Canadian consumer confidence plunges; Bank of Canada holds the line; Are bank profits a tax on society?
SEPTEMBER 07, 2011
Conference Board indicates that Canadian consumer confidence is back to July, 2009 levels:
Consumers are perhaps waking up to economic reality. The Conference Board of Canada has released their August consumer confidence readings. They are ugly:
The Index of Consumer Confidence in August continued its recent downward trend, dropping 6.6 points to 74.7 (2002 = 100). Similar to last month, negativity toward future job creation and making a major purchase was the primary cause of the waning consumer confidence. But pessimism was also higher on responses to both financial questions. Index values dropped in four of the five regions this month; only British Columbia was able to avoid a significant decline in August.
People who aren't confident in their future prospects tend NOT to do one thing that has been crucial to economic growth in Canada over the past decade: They don't take on debt. Whether that debt is in the form of a new mortgage or whether it is from accessing home equity to support consumption, the message is the same. Without an ongoing expansion in consumer debt in Canada, economic growth will have a hard time gaining traction.
This month, just 23.1 per cent of respondents indicated than they expect their financial situation to improve over the next six months, down 3.4 percentage points from July.
the balance of opinion on future employment fell in this month’s survey for a third consecutive time. When respondents were asked if they expect more or fewer jobs in their communities in six months’ time, only 16.2 per cent answered positively in August.
Finally, responses to the question about major purchases proved the most pessimistic in August. The survey asks consumers if they think that now is a good time to make a major purchase and, this month, only 38.6 per cent said yes. This is down 3.9 percentage points from July and is at its lowest level since April 2009. Because the share of negative responses also rose—by 4.1 points to 50.2—the balance of opinion on this question has also reached its most pessimistic point since April 2009, which was the last time the majority of respondents indicated that now was a bad time to make a major purchase.
Wouldn't a house be considered a major purchase? This is a terrible reading no matter how you slice it, and it underscores just how quickly consumer confidence has eroded in Canada. It's hard to imagine confidence eroding at this clip over the coming months, but even flat lining at these levels implies major weakness in consumer spending. It would take some major mental gymnastics to believe that demand for housing won't also come under pressure.
Bank of Canada holds the line:
Mark Carney and the Bank of Canada has kept interest rates at rock bottom levels. From the press release:
The global economic outlook has deteriorated in recent weeks as several downside risks to the projection in the Bank’s July Monetary Policy Report (MPR) have been realized. The European sovereign debt crisis has intensified, a broad range of data has signalled slower global growth, and financial market volatility has increased sharply. Recent benchmark revisions show that the U.S. recession was deeper and its recovery has been shallower than previously reported. In combination with recent economic data, this implies that U.S. growth will be weaker than previously anticipated. The Bank expects that American household spending will be even more subdued in the face of high personal debt burdens, large declines in wealth and tough labour market conditions. Fiscal stimulus in the United States will also soon turn into material fiscal drag. Acute fiscal and financial strains in Europe have triggered a generalized retrenchment from risk-taking and could prompt more severe dislocations in global financial markets. Resolution of these strains will require additional significant initiatives by European authorities. Growth in emerging-market economies has been robust, although its rate and composition will be affected by weakness in major advanced economies. While commodity prices have declined owing to diminished global growth prospects, they remain relatively high.
Largely due to temporary factors, Canadian economic growth stalled in the second quarter. The Bank continues to expect that growth will resume in the second half of this year, led by business investment and household expenditures, although lower wealth and incomes will likely moderate the pace of investment and consumption growth. The supply and price of credit to businesses and households remain very stimulative. However, financial conditions in Canada have tightened somewhat and could tighten further in the event that global financial conditions continue to deteriorate. Net exports are now expected to remain a major source of weakness, reflecting more modest global demand and ongoing competitiveness challenges, in particular the persistent strength of the Canadian dollar.
It's true that the drag on Canada's GDP has been primarily due to global economic conditions, I'm not sure they will prove to be temporary factors. Non-mortgage consumer credit expansion is still running at levels not seen since the early 90s.
Yet we know, from a recent CIBC report, that, "historically, there is a statistically significant relationship
between how much debt Canadians tack on in the form of consumer credit, and consumption gains."
Hard to see how this dynamic will support consumption when debt-ladened consumers are looking increasingly fatigued. Should house prices correct, recession is all but assured, a reality that was explored in a recent post.
I took flak for suggesting last year that a rate cut was likely before any serious round of tightening. At the time, most bank economists had the overnight rate at the Bank of Canada at the 2-2.5% range by next year. In 2010, most economists were also predicting 3 rate hikes in 2011, yet in my 2011 predictions, I said the following:
Bank of Canada holds the line on interest rates all year. 5 year bond prices remain even to slightly lower on the year.
Those who didn't see the economic weakness would be surprised by the fact that Mark Carney has held the line. Furthermore, those who think that he will raise rates as a 'message' to indebted consumers don't understand that business investment, a very pleasant surprise to economic growth, would also be hit hard. The Bank has made it very clear that they will not use monetary policy to curb consumer debt; They view that as the government's responsibility. I agree.
Interesting that the mainstream media is now finally starting to catch a clue:
Markets rule out interest rate hike in Canada, build in possible cut- Canadian Press via CTV
Carney rate pause expected, but rate cut could follow- Globe and Mail via CTV
Interest rates aren't going anywhere fast. Those who think this is bullish for residential real estate don't understand the economic environment that warrants rates at these levels.
Are bank profits a tax on society?
I received an interesting email today. I had never thought about banks in this light, but it is an intriguing position. I'll post the email and let readers weigh in:
The Canadian banks have recently reported nice juicy profits again this quarter and to me, this is unsettling. The profits a chartered bank earns are equivalent to a tax on our society except that they are tax without representation. When banks regularly report profit growth in the 10 to 20% range, they are extracting significant wealth from the economy and conceivably slow economic activity. These excessive profits are being extracted at a time when citizens are taxed at every level and have little collective bargaining or tax shelter rights or opportunities.
