Entries from October 2009 ↓

Dude…

carney21

Okay, first let me get this off my chest. Mark, dude, I’m sorry.

Sorry that I dissed you to reporters when you landed the job. Sorry I created a ruckus when you first appeared before a House of  Commons committee. Sorry I told the committee chairman to shut up, even when the moronic weasel deserved it. I’m sorry it delayed things when they tried to throw me out. Sorry I embarrassed you by asking about income trusts and Goldman Sachs and all that stuff you didn’t want to talk about. I’m even sorry I ran a pic of you here recently with the bottom of your face cut off.

Because, man, now I know two things. You, the Bank of Canada boss, actually do not inhabit your own planet. You walk among us. You have seen the human misery called Leaside and North Van. You know it is the work of the weak and the covetous.

Second, you read this blog, which is cool. Naturally, me and the dogs had our doubts. But not now. After your latest presser it’s completely obvious you sneak little visits here on your Berry when the lesser central bankers are off counting basis points. Indeed, look at what you said about people borrowing their brains out and gorging away on that ridiculously cheap money you gave them?

“We expect prudence from lenders. We expect, and we have confidence in, prudence from Canadians. We remind people that borrowing is for the period you are going to borrow, not just for the moment you take out the loan.”

Hey, that’s telling them. Straight up, Marko.

I know it took a while to spit it out, but this is the first time you’ve drawn that line between the 2% mortgages you gave us, and the mounting, growing, burgeoning asset bubble called the real estate market. As you pithily stated, “Obviously, consumer borrowing cannot grow faster than the economy forever.”

Just the kind of insight we expect from the guy in charge of the money supply, who’s been doling the stuff out like Hallowe’en bobbles. There are, in fact, consequences. If you flood the system with money, make it the cheapest in history, give weekly media conferences on how the recession is over, have CHMC take all the bank risk, then hold housing price hikes aloft as evidence your plan works, chances are some stupid consumers might actually think you mean it. They might overborrow, stagger into the housing market, get into a pissy bidding war and end up paying $200,000 too much.

And while that looks good on your GDPometer, Mark, it’s causing us all in the pack some serious grief. I mean, where’s the long-term good in rendering houses unaffordable? What’s the point of tricking first-time buyers into thinking they have to buy now, or buy never? Why are we better served when we’re all more indebted? And what happens if there’s a housing market correction and thousands of people end up with no equity and loads of debt – which is exactly what follows when you pull the plug? After all, isn’t that the big screwup your American buddy made? As if you didn’t know.

So, Gov, welcome. We were waiting. Yelping and foaming. Giving up hope. Thinking you were more worried about your legacy than your duty.

Now we know. You were just manipulating us.

And I’m sorry about that too.

It’s that simple

dwight duncan1

Ont Treasurer Dwight Duncan: busted

It’d be hard to make this stuff up.

  • One of Canada’s biggest banks is slapped with a debt review and a likely credit downgrade.
  • The country’s biggest province says half its business taxes vanished, and doubles its deficit. It, too, gets a debt downgrade.
  • And it’s taken a mere 12 months for Ontario and Canada itself to pile $83 billion more in debt on taxpayers’ shoulders. In fact Ontario alone figures new debt will hit $70 billion over the next three years, while the national government heaps on $200 billion.

Was it only a year ago we heard this: “We will not be running a deficit. We will keep our spending within our means. It is that simple. The alternative is not a plan. It is just the consequence of complete panic, and this government will not panic at a time of uncertainty.”

So spoke PMSH last October. The prime minister also promised the recession would not come here. So it’s a good thing he’s not running a major Canadian corporation like Bank of Montreal. Oh, sorry. Bad example.

But this is not to dis the political class, now guaranteeing through their actions that your taxes will increase. Instead it’s to remind you of the fragility of the economy and how, in many ways, we have created the illusion of prosperity. Dig down a little, and you’ll wish you hadn’t.

For example, imagine if something really costly happened. Like 30% of the workforce staying home for three weeks because of H1N1. Or some religious fundamentalist whackjobs blowing up the Toronto subway. Or maybe a real estate decline of 15% causing a wave of mortgage defaults on high-ratio loans.

Which brings me to CMHC. Again,

The reason government finances have fallen off a cliff, along with those of carmakers, resource companies, steelmakers, tool and die companies, casinos, exporters and a host of other folks is simple. The economy sucks. People are out of work. Businesses losing money don’t pay taxes. The prime minister was wrong. Apparently you can’t fight global recession with a soundbite.

But meanwhile, two things are booming: Real estate and lending money. House sales are up by a third nationally. The average price is ahead 11% on average. Mortgage loans have hit an all-time high – rising an estimated 12% in 2009 alone. Consumer credit has soared 9% during the recession. And we now owe more, per head, than the Yanks. Household debt in Canada is 140% of income. Down south, it’s 132%.

So why do we have a real estate boom, when they are still wallowing in their bust?

Simply because CMHC, a federal government agency, backs all high-risk mortgages with taxpayer dough. By removing all risk from the banks, it lets them lend to people without money and little prospect of paying their loans off. It allows them to give the cheapest, lowest rate to those with the highest default risk. In case that sounds familiar, we used to call them ‘subprime.’

In fact, the government encourages this. It obviously wants a housing bubble. It’s doubled CMHC’s debt threshold to $600 billion, just slightly higher than the current national debt – an amount of money which goes 100% into high-ratio loans and which is guaranteed by taxpayers. At least those still working.

What’s more, these mortgages are being bought from the banks which originated them (also paid for with tax dollars) so they can make more of them. CMHC then bundles the loans together and sells them as MBS units – mortgage-backed securities, just as Wall Street securitized subprime loans and sold them globally, precipitating a crisis.

The big difference between the two countries, however, is that in America the selling of mortgages was done privately by corporations. So when enough mortgages failed, so did the securities. Here the mortgages are guaranteed by the federal government, so they cannot fail. Unless, of course, CMHC does.

But what’s to worry?

It has six hundred billion in insured loans. And eight billion in equity.

By the way, the Bank of Canada says the recession will be over in 2011.

Hard to make this stuff up.