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Angelaric01

Olivia
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ISA Allowance

If you’re pissed that the banks’ decision on a rate cut was MORE prudent for their corporate health than you would have hoped or expected, you should avoid getting all worked up over the health of those prudent banks.

Here’s a news flash. Canada is not an island. Stupid banks the world over have consensually entered into contracts with stupid customers, threatening the financial health of both classes of parties. So much so that governments the world over are threatening the prosperity of their unborn citizens in order to maybe succeed, maybe fail to lessen the pain to those of us alive today. Canada will take a hit. We’re in that web. But all sane sober reports have Canada in the best possible shape compared to all the others, to deal with this turmoil. I know you’re terribly hurt that Canada didn’t create as many thousands of jobs as the same time last year, but if that’s the worst trouble you can find…

Credit where credit is due. This was an innovative move by the government – and a move that wouldn’t have been possible in the US.

But doesn’t it help to illustrate why Canadians are right to be a little concerned?

***
Banks move to trim prime rate further after Ottawa offers mortgage relief
October 10, 2008 – 13:52
THE CANADIAN PRESS

TORONTO – Canada’s big banks are passing on more rate cuts to consumers and companies after credit markets freed up Friday in the wake of federal government help for the mortgage industry.

TD Canada Trust (TSX:TD) said it will lower its prime lending rate by 15-hundredths of a percentage point to 4.35 per cent, effective next Tuesday.

The Bank of Nova Scotia (TSX:BNS) announced shortly afterward that it is cutting its prime rate by a quarter-point to 4.25 per cent.
Chris Hodgson, Scotiabank’s head of domestic personal banking, stated that: “At a challenging time in world financial markets, this reduction in interest rates reflects actions initiated by the Bank of Canada and the federal government.”

Shortly afterward, CIBC (TSX:CM) chimed in, matching the smaller TD trim in the prime rate – the benchmark for a wide range of lending to individuals and corporations.

The banks had come under fire earlier this week after they passed on only half of the 0.50-point cut in the Bank of Canada’s overnight rate, which was part of a co-ordinated effort by major central banks to ease credit markets.

Friday’s additional trim was credited to the morning’s move by Finance Minister Jim Flaherty to allow the banks to offload as much as $25 billion of mortgages from their balance sheets to the Canada Mortgage and Housing Corp.

TD said this should reduce the banks’ cost of financing, in turn allowing them to trim the price of loans.

Actually, yeah, a little. Because it basically signified that, in the current context, banks didn’t feel they were able to pass the full rate cut along becuase to do so would have put their liquidity positions at risk. Today’s actions by CMHC would appear to add credence to the fact that the banks are having a hard time in the current context, and I’m sorry but considering the fact that the majority of Canadians are served by one of these five institutions, and that I’m one of them, I’m concerned whenever they feel they are under such significant pressure that they feel the need to deviate from standard practice.

The first article is about pensions, and it simply points out what most people already know – that the acturial foundations of Canada’s pensions funds are not guaranteed, and have taken a hit (“pension health index ‘is down another 2 per cent’ since September”, which would be before the meltdown of the past week). They are in fact in a worse position today than they were at any time in the past decade, including after 9/11 or the tech bubble. Like you say, that’s math.

One points out that pension plans that are heavy in the equities market have taken a hit lately. That’s not news, that’s just math.

The other points out that banks failed to “pass on” entirely the most recent BoC rate cut. My memory holds many prior events when the chartered banks were not completely in lock step either, so other than the wailing of some loudmouths (hello Duff Conacher, chair of the Canadian Community Reinvestment Coalition, would you be the same thrown-out-on-your-Duff Democracy Watch chair from federal court? How many advocacy groups can one Duff chair?), I don’t get the fuss. Banks are crumbling the world over and governments are killing capitalism as we speak, and Canada gets knotted up over 25 or 50 basis points. Whatever.

http://www.thestar.com/Business/article/515162

http://www.thestar.com/Business/article/515173

Serious? Uber kudos. I, like most of this country, am long. And ouch.

“the U.S. has compounded things by interfering with nature. Let em fail, but let them fail in the open.”

