was not allowed to rebalance itself in a real recession and therefore myriad distortions remain.

Devastating financial collapse — and a complete implosion of housing prices — still to come, no matter how much Carney warns about distortions. What a fool.

Smoke and mirrors on interest rates at the Bank of Canada

For their sixth meeting in a row now, the Bank of Canada has decided to leave interest rates unchanged.

Some of suggested this latest press release suggests  higher rates ahead, and the stronger dollar that comes with it. I think this is flawed and superficial analysis.

Let’s consider the press release with the awareness that all central bankers are Keynsian-merchantilists.

The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation. On the other hand, the persistent strength of the Canadian dollar could create even greater headwinds for the Canadian economy, putting additional downward pressure on inflation through weaker-than-expected net exports and larger declines in import prices.

So what would curb household borrowing and spending in Canada? Higher interest rates of course. But then that would create a stronger Canadian dollar, which the BoC regards as hazardous because it would hurt exports. To me, this does not suggest higher interest rates from the BoC anytime soon.

Reflecting all of these factors, the Bank has decided to maintain the target for the overnight rate at 1 per cent. To the extent that the expansion continues and the current material excess supply in the economy is gradually absorbed, some of the considerable monetary policy stimulus currently in place will be eventually withdrawn, consistent with achieving the 2 per cent inflation target. Such reduction would need to be carefully considered.

Now this sounds like they are leaning towards raising interest rates. Or does it? Earlier in the press release, they say the following:

While underlying inflation is relatively subdued, the Bank expects that high energy prices and changes in provincial indirect taxes will keep total CPI inflation above 3 per cent in the short term. Total CPI inflation is expected to converge with core inflation at 2 per cent by the middle of 2012 as excess supply in the economy is gradually absorbed, labour compensation growth stays modest, productivity recovers and inflation expectations remain well-anchored.

Here is where we get to the “smoke and mirrors.”

They were just quoted saying they would want to withdraw the monetary stimulus to aim for the 2% inflation target.

But in this last quoted paragraph, they just said that they expected inflation to hit 2% without raising interesting rates. So … what the heck is this all about? Basically, there is no chance interest rates will be going up any time soon.

The reality is this — Carney will not allow the Canadian dollar to appreciate too significantly relative to currency of this country’s primary consumer, which is America.

One must remember that central bankers behind major currencies work together — the key idea is to have major currencies devalue at roughly a steady rate vis-a-vis each other. It is not a counter-example to refer to hyperinflation in Zimbabwe or a like event, because that is a tiny country that means little to the world economy in the grand scheme of things.  The Canadian dollar will not strengthen dramatically against the US dollar, or any other major currency.

Why not? If you are a central banker, you have two conflicting goals:

For importers, you want a strong dollar, so that you can buy foreign goods more cheaply.

If you are an exporter, you favor a weak dollar, so that you can sell more goods to foreigners.

Exporters have traditionally been a more focused and successful interest group than the mass of faceless importers — the exporters are visible and politically active, but the importers are literally… everyone else. Their influence is spread out like too little peanut butter spread over too much bread. Therefore the tendency is always for a steady level of currency depreciation. For the BoC, that is a 2% inflation target.

Because of these conflicting agendas, the central bank behind a major currency cannot allow that currency to appreciate or depreciate too significantly relative to any other major currency. It is the classic problem with central planning — how do you decide what the magic number is? The level of depreciation must be just enough to keep everyone happy — or at least minimize their relative unhappiness.

To take out price distortions, one can consider how all currencies are down significantly from where they were one year ago, in terms of gold. The Canadian dollar is down 12%. So while it has lost purchasing power in terms of gold, it has gained purchasing power relative to the USD, which is down 20% in the last year. The euro and the yen have fared relatively better than the Canadian dollar (down 8% and 11% respectively, in terms of gold), and the American dollar has fared relatively worse. The important point is that they are all down in terms of gold.

This is to be expected. Although the CDN may rise or fall a bit relative to one major currency or another, depreciation of the Canadian dollar will continue relative to gold until Economic Judgment Day comes and Great Depression II hits us. Economic Judgment Day until the big American banks start to lend, and the Federal Reserve is forced to hike interest rates. Until then, Canadian currency is just another depreciating currency in a world of depreciating currencies.

Canada Post strike — good time to abolish Canada Post

Things are a lot different these days than they were when Canada’s postal monopoly went on strike 14 years ago.

The Internet dominates interpersonal communication nowadays — a lot of people wouldn’t even notice Canada Post being on strike these days, other than the fact that they’d have less junk in their mail box.