In my mind, in return for a charter to offer banking business in this country, the business should be required to clearly demonstrate a social conscience with respect to redistributing its profits - more than most chartered banks are in the practice of. For example, one thought that came to mind was profits in excess of GNP growth should be shunted into a micro loan portfolio of some nature whereby the economy is stimulated at the ground level. I'm sure there are many more appropriate directions for giving back these profits, but I can see no justification for banking profits at their current levels in our current economic climate.
Interesting thought.
I'll try to keep daily posts going, but the next couple weeks are pretty busy for me. As always, your readership is much appreciated.
Cheers,
Ben
Posted in:
94 Comments
Joe Q - could you please run the numbers with 0% down (as many banks are giving 5% cash back)?
So are we greatly assisting the younger generation (with ridiculously low mortgage rates) in order to keep them placated and quiet and dutifully paying for the retirees (who, in order to keep getting their Canada Pension, receive ridiculously low interest rates on their hard-earned savings)?
Is this apparently a so-called win-win situation for everybody involved? The "new marginal" buyer helps out the "marginal retiree" who did not save enough, and everybody else in between gets screwed?
So the guy who has saved hard for a down payment is penalized because instead of diving into the market and buying at the lower end, he ends up getting in at the higher end and pays more? The marginal buyer with nothing down wins, even though he stupidly took a great risk (as interest rates could rise). The guy who saved hard to get a good down payment (as he didn't want to risk that interest rates would rise) gets hammered.
The retiree who did not save anything is not bothered by low interest rates (because he spent all his money), but the retiree who saved hard and did not rely on Canada Pension gets hammered because he doesn't get a return on his money.
Completely managed. Marginal helps out marginal, stupidity, risk and greed take all, and the rest get screwed. People who have benefitted by the government bailing them out with programs and tweaks in order to prop everything up are the beneficiaries, but they are dependent people. They think THEY'VE made the money, but they only made it because the government "let them". Any gain they make SHOULD be heavily taxed because, if not for the programs and the artificial suppression of mortgage rates, they would have made squat. They have had their gains "handed" to them on a silver platter.
Ben - they should never have artificially held down interest rates to begin with. Look at the mess it has caused. And when things started going south in the States, they should not have lowered interest rates to zero in order to prop up asset prices.
They have been "managing" the economy for so long, they don't know how to operate any other way. Of course, they always benefit (the top few per cent) from these policies.
Risk needs to be risk, and when people risk too much, they ought to end up losing. When risk is rewarded by propping assets up via various government actions, stupidity reigns. People should go bankrupt when things don't work out, as there are always others who will step in. Assets can always be sold, so long as the price is right.
Ben, you said, "Those who think this is bullish for residential real estate don't understand the economic environment that warrants rates at these levels." Yes, we are heading towards a depression. That's what these rates are saying.
Had rates reflected true inflation, had Flaherty not fooled around, keeping the bubble going by lowering the standards every few months, the market would have been more balanced.
What a God-damned mess! and so preventable!
Depression cometh.
Well if you own bank shares you're getting some of those bank profits; most banks raised their dividends and a lot of pension funds have bank shares. The issue I have with banks is that if their profits are high it will lead to inefficiency and poor distribution of capital. In times like this, though, that's OK because few else are hiring.
On the BoC statement, the most sobering position was their take on exports. This is a huge problem right now, where the government/BoC want businesses to spend on equipment but the large manufacturing base east of Manitoba is going to be loath to invest with non-competitive terms of trade and a dearth of demand with the Americans unwilling to spend. In my view it looks more and more likely like the government will be investing directly in manufacturing and infrastructure in one way or another (bureaucrats are a creative bunch; they'll find a way of doing it under the radar) to bolster jobs. As an example, I know the fighter jet program is controversial but it would see a boost to manufacturing in the Canadian rustbelt. The only thing left is for the government to excuse away why they need to run a deficit for longer than forecast. The BoC's somber forecast today has set this up nicely. Oh yeah, and these "problems" are completely beyond Canada's control, don't you know! LOL Maybe Carney can have a few words with his Swiss peers at an upcoming conference...
From a fellow blogger:
"The first step in restoring consumer confidence is restoring consumers' faith that they live in a reasonably just society. Until the scores of crooked bankers, accountants and political travelers responsible for the economic collapse are imprisoned, faith will not be restored."
They need to start at the top. The insolvent Wall Street banks need to go under (as well as the European ones). New banks will come in to fill the void. Bondholders need to suffer losses. That's what risk is all about.
This is an incredibly "unjust" society at the moment and, even though some are benefitting from it, even they know it is unjust.
Alas, reality starts to set in for all. First comes denial, then comes anger which fuels more loss of confidence. In other words, the death spiral has commenced.
I agree with that. Maybe not imprisonment (unless fraud can be proven) but certainly they should lose their jobs like anyone else who exhibits extreme incompetence or poor judgement on the job. And bailing out the idiots with my money really must stop.
Banks have become the parasites of our modern societies. I absolutely agree with the email you received. We are currently living absolutely insane time and, except for a few in Europe, nobody is protesting. Banks have put our economies to their knees by forcing taxpayers to bail them out because of their reckless lending and over-leveraged bad bets. This has put a tremendous stress on public finances, and more taxes and less services are coming big time.
The fact that banks can greatly benefit from a weakening economy is actually immoral. Banks are supposed to be here to support our economy, not destroy it.
