Sunday, 19 December 2010

MADD


It is the holiday season, so please don’t drink and drive. My title, however, has nothing to do with drunk driving, but rather seeks to co-opt the famous acronym of the mothers and apply it to a grand majority of Canadians. And my new acronym, Mortgage Attention Deficit Disorder, is not so much about what anybody is against as what they have trained themselves to forget and ignore: the stupendous amounts of debt that are now universally regarded as a fact of life here in Canada.

It seems that once again the ideals that we have been keen to use as a country to generalize about ourselves are misplaced: rather than a “prudent, conservative” fiscal nation, we would be a “greedy, speculative” one. A "stable" "rock-solid" economic environment, qualifiers that have been used to describe ours ad nauseum, is only so when people are capable of servicing their debt and willing to constantly part with their money in the hopes that the Bay Street-Central Bank-government cartel will take care of them and knows what its doing. I have brought this up repeatedly for awhile now, over the last many months during which which financial statistics on Canadian households have been quietly released by the bank of Canada a regular intervals.

Though it looks like this month, the fiscal manipulator in chief, Bank of Canada governor Mark Carney, has finally sounded the alarm so loudly and so forcefully that the hankering debt issue has been brought out into the open. His comments have acted as ritalin to the hubris and sand-covered brains in our heads which have been the symptoms of MADD. So it was that the chief pushers of the bubble, the big five banks and their economists, plus all their minions in the press, were unwittingly launched into discussion in which they simultaneously philosophize about the governor's comments and demand explanations for them, which has been going on non stop in the two weeks since. The noise has been so steady throughout all the front pages that it almost feels redundant discussing it on a blog.

I am discussing it anyway, because I need to in the face of a lot of fearful and belligerent commentary that exists out there. Fearful that a veritable bubble has been inflated, belligerence that we will ride it forever into the sunset. Unfortunately, none of this is of much substance, because as usual, the heart of the problem remains unaddressed. Mr. Carney has two dilemmas to contend with. The first is that our great nation could never set an independent economic policy of its own and the best thing those that governed us could think of (beginning with Borden's "branch plant" policies of the teens but culminating with the Mulroney free trade regime of the 80s) was to chain us as an economic lackey to the great rocking and sinking ship of the south. One thing this does makes it difficult to export our commodities anywhere else, but a more important side effect to what we are discussing, is it makes our central bank to raise rates to curb runaway inflation speculation until US fed reserve chairman Ben "Bada-Bing" Bernanke does the same. Canada’s prime rate is already 75 basis points higher than the federal reserve, and some unknown mechanism prevents us from raising it much further.

Here’s the real rub though; no matter how dumb or how smart you are, I don’t know what you do in Carney’s predicament. Do you raise rates and make three million loans and mortgages go bad overnight (which would only punish the big five, so really, I’m all for it) or do you keep them low and watch as Canadians continue to take on debt at blistering levels (which a recent poll indicated they are more ready than ever to do)? Based on our recent experience as a country, we can say that this is something the citizens of this country have been more than happy to do up until now, and will only continue to do should the rates remain at their historic lows.

Either way, I'm probably not the best person to ask, since my skepticism of the "recovery" the public figures verbally dance around with such caution due to it being so "fragile" has only grown with time. I do think there is a lot of unworthy and bad debt in the system that it would probably be beneficial to wash out as soon as possible, but you can most likely count on the government to do just the opposite. Because the pre -conditions they are setting for themselves to do right and responsible things like curb speculation, reduce debt, and address inequality are almost sure to never materialize. Those preconditions being a return to "robust", "sustained" economic growth. Surely these people are smart enough to realize they are rigging this for colossal failure.

What would drive such a failure that would require the use of an outsize adjective like "colossal"? I think that is usually the scope of the problem when an entity (in this case, a nation state) realizes that it is engaged in reckless/self destructive behaviour but maintains its way of thinking in all of the solutions it comes up with. I believe economic growth would call for the economy increasing its value, so why do we think economic growth is possible when we've made real-estate speculation, a sector which adds little to no real value, such an integral part of the economic equation?

