Bankers get the bonus, and government takes the risk - The Globe and Mail

This is a really important piece and I ask everyone to read it. Bankers get the bonus, and government takes the risk - The Globe and Mail

Of course, the situation is much worse than the article states, specifically this point.

At the end of 2008, the latest figures we have, CMHC had $149-billion of investments in mortgage-backed securities on its balance sheet, up from $96-billion the previous year.

While the CMHC may only have 149 Billion of MBS on its books. It has a limit of $600 billion of mortgage loan insurance, up from the previous $450.

Adding to the article, the CMHC, as well as any other insurance such as the Canada Deposit Insurance Corporation, allow the banks to take huge risks that they otherwise would not be able to take (as well as get huge rewards).

Inflation within central bank comfort zone, good job right?

This is a follow up to yesterday's post.

So inflation is up a less-than-expected 1.3 in December? Great job, right??

Well, not so much when you look at the details. Everything the Bank of Canada has some control over rose, and rose quite dramatically.



Food prices rose 1.7 per cent, matching November's increase. Prices for dairy products and eggs rose 1.9 per cent while prices for non-alcoholic beverages went up 4.8 per cent. Food purchased from restaurants, sugar and confectionery, lettuce, and bakery and cereal products also rose.

Other goods that are getting more costly include communications, child care and domestic services, and paper, plastic and foil supplies.

Tuition fees, cablevision and satellite services, and recreational vehicles are also more expensive.

Homeowners' maintenance and repairs costs rose 3.3 per cent while property taxes climbed 4.3 per cent.


So why did CPI only raise 1.3 per cent?



Prices for passenger vehicles fell 3.3 per cent from last year while furniture and household textiles also saw declines.
Computer equipment and supplies and home entertainment equipment, parts and services prices continued to fall.

Overall shelter costs fell 1.7 per cent from a year earlier thanks to a 31.2-per-cent drop in natural gas prices and lower mortgage interest costs. The mortgage interest cost index, which measures the change in the interest portion of payments on outstanding mortgage debt, fell 4.9 per cent in December, Statscan said. Homeowners' replacement cost fell 1.2 per cent.

But the BOC's "policy" of a weak dollar actually increased the cost of natural gas. And most of the other costs are result of China and their fixed exchange rate, since Canada doesn't produce much computer equipment, home entertainment equipment or textiles.

So the BOC's policy is actually raising the cost of food and services, and have made houses unaffordable for those earning an average salary. They have, when you look at the big picture, punished the poor, who would otherwise be enjoying cheaper goods from China, and stable domestic prices, and affordable housing. Instead, they have benefited the rich (although not by much) by creating this bubble in housing. All the while they are applauding themselves for keeping inflation in check.

Note to the Bank of Canada, you don't control Inflation!!!

reportonbusiness.com: globeinvestor.com - Bank of Canada sticks to low interest rates

The Bank of Canada says that inflation is under control.

Interestingly, we had this article yesterday that read

China exports everything from jeans and T-shirts to toys and computers. Is inflation next?

Hmm, something doesn't add up. If the Bank of Canada controls inflation, how can China export inflation? And if China can export inflation, could they also be responsible for the lack of inflation?

And the answer to that is YES, China has a much bigger impact on inflation in Canada than the Bank of Canada. In fact, the only reason we've had any inflation is because the Bank of Canada doesn't acknowledge this fact.

If you look goods and services that the Bank of Canada does have an affect on (mainly, goods and services produced in Canada) you will see that they have a very poor record.

Housing is the prime example. A house is a good like any other, and yet housing prices have increased dramatically. Almost to the same level as it did in the US.

http://www.clevelandfed.org/research/commentary/2009/0909-1.gif


Let's take a look at some other numbers.

http://www.statcan.gc.ca/pub/62-001-x/2009011/t031-eng.htm
Since 2002=100%, you will see that Durable and Semi-Durable goods are actually more affordable now than in 2002 (thanks to China!!)

Services, food and shelter, the three items that I believe the Bank of Canada has the biggest affect on, are up substantially.

The Bank of Canada, through its influence on the dollar, also has a huge affect on the price that Canadians pay for commodities. This has lead to a large increase in cost for transportation and energy prices.

So what exactly is the Bank of Canada achieving through their policies? I argue that they didn't really achieve anything. Had they did nothing at all, the prices of good would have decreased thanks to China, and the prices of housing, foods and services likely would be much lower, which would have translated to a higher standard of living for all Canadians.

Obama unveils bank tax to recover ‘every single dime' for Americans

I can't believe I actually going to agree with a new tax, but I think this one actually makes sense.


Here's why.
According to Reuters

From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent.


I would argue that in a productive and free market, the total profits of financial institutions should be only a fraction of this. In fact, I think it's actually hurts the overall economy when main street is funneling so much money to wall street.

The function of the financial sector should be to more efficiently transfer funds from savers to borrowers who will either invest this money or consume it. Of course, banks should prefer borrowers who will invest this money rather than consume, because when you consume good does not earn anything.

Now for some reason, banks confused houses with actual investments. Houses are not investments in general because they do not bring in income. Yes, a house is an asset, but absence a increase in population, credit, inflation, tastes and preferences, etc, the value of a house will go down (go bid on a house in Detroit).