I think it is time to totally rethink our the financial and banking system should work. Banks main purpose should be to support the economy by providing available and cheap credit to businesses and individuals, and not speculating for their own account on worthless piece of paper (aka derivatives). The deregulation of the financial sector had done nothing good for our economies. It has just increase the power and harmfulness of the banks. It's really time time to go back and put some serious regulations to control and limit what the banks/financial sector can do.
I'm not naive and I know how powerful Wall Street is and how influential it is on the White House and all the political system in the US (and Europe too). However, when people have nothing to lose and start to revolt, it can get really nasty (ask the Greeks today or the French in 1968). With millions of weapons in circulation in the US, if I was Obama, I would get serious about fixing the financial sector problem before things get out of control...
No one thinks you are naive! :)
The banks are far more than just Wall Street. Most of the bankers that make up the shareholders in the Federal Reserve are European, if I recall. I'm no economist, but I do read economic history. The nobles/aristrocrats ceded power to the merchants and bankers centuries ago. The amount of power in the hands of the great banking dynasties vastly exceeds that of any monarch.
This is not to say that they are not vulnerable to popular uprisings, but given recent history, public anger is likely to be misplaced. The power that they have over fiat currencies, governments, businesses (etc) is staggering.
I'm going to digress a bit here.
If you want to remove most of the power banks have and instability they create, it could be fairly easy, provided that there is a political will to do so (which is not going to happen any time soon):
- end fractional reserve lending
- forbid banks from investing/speculating for their own account
- bonus: forbid any form of corporate donations to political parties.
Never in History had gold worked as a currency. The problem is not what backs the money, but who controls its quantity. If we go back to a gold standard, the ones who control gold will be able to manipulate the value of the currency for their own benefit.
Today, 90% of the money is created by private banks through the fractional reserve lending system. The government has therefore very limited control over the quantity of money in circulation in the economy at any given time. Depressions/recessions always happen because of a contraction of the money supply, which most of the time follow a period of excess of money supply.
If we had a centralized public entity that could control the supply of money in the economy, we would no longer have boom and bust cycles (which is nothing more than a transfer of wealth from the poor and middle class to the already wealthy, and is fairly devastating for the population (RE burst)) and we would have a much more stable financial system by no longer allowing the banks to be leveraged...
Recall that story in the Bible about Jesus overturning the tables of the money changers (aka bankers) in the temple? Seeing what's going on these days, that's probably the real reason he was put to death. Amazing that we still have problems with bankers 2000 years later.
wjk - "...probably the real reason he was put to death." I think you deserve a gold star for that answer, because I think it's bang on.
Oh yeah, and holding rates steady? Someone must have told the big banks when they raised their variable rates last week. The fix is in! Or maybe I don't understand the intricate world of mortgage financing! LOL
Variable rate renewals go up up up, renter bears' rents go flat flat flat /s
Banks as a tax: Canadian pension funds (and individuals' RRSPs) are generally stuffed with domestic bank shares, so the profits do get redistributed broadly. Anyone who thinks this profit is risk-free must have missed the 40% price downside in 08-09. Structurally speaking the oligopoly will tend to be profitable so the opportunity is there if you want it.
Define 'broadly'. Are you arguing that there is some sort of equitable distribution involved in capital gains and dividends from banking stocks?
I think that if you look, a good portion of the Canadian population is going to be left out in the cold.
Your point about the profit being risk free is a good one, but not necessarily relevant. I think one of the questions raised in this post is why banks have such an extraordinarily good track record of returns right now. One of the reasons is that they are receiving massive public subsidies. (Flaherty's purchase of 75 billion dollars worth of securities is a case in point). In the US, they are receiving outright gifts from the taxpayer.
It would be interesting to see a model of this scenario, with an emphasis on the return that the taxpayer sees from state-mandated 'investments' (bailouts, subsidies) in the banking sector. Lots of variables, of course.
Almost every Canadian participates in the Canada Pension Plan. If they do, then they're getting a piece of the bank profit pie. The CPP holds a significant position in the Big5 in Canada.
Almost all professional balanced mutual and pension funds also hold significant positions in the Big5.
I'd say that more Canadians are getting some warmth from those profits than being 'harmed' by them in the way a tax harms an economy. .
Well I can agree with the concept of that Canadian bank profits may be generally widely distributed among investors, pension fund holders, bank management, CPP recipients. I believe also that there are whole segments of our society who see none of it.
I also believe that market segments of our society may make significant contributions to their profit through credit card, debit card, ATM, account service charges, short term and line of credit charges and other small account holder fees. These exhorbitant fee rates on small accounts all contribute to bank profits, but I believe the beneficiaries of those profits are another segment altogether. It's fine to say that you can share in the profits by buying the shares if you choose and can afford to invest, but can you also choose to not contribute to the profit if you are unable to share in the profit - I think not, given the merchant structures that have been built by the banking industry.
Since their Charter allows banks to profit from this captive market, relatively competition free, (although Rogers is now planning to join the party) I think thay have a moral obligation to distribute those profits in a more equitable fashion than raising salaries, bonusing, and dividend payouts. However, they are corporations wherein moral obligation is a moot point with little influence on operational decision making.
So a few of the crumbs from the bank ill gotten profits fall into deserving hands. What's your point? That's like saying the Mob gives 50% of their profits to charity so what they do is OK.
The fact remains that much of the banks profit comes from 1) paying savers nothing, 2) issuing risky mortgages that the taxpayer is on the hook for, 3) taking supposedly uninsured gambles that their friends in government will saddle the taxpayer with should the bets go wrong, 4) enormous fees and penalties. I don't see much net benefit to society coming from these activities.
Makaya said:" Banks are supposed to be here to support our economy".
I do not think they have a goal like that in their agenda.