In this article, we read:

Canada Post has offered to increase new employee starting salaries to $19 an hour, from the previous $18 rate, in a workforce where hourly wages top out at $26 an hour.

Canada Post counters that it needs to address labour costs, noting letter-mail business has fallen more than 17% since 2006 due to digital communications — the Internet is chipping away at its business.

Question — why do letter carriers need to be paid $18 an hour at all??? Why does their maximum wage need to be $26? This is a job that could be done by teenagers for $10 an hour. These teenagers would, at least, probably be able to put the right mail in the right mailbox, unlike your average lazy, contemptuous, and bitter Canada Post worker.

Why is it considered a right to get subsidized mail delivery to your house? Why shouldn’t you have to pay the appropriate market price? Shouldn’t you have to pay more for mail when you live in Nunuvut than if you live in Toronto? After all, “mail delivery in the big city” is a very different service than “mail delivery to the desolate Canadian tundra with a population of 17 people”! Why should mail delivery to the middle-of-nowhere be subsidized by people who don’t use Canada Post for anything? This is not moral, and it is not economically efficient!

The whole postal monopoly system is a disgrace. Canada should use the opportunity of this postal strike to abolish Canada Post, which is a complete waste of all resources allocated to it. Then competition should be legalized and the free market can provide real mail service with true market prices.

Here is a 3-step solution to the Canada Post strike. Only these options are consistent with good economics, good ethics, and not being a complete idiot.

1) Fire everyone who works for Canada Post at the moment. That way they can get jobs that actually contribute to the economy.

2) Remove all legal restrictions preventing private firms from providing mail service.

3) Abolish all regulations on courier services so that such services can be more affordable and more readily available to all consumers.

ONLY if this solution is adhered to, will Canada have good postal service. Giving Canada Post’s union ANYTHING, be it more vacation hours, better wages, “better working conditions,” is a complete waste, and will produce more of the same garbage we expect from Canada Post.

We need less Canada Post, not more.

Even ECB crank concedes that core inflation is a lame tool

Even a broken clock is right twice a day. Unless it’s a 24-hr digital clock, then it’s only correct once. Which is still better than an ECB crank like Bini Smaghi, who seems to have recently been right for the first time in his life, by disparaging the idea of core inflation (i.e. without food and energy prices) as a good measurement of monetary policy.

“For central banks around the world, this means that core inflation is no longer a very useful indicator for monetary policy, and should probably be abandoned,” Bini Smaghi said.

NO WAY. This is actually a shocking statement coming from someone like this. Of course, this would probably present itself as an opportunity for monetary authorities to devise statistical methods that are more arcane and obfuscating, rather than less so. I bet the next inflation measuring tool will be a basket of goods consisting 100% of iPads.

Goldman Sachs gets lucky on Libya

Goldman Sachs is getting a subpoena from the Manhattan DA about their role in the 2008 financial meltdown. That’s kind of a drag, I guess, but at least they don’t have to sell Gadaffi a piece of their firm.

Turns out Goldman invested $1.5 billion for Libya’s sovereign wealth fund back in 2008.

They lost 98% of that money.

To ameliorate this disaster with pissed off Libyan officials, Goldman offered to sell preferred shares in their firm.

But now that that Gadaffi is now on the “list of mini-Hitlers for Americans to fight”, Goldman can get out of that deal easily enough.

You kind of have to admire the sheer self-confidence of Goldman, offering to sell a stake in itself to Libya after losing so much of the country’s money. It’s like a used car dealer offering to let you loan money to the dealership after selling you a lemon.

 

As QE2 ends, let us consider where the money went.

Well QE2 is supposed to be ending soon. Or something. The cranks at the Federal Reserve kind of make things up as they go along. But for now the whole thing can safely be considered a classic disaster, as central planning is wont to produce.

For the moment, let’s take a moment and consider where the money went. Behold two wonderful graphs:

ADJUSTED MONETARY BASE

FRED Graph

 

 

EXCESS RESERVES

Graph of Excess Reserves of Depository Institutions

You can draw your own conclusions here.

It is obvious that there will be QE3, QE4, QE5… and so on, until either the entire monetary system collapses or until the central banks stop printing money and produce the Great Depression II (aka Greatest Depression).

Austrian economics in Mainstream Canadian Newspaper…!

I thought it was crazy enough to see the Canadian War Street Journal National Post to have a columnist calling out the Bank of Canada for its counterfeiting operations. The influence of Austrian economics hangs over this article like a halo.

Now shades of the Austrian School are back at National Post.