Also, add to this the "subsidies" that the banks are getting from the government though FDIC insurance, Fannie and Freddie, and their relationships with the Central Banks, I think (and hope) this tax will actually reduce demand for financial services and allow savings to actually go more productive means.

Yes, financial services are required for a healthy free market, but we don't have a free market, therefore, I believe reducing the "rents" that the financial industry gets from the rest of the economy will actually be a good thing.

Canadians playing it safe with mortgages, report finds - The Globe and Mail

Not too sure what the point of this report is. Do fixed rate mortgages somehow mean that we are not a bubble, and therefore nothing should be done?

Canadians playing it safe with mortgages, report finds - The Globe and Mail

Of course, this is absurd.

Let's pretend that everyone who bought stocks on margin during the Dot Com bubble took out a fixed rate loan. According to the reasoning of the article, this would mean that people would be able to afford the interest payments since they are fixed, and therefore there would be no need to worry. Let's ignore the HUGE leverage that people take on to buy houses. Let's also ignore the fact that if houses do start to go down (and having a fixed-rate mortgage will NOT prevent this), people will want to get out while they are still ahead.

One other important thing that is ignored is the fact that houses are UNPRODUCTIVE assets!! This is a very important point. Building houses do NOT make us more productive. And the only hope of paying off all these mortgages is to become more productive. Imagine if all this money had gone into building IT infrastructure, into building factories, and research facilities.

Sorry everyone, I do not have any comfort knowing that Canadians are "playing it safe with mortgages", especially since the article does not provide any Loan-to-value figures, down payment amount, income to loan ratio, or anything else meaningful to show how much leverage people are taking, and leverage is the key here.

U.K. - Hypocrites

This is absolutely disgusting!!
U.K. warns Iceland of pariah status - The Globe and Mail

Here you have the U.K., together with the US, trying to spread "Democracy" around the world, if countries want it or not, and here you have Iceland, exercising the truest form of Democracy (not this "Democracy through representation" scam which only serves the interest of politicians and those who buy them), and the UK, the home of the Magna Carta, is threatening them.

This is disgusting.

Maybe Icelanders don't want help from the IMF, seeing their horrible track record.

Argentina still hasn't recovered.
South Korea, after paying off their debt and vowing never to get help from the IMF again, "We've retaken our economic sovereignty. From now on, we no longer need prior consultations with the IMF in planning and executing our economic policies."
The BBC declared Russia to be "The IMF's biggest failure" and Russia paid off its debt as quickly as possible to get out of the IMF's testicles. Africa likely never will.

Iceland does not need the IMF and does not need UK's financial mafia. And of course the irony is that if Iceland accepts this huge debt, the world will not want to invest it them, who would want to invest in a country saddled with debt? Their only hope is to liquidate all the bad debt and bad investments as soon as possible, and start fresh. And thankfully, it looks like their people want this too.

Coming Canadian Housing Crash??

A really interesting number in this article.
The central bank estimates there was nearly $1.4-trillion in total household credit outstanding in October, the most recent data available, up from $1.3-trillion a year earlier.

Much of the growth stems from mortgage debt, which stood at roughly $950-billion in October, compared with less than $890-billion a year earlier.


reportonbusiness.com: globeinvestor.com - Holiday spending boosts debt levels

Out of curiosity, I wanted to find out what the total amount of debt in the US was in 2007.

I found a number in this article
http://www.crown.org/LIBRARY/ViewArticle.aspx?ArticleId=762


The total overall household or personal debt outstanding in the United States increased by another trillion dollars to 13.8 trillion dollars in 2007.

The Federal Reserve gathers data on all reported funds on a monthly basis. The two main components of household debt outstanding are mortgage debt outstanding (2007 total = $10.5 trillion) and consumer credit (2007 total = $2.6 trillion).

These numbers are from the Central Banks of Canada and the US. Now, Canada's population is about 10 times smaller than the US's. If you divide 13.8 by 10, you get 1.38. And 10.5 trillion divided by 10 is about 1.05 trillion. Canada is treading in very scary waters with its current amount of household debt.

Even more scary is when you look at GDP per person.
Canada's GDP per person is about 39,000 while the US is about 47000. Therefore, Americans should be, in theory, better able to handle such debt because of their bigger economy. There are many who think the US housing crash can't happen in Canada. I'm scared that this wishful thinking is one of the main reasons is hasn't yet.

Well done Iceland

This is exactly why we are in this economic crisis.

Why did the citizens of Brian and Holland invest in Iceland? Because they were being offered a much higher yield, plus they took on the extra currency risk. Of course, usually, in a normal world, a higher yield means higher risk. Higher risk means that there is a possibility that you could lose money. But of course this isn't a normal world anymore.

Why would the people of Iceland want to take on 18,000 of debt for each citizen for the benefit of foreigners who didn't properly research the risks they were taking?

And what is the benefit of entering the Euro? Could it be that the government would be allowed to take on as much debt as they see fit, knowing that this would not result in the collapse of their currency and perhaps a nice bailout from Brussels?

We are entering a world of polar opposites. On one side you have the politicians and the elite who are pushing for more globalization with increased global regulations, and on the other side, you have the citizens including the people of Iceland, and the tea-party movements who are pushing for more localization, wanting to keep their culture and their independence.

If I have to make a prediction for the underlying theme in the next decade, I think that this will be the driving issue.


reportonbusiness.com: globeinvestor.com - Iceland in crisis after rejection of bill