They are supposed to make a profit and it is up to society to make sure that in doing that they support the economy and not otherwise. They have to play by the same rules as every other business - plan, work, take the calculated risks, make the profit. Reward yourself when there is a gain, suffer when you loose. When they bailed out every now and then ("to big to fail" were bailed in US and the smaller ones were let go - so much for the equal rights) and in Canada they are protected from the risks by the CMHC, they start to be the parasites of the society, they flourish when the society suffer - but they are not a single bit guilty, they play by the current rules and the society allows them to do.
Olga has a point. From a legal standpoint, they are corporations that are tasked with maximizing returns to their shareholders. When in conflict with other goals (e.g., social responsibility, helping the economy), that one takes precedence (or else!)
That doesn't mean that bankers view their role as profit maximizers. Banks have legitimate and useful functions. Unfortunately, they also make use of mechanisms that are more dubious, such as the practice of fractional reserves. If the consequences of this practice were allowed to accrue to the bank itself, this might not be so bad. But the introduction of sophisticated 'lender of last resort' systems creates a form of moral hazard that absolves banks of the requirement to perform risk analysis. Taxpayers then become a form of premium-free insurance against bank defaults and malinvestments.
So in that case, Jim, because the banks are essentially protected (from risk), then so are the shareholders. Bank CEO's, high-priced employees, ridiculously high bonuses (for what? for no risk?), and shareholders are essentially all extremely well-paid public employees. The government has got their backs.
If that's the case, then all those in favour of reducing their remuneration, please raise your hands.
"they play by the current rules and the society allows them to do"
I'm not saying anything different when I say the following: "The deregulation of the financial sector had done nothing good for our economies. It has just increase the power and harmfulness of the banks."
The society allowed them to do so because they (the banks) have managed to corrupt enough politicians in the US to change the old rules (aka more regulations) to the new ones (aka very limited regulations)...
Indeed. These political questions, and politicians are responsible for answering them, on behalf of the electorate.
Seriously? Can you imagine a Canada without profitable banks?? Canada's whole economic and financial system would crumble. Credit would dry up even more than it has and our economy would die. Home prices would definitely fall more than anyone could imagine.
If you wanna share in the banks profits BUY their Shares. They pay dividends four times a year. Or Join a Credit Union, they redistribute profits. There are more than the big 6 Banks. There are over 70 to choose from.
Good convo but not one of you mentioned what really started the banking fiasco.
The Glass-Steagall Act: This was a banking law that refrained commercial banks from owning or becoming investment banks since 1933. In 1999 (under Bill Clinton) the law was repealed and so the banking cartel was born. http://www.investopedia.com/articles/03/071603.asp#axzz1XJXEkulq
And yes, Canada repealed the same provisions from The Bank of Canada Act around the same time. Then you wonder who's really running our country...
Agree with you. This is what I was referring to when talking about deregulation.
Remember this picture?
http://tinyurl.com/3p2ja6a
In lock step with the States. Canada can't sneeze without first asking their permission.
Great discussion!
LOL, Yahoo! Answers explains why Canadian Real Estate is another bubble waiting to burst -
http://ca.answers.yahoo.com/question/index?qid=20110906213100AAC1F7m
Ohh my, it's a bubble for sure if it's on Yahoo boards..lol
Next up, Wikipedia!
Just for the fun of it, Wikipedia says -
http://en.wikipedia.org/wiki/Real_estate_bubble
"As of 2007, real estate bubbles had existed in the recent past or were widely believed to still exist in many parts of the world, especially in the United States, Argentina, Britain, Netherlands, Italy, Australia, New Zealand, Ireland, Spain, Lebanon, France, Poland, South Africa, Israel, Greece, Bulgaria, Croatia, Norway, Singapore, South Korea, Sweden, Baltic states, India, Romania, Russia, Ukraine and China."
Next, we'll have Appraiser and SM using this Wikipedia article as proof that there's no RE bubble anywhere in Canada.
I am sure if anyone wanted to add Canada to the list in Wikipedia, it's not very hard to do in Wikipedia. Please be my guest.
Here comes the liquidity scramble to raise cash...
TD Bank sells largest ever dollar covered bond deal
http://ca.reuters.com/article/businessNews/idCATRE78679X20110907
RBC selling U.S. retail bank branches for $1.57 billion loss http://ca.finance.yahoo.com/news/RBC-withdrawal-U-S-retail-capress-39846...
August TREB report out today: Strong August Home Sales up 24%!
http://www.torontorealestateboard.com/market_news/market_watch/index.htm
When the CHMC mentioned 'immigration' being a factor, they meant it.
I am not sure if my comment go deleted, but I posted a link to an article that talked to 3 different branch bank mangers who said that | Canadians have turned homes into atms" it was a very good article that talked the reality of how people are living in Canada i can't find it anywhere now.
BAML also put out a great report on cmhc increasing it's cash position and higher forecast home prices in Canada.
Wasn't deleted. You posted it in the previous article's comment section.
Sorry Ben I had to crunch these numbers.
Let's do a little speculative math everybody.
ON will represent Ontario percentage
CAN will represent Canadian Total
Source: http://www.ontarioimmigration.ca/en/tools/OI_RESEARCH_STATS.html
—Permanent Residents
In 2010, Canada admitted a record 280,636 permanent resident immigrants. Of these, Ontario received 118,116 permanent resident immigrants, who accounted for 42.1% of the total admissions to Canada in 2010.
Therefore: 118,116 divided by 4 (yearly quarter) = 29,529 or is equal to 10.5%ON of 280,636CAN
—Temporary Residents
In 2008, the number of temporary residents in Ontario was 240,264, 40.8% of all temporary residents in Canada.
For a more accurate number, we shall use 2010 total temporary residences (383,929CAN)
40.8% of 383,929 = 153,571.6 for Ontario in 2010
Therefore: 153,571.6 divided by 4 (yearly quarter) = 38,392.9 per quarter or is equal to 25%ON of 153,571.6CAN
Next...