I disagree. So PERHAPS they may be compounding things by the complete lack of any guiding principals in what fails and what doesn’t, and in the constant and slowly escalating interventions, such that the market has no idea what has a government imposed floor and what doesn’t. They could be prolonging the misery somewhat, but I certainly don’t think that this, on balance, would be better if the government completely stayed out of it. Without the bailout, without the liquidity injections, without the rate cuts, I’m not convinced a single large US retail bank would stay solvent, and there is no way institutions like the FDIC could take up the slack. And I still do think that Flaherty should play ball with the “G7 Consensus”, not go fishing. :) I completely concur with you re the shorting and MTM rules though.

The difference is the depth of the involvement. As one who is comfortable long or short, I’ll be the first to admit that Canadian banks do not have the exposure that investment and depository banks elsewhere do. But that doesn’t mean they don’t have issues of their own, nor does it insulate them from the more global pressures.

As for the “meeting” some of the prescriptions they are coming out with are in fact making the problem worse. Flooding the market with credit hasn’t helped. Suspending mark to market accounting rules in fact has made things oh so much worse – now bad assets may as well be marked to whatever fantasy of the day the mailroom clerk has. Banning shorting was never a good idea as it only makes things worse in a) other sectors and b) in the market as it reopens. Witness today.

The bottom line is there is no trust out there, for good reason too. The investment dudes all play the same game and now everyone is exposed, and everyone knows how exposed the others. No one can place a realistic valuation on assets which are the core of the problem and the U.S. has compounded things by interfering with nature. Let em fail, but let them fail in the open.

In the future trust will be legislated. It will be onerous. And it will severely limit profitability. But that’s the price we’ll have to pay. That’s a clear role for government. Its not a “conservative” policy either. But it will be done by whoever is in power.

Meanwhile, instead of *leading*, Flaherty, Carney, Harper have been following in the footsteps of the very people who are making the situation worse. And if you look at the timeline, (a detailed version of which I do hope to finish sometime soon in fact) you’ll see that little original thought has gone into our situation, at least since the start of things a year or so ago.

If we are merely going to parrot what the U.S. is doing, and failing as it tries, to “fix” the situation, we’d be better off if Flaherty went fishing than to Washington.

I’m not terribly concerned about what’s transpiring, at least not from a personal finance perspective. I can turn a (very) decent profit in any market. But I am terribly concerned for the 99% of Canadians who can’t, and my mother – take note Stephen Harper – is one of them.

Will it work? Who knows. But it’s better than running around Canada in circles screaming the sky is falling. And to be quiet honest, I don’t think Flaherty or Harper have much leverage in any of this. He’ll do exactly what the G7 consensus tells him to do.

Willing to be convinced….but you have to provide more evidence than saying they borrowed money to fund an item that was mentioned in the previous years budget, which by the way has been reviewed by countless analysts and the auditor general.

If this is something nefarious its an amazing case of hiding in plain sight. Saying that others lack your powers of perception without elaborating is kind of empty. What did they fund, they state it? What is wrong with what they have done?

Watkins, so they are accused of not being involved in a crisis that doesnt originate in Canada….once again, what else would you have had the government do at this stage?

Low blow, I know.

You enjoy being treated like a fool, be my guest.

By the way, banks make up a goodly portion of the membership of the World Economic Forum. Funny thing, banks ranking banks.

Nice fluff piece on a dreadful day though.

Hey, didn’t the IMF have nice things to say about their banking system too?

“Deflation is great”

You are kidding me! Deflation is as evil if not more so than inflation, which is very bad as well.

You think your wages stay the same in a deflationary environment,….nope…it definitely kills lending….why borrow when all that will happen is your ability to pay back the debt disappears.

Debt or credit is a needed thing, too much for non productive activity is definitely a problem. But without credit you dont get investment, inflation and deflation all introduce uncertainty to future value…so price stability is the point….1% inflation or deflation isnt going to do any damge…10% either way does. If every business had to save the money before it bought the machine productivity starts to fall.

Money is a store of value, no different than real estate is a store of value….but cash or money is portable, divisible etc. Liquidity refers to the ability to exchange it for other things.

Liquidity in a banking sense refers to do they have cash or value to loan out or return when people ask for it paper form or need to exchange it with another institution. In an inflationsary environment you want to reduce your money supply, and thus raise its price to reduce the currency debasement. In a deflationsary environment you do the opposite.