Peter Foster comes out citing Austrianism on the topic of monetary growth and inflation leading to malinvestment. Hayek’s name is dropped. Contra Keynesianism, which he calls a systemic failure, producing only debt and inflation and no real economic solutions. This is not too exciting by itself — this Peter Foster guy is nothing special as a commentator, other than his general favor of markets over governments. But the fact that it gets reference in a publication like this is interesting however.

I discovered Austrian economics in 1998, sort of by accident. You would have never, I mean NEVER seen a reference to Austrian economics in a mainstream paper back then. Austrianism was just … a complete non-issue. Fortunately, Austrian economics has become more mainstream, due in large part to the Mises Institute and Ron Paul’s 2008 presidential campaign in America, and outspoken fellow travelers of the Austrian school on the financial news networks, such as Peter Schiff and Marc Faber.

The more people discover the Austrian school of economics, the more people will become impervious to the dogmas and deceptions that have made them blind to how the market makes them free and the government enslaves and impoverishes them.

Bank of Canada — engine of too much debt — warns about too much debt.

The Bank of Canada is warning Canadians about too much debt.

Experience suggests a long period of very low interest rates may be associated with excessive credit creation and undue risk-taking as investors seek higher returns, leading to the underpricing of risk and unsustainable increases in asset prices.

This is a remarkable statement, really — it reveals that the Bank of Canada’s economists either don’t know economics, or they pretend not to know. The issue should not be about how low interest rates “may” be associated with excessive credit and excessive risk. Rather, there is a direct causal relationship here.

Mises wrote:

If there is credit expansion [by the central bank], it must necessarily lower the rate of interest. If the banks are to find borrowers for additional credit, they must lower the rate of interest or lower the credit qualifications of would-be borrowers. Because all those who wanted loans at the previous rate of interest had gotten them, the banks must either offer loans at a lower interest rate or include in the class of businesses to whom loans are granted at the previous rate less-promising businesses, people of lower credit quality.

This is not rocket science. It is not a complex relationship to understand at all — if interest rates rise, there will be fewer risky loans than there would be otherwise; if interest rates falls, there will be more risky loans than there would be otherwise.

But if you have a PhD in economics, like our ex-Goldman central planner at the BoC, Mark Carney, you probably are incapable of understanding this, and would say something inane like, “In light of the high level of indebtedness of Canadian households, some caution in banks’ lending to households is warranted.”

Carney does not realize that lending standards are directly related to the ease with which credit is made available. Talk is cheap. If Carney jacked up interest rates to 10% tomorrow, that would have a dramatic impact on lending standards, much more so than his oracular admonitions about risky lending.

On the other hand, what would happen if Carney decided the economy was too weak, and he cut interest rates down to zero? Then we can rightly expect that more loans would be made to those businesses and individuals would have been previously deemed unworthy of credit. 

A lot of Canadians like to think we breezed through the financial crisis without too much pain and suffering — “our banks didn’t need a bailout,” and that we are leading the way out of economic ruin.

All is not well, however. The mammoth growth of consumer debt in this country, the worst of all OECD countries at about 140% debt-to-asset levels, is a very serious problem . With our housing market still in bubble territory, unemployment relatively low, and implausibly low interest rates, Canadians have been piling on more and more debt.

It’s so bad, even the banks — you know, the ones making all these questionable loans to Canadians mired in debt — are raising concerns. You have to acknowledge this is a bit rich — but don’t worry big Canadian banks — I am sure you can keep making your risky loans and if (when) things turn ugly, someone will bail you out.

Ben Bernanke: 100% Wrong.

Bernanke made an appearance on “60 Minutes” the other night (Part 1, Part 2). This is a soft interview for Bernanke. There are no tough questions because the interviewer does not understand economic science or finance.

First, I would like to remark on what is apparently Bernanke’s profound nervousness — at least that is how I interpret his trembling voice and his quivering lips. I’ve seen a lot of Bernanke footage, albeit not often so close up on his bearded mug. He often sounds shaky, even back in 2006-2007 when his forecasts were all rosy, but not this shaky. This is not the look of a man who is 100% sure of his actions. But enough of my pop psychology, and on to a few matters of substance.

“This fear of inflation is overstated,” he says. Is it really? It looks like Bernanke did create lots of money, but has not yet translated into a rise in M1 — instead, it is stockpiled as excess reserves of commercial banks. The monetary base has been basically flat the last several months.