Source: http://www.cic.gc.ca/english/resources/statistics/data-release/2011-Q1/i...
2011 Q1 Immigration Stats (3 months)
Total Permanent Residents into Canada 49,465 (10.5%ON of 49,465 = 5193.82/3 months = 1,731.27)
Total Temporary Residents into Canada 96,316 (25.0%ON of 96,316 = 24,079/3 months = 8,026.33)
Total for Ontario (1,731.27 + 8,026.33) = 9,757.6 immigrants per month.
So...
We can estimate (crudely) that Ontario receives 9,757.6 permanent + temporary immigrants per month. How much of this figure factors into rent and home purchases? Who knows. But one factor we can all agree on is that they all need to live somewhere.
You don't take into account the people that leave the country. You need to look at net migration to have a clearer picture of the potential impact on housing. There are a lot of permanent residents that also leave the country after a certain period of time spent in the country (I know quite a few of them!).
We're just speculating..
Woops. Revised Numbers
ON will represent Ontario percentage
CAN will represent Canadian Total
Source: http://www.ontarioimmigration.ca/en/tools/OI_RESEARCH_STATS.html
—Permanent Residents
In 2010, Canada admitted a record 280,636 permanent resident immigrants. Of these, Ontario received 118,116 permanent resident immigrants, who accounted for 42.1% of the total admissions to Canada in 2010.
Therefore: 118,116 divided by 4 (yearly quarter) = 29,529 or is equal to 10.5%ON of 280,636CAN
—Temporary Residents
In 2008, the number of temporary residents in Ontario was 240,264, 40.8% of all temporary residents in Canada.
For a more accurate number, we shall use 2010 total temporary residence (383,929CAN)
40.8% of 383,929 = 153,571.6ON (Estimated)
Therefore: 153,571.6 divided by 4 (yearly quarter) = 38,392.9 or is equal to 60%ON of 383,929CAN
Next...
Source: http://www.cic.gc.ca/english/resources/statistics/data-release/2011-Q1/i...
2011 Q1 Immigration Stats (3 months)
Total Permanent Residents into Canada 49,465 (10.5%ON of 49,465 = 5193.82/3 months = 1,731.27)
Total Temporary Residents into Canada 96,316 (10%ON of 96,316 = 9631.6/3 months = 3,210.53)
Total for Ontario (1,731.27 + 3,210.53) = 4,941.8 immigrants.
So..
We can estimate (crudely) that Ontario receives 4,941.8 permanent + temporary immigrants per month. How much of this figure factors into rent and home purchases? Who knows. But the one factor we can all agree on is that they all need to sleep somewhere.
A small excerpt from the Vancouver Sun yesterday
http://www.vancouversun.com/business/fp/yourmoney/CANADA+AFTER+PART/5358...
For decades, Canadians have been told — propagandized, some might say — high levels of immigration sustain economic growth, avoid labour shortages and make up for an aging population. Challenging these claims treads on numerous toes — politicians who regard the immigration system as a vote-importing scheme, corporations that want workers on the cheap, and an immigration industry composed of lawyers, consultants, settlement groups and activists enjoy all the benefits taxpayer money can buy.
Canada has the largest per capita level of immigration in the world — some 280,000 immigrants and refugee claimants a year for a population of 34 million. In early 2009, Immigration Minister Jason Kenney was decidedly upbeat in pointing out that if you include "temporary" workers and students the number is in the 500,000 range.
Do Canadians as a whole support this? Hard to say.
They can't vote directly on the issue of immigration, and political parties avoid serious discussion of the topic like the plague. But a recent worldwide poll by Ipsos suggests neither the politicians nor the immigration lobby would like any vote results. More than half of Canadians — about 56 per cent — think immigration places too much of a burden on public services. A recent study by researchers Herbert Grubel and Patrick Grady lends support to that judgment. They estimate newcomers cost Canadians between $16 billion and $23 billion a year because they receive more in government benefits than they contribute in taxes.
End.
Greg - thanks for the figures. Yeah, like those numbers aren't going to have a huge effect on rentals! Very interesting.
more important thing greg is that people blend into society and the host country has work for them to pay to buy or rent a home. that is position of strength that is the core to any economy. The fact they can source an income to service debt is all that matters to make a canada and canadas economy a stronger force. how they eventually spend it is really meaningless. they will spend.
Filling up a country in order to have endless growth is just plain stupid.
Now we know what they were fishing for at the G20 in Muskoka. Immigrants not muskies.
In my opinion banks should be nothing more than a utility service and make up just as much of country's GDP as for example, gas/electric utility, holding funds and redistributing them and thus should be regulated as such. All other functions (such as speculation, loans etc. etc) should be performed by other players that can be allowed to fail and not allowed to grow out of control.
Today FIRE sector comprises 25% of GDP - however this sector produces NOTHING, it is purely a mechanism to skim 25% off of the real GDP. Basically, having a parasitic load on the rest of economy.
Dmitri - well said! I totally agree. If the banks did not have the government backstop, there is NO WAY they would be risking.
The FIRE sector needs to be snuffed out because the only thing they represent is pure greed. How does that make a country? It doesn't.
I picked a basket of apples yesterday. Had to go way up on the ladder to get them.
Then I accidentally left the basket of apples on the front porch last night. The deer were grateful. How could the deer possibly resist a nice basket of apples. Dumb mistake on my part.
Asking if banks are a tax on society is a similar mistake. It invites conspiracy theorists to a feast. And they'll keep coming back looking for more.
John in Ottawa - when an entity is given a government charter, then creates money out of thin air (consumer and government debt), then charges interest (and is protected from losses, to boot), then they are a tax on society. Their mortgage risk is taken up by the taxpayers (through CMHC and the selling of "guaranteed by taxpayers" securities).
A tax on society? It looks like it, to me.
