Stephen Harper and Canada's subrime market

A wonderful article in today's Globe and Mail put the pieces together and explains how the Conservatives' 2006 budget opened the door to the issuance of high risk mortgages in Canada.

"The new rules encouraged the entry of such U.S. players as American International Group – the world's largest insurance company – and Triad Guarantee Inc. of Winston-Salem, N.C. Former Triad chief executive officer Mark Tonnesen, who spearheaded his company's aborted push into Canada, said the proliferation of high-risk mortgages could have been mitigated if Ottawa had been more watchful. “There was a lack of regulation around the expansion of increased risk,” he said."

According to the same article, "new mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time".

A big surprise? No, not really

It made the headlines of the National and every media outlet out there, the Bank of Canada reduced it's overnight lending rate by 0.75% to 1.5%, a 'deep cut' for some commentators. Will it have an effect? not really. Is it a sign of worse to come? I fear it may. But first here is why this cut does not come as a surprise and why, if the Bank is going to cut rates in the future, it may have only one bullet left in its charger.

The latest big economic news was released last Friday: Canada lost 71 000 jobs and the US about half a million. Proportional to the size of our economies, Canada's numbers are much worse than what happened down South. The recession could no longer be denied and with Parliament out the Bank was left alone to provide any stimulus to the economy.

Overnight lending concerns only a fraction day to day costs banks handle. With our banks already in a weak position from other investments not doing so well, even if our banking system were competitive you would not see the full reduction passed on to consumers (to a certain extent it would irresponsible for banks to do so). My more fundamental concern, and this is why I fear there is worse to come, is that the problem we face is not the cost of credit but rather its nonexistence. Banks simply are not lending (ask any business owner, they'll tell you). In that situation, the traditional tool of lowering rates to nudge up investment isn't going to get us anywhere. The Bank of Canada is in a difficult position, the interest rate is so low there remains very little room for anything but one, final, drastic cut to the overnight rate (if your going to end up at 0%, might as well go out with a bang). After that we face to possibility of being in a liquidity trap.

The solution? Helicopter money. I'm not joking. Milton Friedman's idea, not mine. And it's a sensible one. If banks aren't lending, then the central bank should drop huge wads of cash from helicopters into the hands of businesses and consumers to get them to spend again. Now, implementing an actual helicopter drop is out of the question but it does tell us what policies we should want our government to pursue: spend, spend, spend, bypassing the banking system.

Most of the pain at the moment is concentrated in Southern Ontario, Canada's manufacturing belt, but expect the end of winter and early spring to lead with piles of canceled tar sands, refinery and related projects in Alberta and Saskatchewan. World demand for oil will slump much further in 2009 (see this article in the Financial Times) and the days of even $40 barrels we be far behind us (another reason the environmental movement has got it's focus all wrong).

Deconstructing Ottawa

Quick reaction to the Throne Speech. The weakening of the federal government will shift into a higher gear this year as the Conservatives will slash chunks away from pensions, benefits and salaries of the civil service. Crise économique oblige, I hear Harper saying.....

A last, Alberta may be coming to its senses

Alberta has been told to start saving, seriously, for a rainy day. Finally more attention is paid to the fact that the Heritage fund is nothing more that a bad joke, a dismal performance by the Alberta government to plan wisely for the future.

In essence, the fund accumulates surpluses, mostly from oil and gas revenues, as an investment fund. Other oil rich countries do the same, operating their own sovereign investment funds. The best at this game is Norway, no contest. Its fund has grown to over US$400 billion. Assuming the fund manages to yield only 3% on its investments, that is still US$12 billion in additional cash for the government coffers every year. By comparison, the Heritage fund has manage to amass, so far, only CAD$15 billion.

You might say I am too harsh in this simple comparison. After all, Alberta is a province of only 3.5 million. Norway, on the other hand, is home to 4.5 million people. Oops, so population is not a factor.

But Norway has been running its fund longer, right? The Norwegian Petroleum Fund was established in 1990. The Heritage Savings Trust Fund was created in 1976. Ooops again.

Layoffs, more layoffs and then, perhaps, file for bankruptcy

This is the way it goes. Firms face declining profits, for either temporary or permanent reasons, and need to cut costs somewhere. Pink slips are sent out, en masse at times. Witness Citigroup's 52 000 just this week. So as a picture is worth a thousand words, a graph, to an economist, is worth a thousand more.There were about 700 publicly listed firms in the US to have filed for bankruptcy in the last two decades of the 20th century. This figure depicts what occurred, on average, to the growth rate of their workforce in the years running up to, and immediately following, their filing for bankruptcy.

When hit by hard time, layoffs as a fraction of a firm's employ can achieve staggering proportions. In the year previous to filing for bankruptcy - remember, at this point management still thinks it can save the ship - firms layoff on average 20% of their workforce. Returning to the case of Citigroup, with around 350 000 employees, the combined layoffs of this week and those earlier this year reach 69 000. Or about 20% of the workforce.