Right now we need to deflate a number of asset bubbles without triggering a general deflation…not easy and very dangerous if we do it incorrectly, as dangerous as trying to break an inflationary bubble without killing your economy. Think 1980 with 21% interest rates as the result when you let it get out of control. Think 1930′s with 30% unemployment when you let deflation get out of control. The real estate bubble should have been pricked a few years ago….less painful….

“Deflation is great”…I dont know what to say, other than you are quite misguided and misinformed.

As for the red herring on the governments budget…..looks like they funded the infrastructure programs ahead of time…effectively loaned the money from one side of the government books to another. I believe they have worked it like a sinking fund so it pays itself off in future budgets, unlike handwaived promises. If the program is cancelled the money is returned and the debt repaid….total tin foil hat stuff otherwise by claiming cooked books…..goodness it has to make it past the auditor general, who is next to a saint right now. Wrong tree, but definitely a dog bark of an issue.

Now that they are in power they put forth their agenda/plans which they firmly believe should be in place….freer markets, larger banks, less regulation, etc etc…….

Fast forward a year or so and things go south, we are on the verge of a financial crisis, one with the impact such as we are now witnessing and which is bringing financial markets around the world down down down, not to mention the value of our own hard earned pensions!

With the Conservatives in power they will implement their long held beliefs and Canada will not have any form of a safety net in hand to fend off any adverse affects of the global markets, which we all know can swing south very quickly!

Is this what Canadians really want? Are we prepared for less regulation, larger banks, and less government involvement? If so then picture what we are going through now after havign the Conservatives in power and letting things fall where they may.

Stephen Harper wants to let things play out. He prefers to sit on his hands rather than get involved. It is a strategy which, while it may not be wrong, it sure has a large impact if it is wrong …………….

I want a government that cares about me/my well being before the corporate well being of over paid executives in a freer less regulated market place which has inherently a higher risk! I want my government on my side when things start to go sour!

I cannot afford to wait 20years for my pension value to get back to where it was! And yes, I could go and whithdraw all of what there is in my pension from the markets right now and quit my whining. But, if I did that and every other Canadian did that then what’s to be of the free market system? After all, they are also very dependent on the influx of money from pensioners such as me!

Thing is that $14.2B doesn’t show up completely as either a recievable or an investment.

Jim’s not telling the whole story.

Deflation is not great for everybody. It is horrible for people locked into loans or mortgages negotiated at the peak of a bubble – the house they bought is now worth less. For those that owe money, their income goes down (for what are wages but just another price), but the size of their debt does not.

Moreover, deflation discourages consumer spending and encourages saving. That is great in the long-term but not in a time when you probably want people to buy stuff. Lets not forget about the short-term – sure drinking Ginger and Rye isn’t a long-term solution to my studying for comprehensive exams, but it will certainly increase my marginal utility for the moment.

The assets whose prices are dropping most drastically are the *fake* assets which were vastly overpriced due to the conditions of the inflationary bubble which preceded the deflation. The price of bad assets must fall or else there is no such thing as a market. Toxic sludge mortgage-based securities, for example. Shares in unprofitable dot-coms. Etc.

And money is not liquid. It’s not a lubricant. It’s a store of value. If you create money out of nothing and then use govt fiat to force everyone to accept the money then you destroy the value of the money which people have worked hard for and which they have diligently saved. When you act like money is some kind of liquid lubricant and hose it around you are telling working people and investors, “To hell with working and saving – watch us shoot pure wealth out of our magical wealth-i-nator!”

So to modify your assertion slightly, the real threat to *bankers and to politicians* is deflation. Inflation is their greatest friend because they can make a lot of dough on rising bubbles. Borrowing cheap and lending dear in ever-increasing amounts, using leverage, is how bankers become billionaires. Constantly expanding government borrowing, spending and taxation is how politicians gain power over people and become millionaires. That’s why politicians will always bail out bankers, even when they lie and pretend they’re not bailing them out, and it’s why bankers never criticize govt policy, especially not central banking policy.

Deflation is great for everyone else because they pay lower prices. Their paycheque goes farther. They don’t have to borrow as much. Their savings are not wiped out by inflation. Their real savings of real money they made is the real engine of growth, through real investments. Not the fake, speculative, inflation- and credit-driven central bankers’ and politicians’ kind of growth.

Deflation wipes out the lame, crooked and unprofitable businesses which pop up like mushrooms during bubbles – which frees up the labor force and other assets so they can go back to working for solid, reputable, honest and profitable businesses.

