more Canada - banking safety & housing bubble

[Spartacus]

this matches my view on self congratulatory Canadian banking claptrap. I don't know how to do the research to verify their leverage numbers though ...

http://baselinescenario.com/2010/03/...nking-fallacy/

and more bubble views

http://gullibilityplanet.blogspot.co...ng-bubble.html

[GRG55]

Re: more Canada - banking safety & housing bubble

this matches my view on self congratulatory Canadian banking claptrap. I don't know how to do the research to verify their leverage numbers though ...

http://baselinescenario.com/2010/03/...nking-fallacy/

and more bubble views

http://gullibilityplanet.blogspot.co...ng-bubble.html

A rebuttal to Simon Johnson...

Friday, April 2, 2010

Is Canada Better Regulated?


As the United States struggles with achieving any substantive financial system regulatory reform against the well financed opposition of bank lobbyists intent on preserving the profitability of systemic risk, there has been a weak and poorly focused debate on whether Canada, which was relatively unaffected by the current financial crisis, has a better regulated financial system or not and, if so, why.

In May 2009, The Wall Street Journal argued that the Canadian financial system is not exportable to the United States, because Canada does not promote affordable home ownership through government subsidized programs with down payments as low as 3%. In Canada you need a down payment of at least 20% or you are required to purchase mortgage insurance. Mortgage interest is not deductible in Canada. While a homeowner in the United States can walk away from a loan if the balance on the mortgage exceeds the value of the home, in Canada mortgage holders are strictly responsible for the their home loans and the lender can file claims against other assets...

...While the Financial Times article also caters to a "robust" mortgage market with only a 1% default rate while having approximately the same home ownership rate as the United States, David Dodge, a former governor of the Bank of Canada, maintains the structure of the banking business allows the banks to make healthy profits without taking extreme risks. "You had a set of banks that had essentially very profitable domestic commercial banking franchises. They had to be pretty bad in their other business to lose money overall."...

[Spartacus]

Re: more Canada - banking safety & housing bubble

Thanks for the link, I'll have to read more to see if they can convince me there's no bubble.

I've dealt at arm's length with OSFI, and sometimes they are tough, so I did look askance @ Johnson's view that there's a cozy relationship.

On the other hand, there have been times it looked to me like OSFI bent over backwards in serving the banks' interests.

not so much a rebuttal, they take exception with a few observations, agree with some ... , but there's a lot of Johnson "doesn't consider ...".

I found their end point interesting: "We should be looking for financial regulatory reform which stresses the principles of risk management."

Which completely misses the real problem, as I see it: if the regulators and the regulated have a revolving-door relationship this is eventually guaranteed to fail. They will reach a concensus on risk management that will allow excessive risk taking.

Their other commentary, especially the arguments that there's no Canadian housing bubble is par for the course.

Their 2 forceful arguments against a bubble popping are
1. mortgages are full recourse
2. the current house price rise is a rebound from the last bubble's pop, which held prices artifcially low for a decade

My take on these is:
(1) this didn't prevent the late 80s bubble from popping, with some prices falling 50%.
EDIT: I do find this to be a powerful argument. At the same time, it's a telling commentary on their mindset that they don't see this same argument applied to the LAST housing pop.

(2) the only valid reason for excessive price increases is fundamentals: supply versus demand, for example: any other reason for a price run-up doesn't matter, if it's unsustainable based on the fundamentals there must be a correction: higher wages or lower prices. their cited reasons read to me like a "post-facto rationalization", a verbal exercise designed to fit the facts into one of the fundamentals, and not a real fundamental consideration.

A rebuttal to Simon Johnson...

Friday, April 2, 2010

Is Canada Better Regulated?


As the United States struggles with achieving any substantive financial system regulatory reform against the well financed opposition of bank lobbyists intent on preserving the profitability of systemic risk, there has been a weak and poorly focused debate on whether Canada, which was relatively unaffected by the current financial crisis, has a better regulated financial system or not and, if so, why.