I don't want to draw any conclusion as to Citigroup's future prospects. IBM slashed 60 000 employees back in 1993 and is still around today (although in business lore, IBM is a story of recovery from near bankruptcy).

Jim Flaherty: Stand up comic

I don't know whether to laugh or cry at this point. Flaherty's latest brilliant idea, shared with the media in what appears was an impromptu discussion, is to sell off some of the remaining federal real estate assets in order to avoid a deficit. I had to post the following as a comment to the Globe's article:
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Flaherty, and the rest of this government, is a joke himself. Let's say your house is worth $100 but loses 50% of its value because a housing market bubble has just burst. Now, you could borrow 75$ from the bank (you're still in good terms with them) to pay for this unexpected bill that just came in through the mail, or you could listen to Flaherty: sell the house for 50$, still have to borrow 25$ to pay the bill, and sleep on a park bench for the next little while as winter approaches.

Personally, I'd rather borrow the money and pay it back back with my house when it is worth $100 again. At least I can enjoy a little extra $25 for a few nights at a good hotel....

Anyway, the guy seems to be improvising every step of the way and so far, he's a pretty bad act.
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Just for kicks, I love to read the comments others leave behind. Here's a stellar example:

D Peters from Alberta, Canada writes: I have an idea, lets sell all that dead weight east of the ON-PQ border? That's a lot of land we can download. Well, maybe w should just sell all the have-not provinces and keep the rest. After all they don't seem to be generating much of anything.

Our revered Canadian banking system

I always have to cringe when commentators, particularly in business columns, praise our country's banking system. The claim is that somehow it possesses some kind of maturity and sophistication that puts it above and safe from the irresponsible behaviour we see and have seen down South. The fact is that we tolerate limited competition under our banking act. And we do so under the assumption that in return bankers will uphold the most strict business standards. In case you did not know but suspected as much, chartered banks enjoy phenomenal profit margins and, in effect, a virtually unlimited ability to tax our banking transactions to generate revenue.

Ignoring for the moment the remarkably poor services they provide, today's announced $50 billion in additional bailout money for these same banks has not raised much alarm, concern or indignation. Perhaps it is a matter of scale. The news media are swamped with numbers out of the US, a much large economy. So large, in fact, that a general rule of thumb is to multiply by 10 any number out of Canada before comparing it to actions South of the border.

So what happens to our little $50 billion package? A whopping $500 billion!!! Add to that another $25 billion doled out earlier this fall (again, multiply this by 10) and we have committed, just hold it, $750 billion to our strong, stable banking system. If that number sounds suspiciously familiar to you, remember the controversy just a month ago in the US over a similar large sum of money destined to the financial sector. In the American case, however, it was always clear that the money was destined to bailing out an irresponsible financial sector that would, in due course, be held accountable for its actions and the people's money.

So if the size of the bailout is any indication, the health of our banking sector is at least as bad as in the unregulated South. Despite enjoying large cash flows from a protected market, these banks made poor investment decisions, did not proceed to do the proper risk assessments of investment vehicles and no longer deserve the protection afforded under the Banking Act.

One last troublesome note. Given the vast amounts of public money involved, where has the opposition been hiding? who will defend tax payers and ensure governmental aid is accompanied by strings and reforms? Which is safest to assume: the opposition is asleep at the switch or is comfortable with maintaining the status quo? Oh, and by the way, no one has mentioned how the purchased bad mortgages from banks will be priced.....

Finding a job

Four years into your doctoral program and the fabled meat market for young economists is about to become a reality for you. For years it seemed to you a nebulous constellation in a far away galaxy that somehow attracts graduates and would be employers, mixes them up, and spews out new assistant professors. As you get closer you begin to understand that murky process by which you are about, if you are lucky - a point to which I will return frequently in the future - shake hands with your future colleagues and realize "the" dream.

This first post is somewhat of a teaser. It won't go into many details, explore the specifics, technical and human, of the job search process. I will only outline the general process, introduce the main characters, give you a sense of the plot line. Over the coming weeks and months, as I, myself, sail closer to that momentous event of the "Grand Meeting" in early January of each year, I will fill in the gaps and try to color as bright as possible this story.

The actors: you, the candidate; them, the employers; the Grand Meeting, that first interview in a hotel room somewhere in the US.

The time line: preceding summer, spend all you time writing, writing and writing that paper representative of your abilities to conduct research; the fall, ask for letters of recommendation, write countless cover letters, and apply, apply, apply; December, spent hooked to your phone and your e-mail account, waiting for invitations to interview; first weekend in January, the Grand Meeting.

As things start to crank up, discussion forums pop up, collective anxiety is on the rise, and I will will try to comment as regularly as I can.