If everyone is working productively for solid companies which don’t have to borrow a lot of money, and the workers don’t need a lot of welfare or other forms of govt “help”, this is indeed a nightmare for bankers and politicians. If that ever happened they would have no choice but to go get a real job.

Where were you when Bob Rae needed you?

The main deficit items are “Other Investing Activities” and “Accounts payable, receivable, accruals and allowances”. The only description of “Other investing activities” I’ve found is from the 2004-05 Annual Report on Government Finances: other investing activities, primarily for increased loans under the Canada Student Loans Program, and increased requirements relating to the transfer of the Government’s holdings in the Canada Pension Plan to the Canada Pension Plan Investment Board.

Why would investing activities show a cash outflow this year? It could very well be the endowments the Government has made to various funds: community trust, infrastructure etc. The Tories have noted a few times that they have structured these funds so that the Government will be repaid (unlike the Liberal practice of permanently endowing foundations). That would be consistent with this accounting presentation…

No, it doesn’t.

Which clearly they wouldn’t if you had had your way back in the 90′s. As I commented in your last blog post, I easily found several mentions of you encouraging bank mergers after deregulation of our banking system.

Everyone, just google:

banks site:andrewcoyne.com

For a bevy of Andrew Coyne’s columns from the 90s supporting deregulation of our banking system, followed by mergers. Would we be bailing out the banks right now if Paul Martin had followed your advice. You betcha!

And people aren’t worried about their “savings” in the sense of a run on the bank and our banks going broke. They’re worried about their stock-indexed mutual funds, which are currently in a nosedive. The Dow just closed below 9000. Care to comment?

bull. They’ve drained the tickle trunk and printed notes they can’t cover before year end. That hasn’t happened for years.

I can report a budgetary surplus as long as I book my new Porsche as a non-budgetary transaction.

It IS standard practice if you’re Jim Flaherty.

You’re pretty much right on the money provided by the Bank of Canada, but it’s useful to note that the spread between commercial paper rates and the bank rate hasn’t really moved. The paper rates have come down, but no more than the bank rate has…the credit squeeze is still being felt in Canada even after Carney’s announcement.

Scott – none of the 230 economists think a carbon tax would head off a recession. More generally, they agree on “carbon pricing” (either a tax or cap and trade) but note that cap and trade has more certain *environmental* effects. The lead author has also noted that a carbon tax is better able to target consumers (i.e. drivers) – but Dion’s proposal exempts them. Overall, it’s not clear that these economists endorse the Green Shift as written.

that money is liquidity and it isnt debt, in the traditional sense, no interest is paid on it. It is the supply of money, ie the priniting press. This ensures banks have lots of it around….to meet needs, so they dont have to borrow from friends and to keep the price of money, interest rates, low.

You get concerned about this from an inflationary point of view if it happens at the wrong time. But the the threat is from deflation, falling asset prices, right now and from a liquidity issue…not enough to lend so even good projects and risks go begging.

total red herring

Re: The increase in non budget items…someone better at budget reading might be able to find what it is but I suspect it is all related to the infrastructure spend announced in the 2006 budget, a 33 billion in total spend over 7 years. So the money is put aside now for the money they are doling out over the next 5 years I believe and is paid for out of each budget and has already been accounted for. So as each year brings in the receipts the debt for this project is retired…..standard practice I believe. But I havent been able to find the specific table, I have better things to do than comb in detail through budget tables.

Much ado about nothing. The government is still earning more than it expends. You need to find where the Loans to Crown Corps went…my suspicion is they set one up for the infrastructure fund….but once again someone else needs to chase that one.

In castigating Scott Brison, he said “Canadians are worried about their jobs, their pensions and their mortgages, not……”

Then again, not expecting anyone here to hold Conservatives to account for continuing hypocrisy.

I assume your “explain ‘extreme’” remark was meant for me. I put extreme in quotation marks (“extreme”) on purpose. I don’t mean “extreme” in the sense of “extremist”, I simply mean “extreme” in the sense of “outer edge”. So the CPC is “extreme” in the sense that there is no political party in the country to their right. They are at the “extreme” of the (mainstream) political spectrum in Canada on the right, just like the NDP are on the “extreme” left of the spectrum in Canada. Everything beyond these parties, in either direction, is “here be dragons” territory in Canadian politics.

Sorry if that wasn’t clear.