It's called usury which was illegal over a century ago http://i55.tinypic.com/2vb08e0.png
This idea that money is created by banks out of thin air is an internet meme created by cartoon bunnies and a few commentators who should know better.
It defies even the simplest logical examination. If chartered banks can create money out of thin air, why not create trillions of the stuff? Pay huge dividends with it. Heck, drop a couple of million in my checking account, it's free and I don't mind.
Money and banking are complicated. You can't learn much from cartoon bunnies.
That said, I've always maintained that I can support any point of view I wish to put forward, no matter how radical or out of the mainstream, with readily available information from the internet. That doesn't make my point of view correct, but if we are going to believe everything we see and read on the internet, it is supportable.
I'm going to recommend a book to all of you: True Enough: Learning to Live in a Post-Fact Society by Farhad Manjoo. It should be required reading before anyone voices an opinion on anything these days.
For my part, for every hour I spend reading new "facts" on the internet, I spend the next six researching whether or not I should believe it.
BTW, I gave the book to my son back last December. He's starting third year economics at university this week. Last week he started spouting some complete garbage about Alan Greenspan and central bankers that he had read on the internet. I guess he didn't read the book.
"If chartered banks can create money out of thin air, why not create trillions of the stuff?"
They did. An estimated 1 to 1.4 quadrillion dollars worth in the derivatives market. This number is mainly comprised of massive short positions and credit default swaps (insurance) meaning should any major corporation, bank or country default, the CDSs will get triggered--insurance companies go broke and must be bailed out--which means more government printing and so on... It just never ends.
Until they ban derivatives or impose position limits, you can expect more money printing and bailouts.
Well said, Greg. Derivatives are a ticking time bomb.
"This idea that money is created by banks out of thin air is an internet meme created by cartoon bunnies and a few commentators who should know better."
Well, that's what fractional reserve banking is about. Simplistically, if a bank has $10 in deposit, it can lend out $100. Therefore, the extra $90 lent are indeed created out of thin air.
May I suggest you to watch these excellent videos:
The money masters: http://www.youtube.com/watch?v=JXt1cayx0hs
The secret of oz: http://www.youtube.com/watch?v=swkq2E8mswI
Money as debt: http://www.youtube.com/watch?v=Dc3sKwwAaCU&feature=related
"therefore, the extra $90 lent are indeed created out of thin air."
No!!!!! The capital is lent out against collateral, it's not "created" -- the bank is lending YOUR money out, not creating new money. In fact you can do it yourself, no need to involve a bank. Yes, it blows the mind, but the books balance.
Don't let the smooth talk and foreboding music fool you. That's just my "opinion" I guess, so feel free to believe otherwise.
Now I'm definitely going to read John's recommended book.
Jesse, let's assume today, I don't have money but I want to buy a car. I go to the bank and ask for a car loan. The bank approves it and give me, say, $20,000. Where does the money the bank is lending me comes from? It doesn't come from me since I didn't have it. It doesn't come (entirely) from the bank either, it is created. As I pay back the loan to the bank, then this created money disappear, except the interests and fees the bank had charged me.
Now ask yourself the question: if today, everybody in the world wanted to pay back their debt, would that be possible? No, because there is not enough money in circulation (the debt created (capital + interest) is superior to the money created(capital only)). Does this blow your mind?
I agree with you, the bank has to balance its books, but that's just accounting. The reality is that money is indeed created out if thin air by the banks.
Thanks, Makaya. You said it better than I did.
"It doesn't come (entirely) from the bank either, it is created"
This is simply not true. The charter bank lends out money on someone else's deposits. They do not "create" money. It might help if they physically showed you the account and the face of the guy whose money you're borrowing because it makes it a bit too personal and banks likely feel uncomfortable with that.
The central bank creates money, chartered banks do not.
"This is simply not true". Actually, it is true. It's not because you repeat ten times I'm wrong that I am wrong. I think you don't understand how fractional reserve banking works and where the money supplies come from.
Here are a few quotes taken from Wikipedia:
"Fractional-reserve banking is a type of banking whereby the bank does not retain all of a customer’s deposits within the bank. Funds received by the bank are generally lent to other customers. This means that available funds (called bank reserves) are only a fraction (called the reserve ratio) of the quantity of deposits at the bank. As most bank deposits are treated as money in their own right, fractional reserve banking increases the money supply, and banks are said to create money.
Bank runs (or when problems are widespread, a systemic crisis) can occur in fractional-reserve banking systems. To mitigate this risk, the governments of most countries (usually acting through the central bank) regulate and oversee commercial banks, provide deposit insurance and act as lender of last resort to commercial banks.
Fractional-reserve banking is the most common form of banking and is practiced in almost all countries. Although Islamic banking prohibits the making of profit from interest on debt, a form of fractional-reserve banking is still evident in most Islamic countries."
http://en.wikipedia.org/wiki/Fractional-reserve_banking
About Money Supply:
"Note: The examples apply when read in sequential order.
M0
Laura has ten US $100 bills, representing $1000 in the M0 supply for the United States. (MB = $1000, M0 = $1000, M1 = $1000, M2 = $1000)
Laura burns one of her $100 bills. The US M0, and her personal net worth, just decreased by $100. (MB = $900, M0 = $900, M1 = $900, M2 = $900)
M1
Laura takes the remaining nine bills and deposits them in her checking account at her bank. (MB = $900, M0 = 0, M1 = $900, M2 = $900)
The bank then calculates its reserve using the minimum reserve percentage given by the Fed and loans the extra money. If the minimum reserve is 10%, this means $90 will remain in the bank's reserve. The remaining $810 can only be used by the bank as credit, by lending money, but until that happens it will be part of the banks excess reserves.