In May 2009, The Wall Street Journal argued that the Canadian financial system is not exportable to the United States, because Canada does not promote affordable home ownership through government subsidized programs with down payments as low as 3%. In Canada you need a down payment of at least 20% or you are required to purchase mortgage insurance. Mortgage interest is not deductible in Canada. While a homeowner in the United States can walk away from a loan if the balance on the mortgage exceeds the value of the home, in Canada mortgage holders are strictly responsible for the their home loans and the lender can file claims against other assets...

...While the Financial Times article also caters to a "robust" mortgage market with only a 1% default rate while having approximately the same home ownership rate as the United States, David Dodge, a former governor of the Bank of Canada, maintains the structure of the banking business allows the banks to make healthy profits without taking extreme risks. "You had a set of banks that had essentially very profitable domestic commercial banking franchises. They had to be pretty bad in their other business to lose money overall."...

[GRG55]

Re: more Canada - banking safety & housing bubble

Thanks for the link, I'll have to read more to see if they can convince me there's no bubble.

I've dealt at arm's length with OSFI, and sometimes they are tough, so I did look askance @ Johnson's view that there's a cozy relationship.

On the other hand, there have been times it looked to me like OSFI bent over backwards in serving the banks' interests.

not so much a rebuttal, they take exception with a few observations, agree with some ... , but there's a lot of Johnson "doesn't consider ...".

I found their end point interesting: "We should be looking for financial regulatory reform which stresses the principles of risk management."

Which completely misses the real problem, as I see it: if the regulators and the regulated have a revolving-door relationship this is eventually guaranteed to fail. They will reach a concensus on risk management will will allow excessive risk taking.

Their other commentary, especially the arguments that there's no Canadian housing bubble is par for the course.

Their 2 forceful arguments against a bubble popping are
1. mortgages are full recourse
2. the current house price rise is a rebound from the last bubble's pop, which held prices artifcially low for a decade

My take on these is:
(1) this didn't prevent the late 80s bubble from popping, with some prices falling 50%.
(2) the only valid reason for excessive price increases is fundamentals: supply versus demand, for example: any other reason for a price run-up doesn't matter, if it's unsustainable based on the fundamentals there must be a correction: higher wages or lower prices. their cited reasons read to me like a "post-facto rationalization", a verbal exercise designed to fit the facts into one of the fundamentals, and not a real fundamental consideration.

I think I am closer to your view due to the following:

1. We've had housing bubbles and busts before...just nothing on the scale of what the USA, Ireland, Spain, Dubai and so many other jurisdictions have recently experienced...so no reason to think it can't happen here in some form again;
2. Canada is not immune from the effects of the ongoing global liquidity pump;
3. The more I hear denials of a housing bubble from the same people representing entities that would be gravely harmed by a bursting bubble [Finance Minister Flaherty, the Chief Economists of the Canadian banks, etc.] the more convinced I am that the situation is worse than it appears;
4. During the height of the crisis the "flagship" financial assistance program the Canadian Federal Government instituted was to buy MBS from the banks [in the past 18 months CMHC has purchased more than Cdn $70 Billion of MBS from the banks using taxpayer money].

To their credit, the Government did take some baby steps in February to slightly constrain mortgage leverage...but those don't seem to have had much effect so far...

[Spartacus]

Re: more Canada - banking safety & housing bubble

I think I am closer to your view due to the following:[*]The more I hear denials of a housing bubble from the same people representing entities that would be gravely harmed by a bursting bubble [Finance Minister Flaherty, the Chief Economists of the Canadian banks, etc.] the more convinced I am that the situation is worse than it appears;

For those with no faith in governments this was par for the course. For those with some remaining faith, maybe this will be a wake up call

Paulson & Bernanke:
(after the crisis is obvious to EVERYONE) there's no crisis
(later) there's no crisis
(later) the crisis (that never started) was unpredictable - no one saw it coming
(later) the crisis is not that bad ... join hands & buy some SUVs
(later) the crisis (that never started) is being forcefully dealt with
(later) the crisis (that never started) is half over
...
...
(later) we need more power to deal with the next crisis that will never start