I want to come back here to these people I call the pushers, the best example of which I can think of is this real estate agent who writes a column in the free local here. I will share two of his profound insights. Here in Waterloo, with a large university-attending population, there are a good deal of clusters of absentee-owned, slumlord, student housing areas. When the government raised the capital requirements for owning secondary properties this year, this columnist lamented how what his slumlord client could once buy four properties with would now only land him two, which in turn halves his commissions and means "less money pouring back into the local economy". As if the local economy has any value added to it by some asshole whose sole role in it is trying to get rich by skimming the bubble that expands by successfully encouraging people to go in over their heads. Another even better one was when he was sitting at a bar and he overheard a pilot mulling over buying a house to two friends, but ultimately deciding against it due to ongoing overhead costs, concerns about an overinflated housing sector, and endless maintenance responsibility bullshit. The columnist wanted to grab the stranger by the collar and tell him his buddies were only trying to house-block him because they couldn't own themselves. Hidden message - "your friends are losers cause they don't own, so stop being dragged down by them." And his justification for his "house-block conspiracy"? His mantra of “It only trends upward”. This phrase making it in print at all is proof to me of either A) how deluded the collective mentality has allowed itself to become or B) how strapped independent newsrooms are for talent and content.

It's not just some small-time agent/broker with Trump Ego-sized delusions of grandeur that I'm worried about. It's Canada's cartel of banks that have facilitated the whole situation to evolve as it has, with the more cryptic and sombre declarations of celebrity CEOs transmitting the same messages in the business pages. TD CEO Ed Clark declared that if one bank actually wanted to cool down on blowing bubbles, the other four would "carve up" its (unworthy) client base. If the army of mortgage brokers, private lenders, and agents are the pushers, the banks are both the kingpin and an enabler to a population so vain it is convinced that home ownership is a privelege, a right, and rite of passage. If you leave North America, you discover that it is in fact none of these things. But the charade continues with all of the fervour and bustle of the drug trade where I borrowed the names of the interested parties from, for the same reason that it is very, very good business. Until a widespread contagion of cognizance materializes that makes the whole rotten bottom fall out.

Consider the observation this week that an average three bedroom house in the Vancouver area, the country's most "bubble-danger" real estate market, now would cost you $600,000. So first, you have to save $165,000, at which point you would qualify for a 25 year mortgage at $2,700 a month. That is calculated at today's historically low rates, which have nowhere to go but up, plus untold thousands in rising taxes, junk fees, renos, upgrades, maintenance, and on and on and on.

It's not that I'm ideologically opposed to owning, it's that we could have avoided such a patently absurd proposition to people the future foundation of society is supposed to rest on. Financial institutions and the government should be rewarding a young family starting out or a responsible individual for earning and accumulating real capital to invest by telling them they are sorry, but they won't lend to them until they come up with enough money to prove that they are serious about developing financially responsible habits. Of course it is impossible to say this now, but if it had been done at the outset, it would have kept prices reasonable and assured that they rose at a sustainable pace. Instead, we've created a situation where you have an enormous amount of the population living paycheque to paycheque servicing debt in the hope that the worth of what that debt represents "will only trend upward" and the government will subsidize their lifestyle through low rates and tax breaks. It's not surprising since the government manages its finances the same way; it is surprising that in light of that the Prime Minister has the gall to tell Canadians to "manage their affaires soundly" after presiding over and facilitating the biggest real estate bubble in Canadian history, 2006-present.

While Mr. Carney's warnings may enable him in the future to say "I told you so", people will not forgive him for not taking more active steps to save them from themselves. Which he will be forced to do anyway by raising rates. This is where people who did not have the financial literacy tools to live within their means will be punished, and not necessarily deserve it. Just as a one size fits all school system often "fails" people with learning disabilities who are only themselves able to realize this much later on. The only thing the MADDs will be guilty of is believing that a 148% indebtedness rate (US pre-crash peak: 162%) was "normal" and it was worthy price to belong to the 70% homeowning majority segment of the population (US pre-crash peak: 67%).

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