Yet, when the banks do start to lend and the magic of fractional reserve banking kicks in, prices will be bid up to epic proportions. Export economies such as Canada will in turn have to inflate so they can push up the US dollar and push down their own currencies. That is why QE2 is a big concern to many people. What Bernanke says in defense of QE2 is important:

“We are not printing money,”

This comment drew a few snickers from my peers, but I think this might be a rare case of Bernanke speaking the truth. The “QE2” announcement did not actually mention quantitative easing at all, it merely said the Fed would buy long-term Treasuries. Since then, it has increased its holdings of Treasuries but sold other assets. Net effect – no real change in the base. I suspect this will continue into the near future.

The purpose of the Fed is to protect the big banks. Bernanke can handle 10% unemployment so long as the big banks are happy. When the banks get in trouble, then he will be forced expand. I think this arises from his complete failure to understand the business cycle. His ideas about the Great Depression are not reassuring.

The mainstream likes to make Bernanke out to be a great sage on the subject of the Great Depression, and that is the case here. I guess the logic is something along the lines of: if Bernanke believes something about the Great Depression, it must be true. It’s Bernanke, he’s smart and he studied the Great Depression, how could he be wrong? (hmm…) Well, I have a big chip on my shoulder about this. This is one of the most baleful ideas in the realm of economic inquiry. Bernanke is totally wrong on this issue.

Bernanke’s thesis is that the Great Depression was caused by the Fed’s contraction of the money supply and the failure to inflate. The Fed did not reduce the monetary base after the crash. After a period of keeping it flat, they expanded the monetary base slightly in 1932 then dramatically from 1933 onward.

The money supply did collapse, but only because so many banks went bankrupt. This came to an end in 1934 when the FDIC was created. From here on the money supply rose. The Great Depression did not end until after World War II. Bernanke’s theory is not supported by evidence.

(This chart was taken from here.)

With Bernanke running things, we are probably doomed. I believe his policies will eventually cause mass inflation, and nations where the economy is structured towards servicing American consumption will be forced to inflate as well. Canada sells the Americans $350 billion dollars worth of goods each year. Mark Carney thinks a strong Canadian dollar is bad for Canada’s economy.

Canadian banks, bailed out by the Fed.

Documents released by the Federal Reserve show that Canadian banks used the Fed’s special loan programs to strengthen themselves when the economy started to go sour.

I find this very enlightening. First of all, there is stubborn myth that circulates our country, averring that Canadian institutions did not need a bailout. This is simply untrue. Canada’s bank bailout was a little more sophisticated, a little less blatant, than, say, the US bank bailouts, but it amounted to a bailout nonetheless. The Canadian government buffered its big financial institutions with a whopping $75 billion dollars used to buy bad assets.

Second, the Fed’s loan programs are bailouts too.

Canadian banks said the moves to seek loans from the Fed were dictated by strategy and not by necessity.

RBC accessed funding from the Fed “purely for business reasons – better pricing and collateral rules – and because they were the best deal for our shareholders at the time,” said Gillian McArdle, a bank spokesperson. “Our access to funding remained very strong through the entire crisis.”

This is an interesting thing to say. Let us think about this a bit.

Remember that the Federal Reserve has a monopoly on the creation of US dollars. It can buy any asset it wants with digital dollars created out of nothing. Other institutions cannot do anything like this.

If an institution like Royal Bank cannot raise capital on the market and turns to a central bank for help, this is a bailout. This allows it to strengthen its balance sheet in a way that would not be possible without the central bank’s intervention. Saying this does not amount to a bailout is incoherent.

Central banks exist to bail out big financial institutions and governments when markets go bad. In 2008, the Fed bought a trillion dollars or so in garbage assets that the market would not touch at face value. The Bank of Canada helped bailout banks too.

So in addition to getting bailed out by the the BoC and the Canadian government, Canadian banks were bailed out by the Federal Reserve as well!

Why is this important? In the business cycle, when the boom period reaches its apex and market forces begin initiating vengeful corrections, bad debts must be liquidated for the economy to become rebalanced. This is value of the recession — it restores soundness to the economic system by clearing out the malinvestments perpetuated by expansionary monetary policies that create the bubble. Of course, in 2008 governments and central bankers around the world stepped in to ensure that would not happen.

The fact that Canadian institutions availed themselves of the Fed’s interventionary loan programs (to say nothing of the $75 billion bailout from Canada) reveals that Canadian banks are not as strong as people claim. Like all commercial banks operating on fractional reserve banking systems, Canadian banks are inherently on the verge of bankruptcy at all times. Our system ought not be the envy of the world — instead, it is just another facet of the nightmarish system that Bank of England Governor Mervyn King candidly called “the worst banking system conceivable.”

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