The M1 money supply increased by $810 when the loan is made. M1 money has been created. ( MB = $900 M0 = 0, M1 = $1710, M2 = $1710)
Laura writes a check for $400, check number 7771. The total M1 money supply didn't change, it includes the $400 check and the $500 left in her account. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
Laura's check number 7771 is accidentally destroyed in the laundry. M1 and her checking account do not change, because the check is never cashed. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
Laura writes check number 7772 for $100 to her friend Alice, and Alice deposits it into her checking account. MB does not change, it still has $900 in it, Alice's $100 and Laura's $800. (MB = $900, M0 = 0, M1 = $1710, M2 = $1710)
The bank lends Mandy the $810 credit that it has created. Mandy deposits the money in a checking account at another bank. The other bank must keep $81 as a reserve and has $729 available for loans. This creates a promise-to-pay money from a previous promise-to-pay, thus the M1 money supply is now inflated by $729. (MB = $900, M0 = 0, M1 = $2439, M2 = $2439)
Mandy's bank now lends the money to someone else who deposits it on a checking account on yet another bank, who again stores 10% as reserve and has 90% available for loans. This process repeats itself at the next bank and at the next bank and so on, until the money in the reserves backs up an M1 money supply of $9000, which is 10 times the M0 money. (MB = $900, M0 = 0, M1 = $9000, M2 = $9000)
M2
Laura writes check number 7774 for $1000 and brings it to the bank to start a Money Market account (these do not have a credit-creating charter), M1 goes down by $1000, but M2 stays the same. This is because M2 includes the Money Market account in addition to all money counted in M1."
http://en.wikipedia.org/wiki/Money_supply
@Makaya I understand how FRB works but the bank does not "create" money, it loans out someone else's money, whether it be the Bank of Canada's deposits or a private depositor.
Your claim was "[t]he reality is that money is indeed created out if thin air by the banks."
I am telling you -- again -- that nowhere in the paper trail is this the case. It is true that there is a multiple of the Bank of Canada's deposits on banks' balance sheets but the [charter] banks don't "create" money, they intermediate deposits. The Bank of Canada creates money.
Well, I guess banks must be magicians then. If the central bank issues $100, and after the deposit/lending re-deposit/re-lending process operated by the banks, the total money in circulation becomes $900, and you tell me that the banks don't create money, then it must be something that has to do with magic.
@Makaya, I'm not trying to be obtuse here. I understand that a small deposit by the central bank into a chartered bank is multiplied. The distinction is important here: the banks do not control the money supply, they are intermediary lenders, do so as an almost chronic addiction, and make a hefty profit for their efforts. When we're talking about how banks are given free license over this and that -- and that is where the conversation before this sub-thread got started -- we should understand who is actually "creating" the money.
The chartered banks are the mechanism by which this money is created and yes they make decisions about who gets the loan and at what rate of interest. But the point I'm trying to make is that nowhere in any of the chartered banks' day-to-day operations do they "create money out of thin air". I can trace through every single transaction of the FRB lifecycle and nowhere do I see some glitch in the frame or something like that where the magician crammed the bunny into the hat without anyone else seeing. Now if they do perform some magical money creation, please point to the exact transaction where they create money.
Now if someone states "the Bank of Canada creates money out of thin air" I have no problems with that.
I think the distinction about "creating" money is important because it goes to the heart of who controls the money supply. Some comments on this thread seems to imply that chartered banks control the money supply, directly or through backroom political lobbying and influence, and this is some indication that they are given too much power over the economy. I say, when it comes to money creation, this is hooey, and I doubt that chartered banks are too cozy with Mark Carney.
Chartered banks make gobs of money and pay themselves well, so yeah that's a problem because maybe they shouldn't be paid so well and start tightening their belts like everyone else and they should give more money to shareholders or cut service fees. As a shareholder and taxpayer that's something I can get behind!
I don't disagree in any of the things you said in your post. However, banks have much more power than you think. As you pointed out, they get to decide who gets a loan and who doesn't. I have no problem with that if the decision is solely made on a risk basis, aka whether the borrower can pay the loan back. But nothing prevents a bank to make that decision for other reason (political, economic influence, etc.). Do you think this is a power they would not use for ethical reasons?
Now, imagine a president that was elected during a major worldwide financial crisis on the basis that he would "fix" the financial system, and therefore would impose regulations that would go against the banks profitability/best interests. During the negotiations, the banks tell the president that if he even dare to do anything to regulate their (dirty) business, they would stop (or seriously reduce) lending to people and businesses. What would be the effect on the overall economy? What would the president therefore do? Sounds familiar?
If it is in the best self interest for banks not to lend, that's what they would do. It's been like that for a long time: "Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild (1744-1812), founder of the House of Rothschild.
This problem is even more critical in a country like Canada where we have an oligopoly of 5 major banks that control most of the lending in the country.
I think what we agree on is that the banks have way too much power and influence in today's economy.
John in Ottawa said, "If chartered banks can create money out of thin air, why not create trillions of the stuff?"
They did. Remember how they wrote up over a trillion dollars in mortgages, collecting fees and unconscionable bonuses all along the way? Remember how they bundled these mortgages together (mortgage-backed securities that were ridiculously rated AAA) and sold them to unsuspecting investors around the world, collecting more fees and unconscionable bonuses? Heck, Goldman Sachs, while promoting these AAA securities, was shorting them as well.
They did print trillions and should have gone bankrupt for it, but FASB stepped in and changed the accounting rules, which has allowed the insolvent (yes, insolvent) banks to pretend they are going concerns.
They CAN print trillions - and DID - but the downside is that you go bankrupt when it all falls apart, unless you can PRIVATIZE THE PROFITS and SOCIALIZE THE LOSSES.
That's what has happened. Perhaps you should give your son a listen. Even Alan Greenspan has admitted under oath, before Congress, that he had "been wrong".
Let's face it, getting rid of the Glass-Steagall Act (see Greg's post above), passing the Commodities Futures Modernization Act (derivatives gone wild and no one is minding the store), suppressing true inflation measures, keeping interest rates too low for too long, providing credit with no documentation, low FICO scores, high frequency trading, insider trading - it was one big orgy of financial gains.
"A tax on society? It looks like it, to me."
Inflation is a "tax" too. This was hit home recently talking to some neighbours who had their rent boosted by 3.5% year-over-year and are having trouble making ends meet. For them their wages are not going up; no matter how you slice it their balance sheet is "taxed"; it's not just government taxmen and their Bay Street henchmen who cometh.
John is right though. Banks don't "create money out of thin air". And here's something that will blow your mind: Canada has no fractional reserve ratio! Holy f*ck they can just loan out money without holding back reserves? Nope.
It always amazed me that people manage to drive a car for a lifetime without accidents. Doesn't mean they can't rev the engine and plow into the back of a semi at any time. This is a similar analogy for the Bank of Canada who control the base money supply. They happen to be good drivers, at least that's what my paycheck and bills tell me. But I suppose they could "lose it" and veer into oncoming traffic, or not completely understand how their engine works and run it into some bizarre operating state and flip over, which is pretty much the point of many a fiat-money-gold-standard conspiracy theorist. Doesn't mean it's likely.
The moral tragedy is the people suffering from Stockholm Syndrome who do not demand more from their government. Borrowing (credit) was an evading campaign to fulfill personal consumption due to lower wages.
Greg - agreed. The vast majority are totally captured, totally. Heads filled with generations of propaganda, they conform without an inkling of a doubt in their minds. If they do ever question something, it's quickly dismissed. Step out of their box and you're labelled a "conspiracy theorist". Sad.
"Step out of their box and you're labelled a "conspiracy theorist". Sad."
I take issue with the "printing money out of thin air" claim which is simply not true. Take away the modern-day banking system and credit will still be around in some form or another. There is no "propaganda" going on here, there is a disconnect between a statement made and the actual accounting.
And yes a central bank can create inflation in a heartbeat, and the system by its very nature taxes money. No argument. It's egregious that a select few can become very wealthy without producing much value (or worse). This is why I advocate for full employment.
Jesse said, "Take away the modern-day banking system and credit will still be around in some form or another."
Yes, but the lender (who will not be backed by the government) would charge a marginal buyer (if he gave him a loan at all) an arm and a leg. Risk would be appropriately assessed (because the taxpayers wouldn't be holding the bag), and no bubbles would be formed. This is the way it should be.
The money IS created when the loan is taken out. It did not exist prior to that time. I'll hunt down some links.
Perhaps you could provide some links that back up what you say. You're refuting me, I'm refuting you, and neither one has provided links. Does the loan come from demand deposits? How much do banks have to hold in reserves?
"and no bubbles would be formed."
Tulip mania, anyone?
In terms of links you can just look up "fractional reserve banking", even the wiki, and apply the basic logic on how the accounting works. Canada requires capital reserves, which has a very similar effect to FRB. Tell me where banks "create money" in these transactions:
1) Saver A deposits $100 in bank B.
2) A books $100 asset, B books $100 liability
3) B lends (say) $90 to C. B books $90 asset C books $90 liability
4) D gets $90 from C, deposits it in B, D books $90 asset, B books $90 liability
5) etc.
Nowhere here has anyone booked an asset "out of nothing", except for the seed from the central bank. Banks don't "create" money, they intermediate capital.
Now you can claim that this is "creating money out of thin air" but that implies like we're giving banks a blank check to do lend out whatever they want. The accountants would take issue with that.
Canada's central bank can "create money out of thin air" but a chartered bank cannot. That's my point.
jesse said, "Canada requires capital reserves, which has a very similar effect to FRB." Is this what you mean?
"'(4) On the first day of the first month following the month this section comes into force, the primary reserve referred to in subsection (2) shall be reduced by 3 per cent, and thereafter on the first day of the first month of each of the next three succeeding six month periods, the primary reserve as modified by this subsection shall be reduced by 3 per cent, and on the first day of the twenty-fifth month following the month in which this section comes into force, the primary reserve referred to in subsection (1) shall be nil.'
…
What I cannot determine is when the above was actually PASSED into law. All I seem to find is other sites stating it was sometime around the early 1990s. I’ll keep looking. If anyone knows and has proof, drop me a line and I’ll update this post.
Update: It seems that the above text was quietly passed into law in December of 1991, via Bill C-19. I need to find a reputable source for this.
What it says is that when this act is passed into law, the bank reserve requirement will fall over a 25 month period until the Bank Act of Canada no longer requires the bank to keep ANY reserves."
http://gilliganscorner.wordpress.com/2008/04/06/canadas-private-banks-ha...
jesse - the author of the above article sums it up in his own words:
"457. 'We changed this requirement. Banks don’t have to have ANY money in the vault to back their loans. We, the government of Canada, authorize them to mint as much checkbook money out of thin air as the market will bear. We will stay out of the banks business as they must know what they are doing. However, if they screw up, we will make sure the citizen bails them out via inflation and extortion…ooops, we meant taxation. Well, we would do that anyway. Good luck with that!'
This is why if you look at the Bank Act today, you will see no mention of any reserve requirements at all."
backwardsrevolution, I don't have the specific clause in mind but here is comment a on a blog that explains that a de facto reserve ratio is imposed by OSFI :
http://gilliganscorner.wordpress.com/2008/04/06/canadas-private-banks-ha...
As I stated before, Canada in effect has a reserve ratio, it's just not as plainly laid-out as, say, the US's.
Rick Santelli calls out the Ponzi Scheme today on CNBC
http://www.youtube.com/watch?v=JcxdbE7IR7E
Jesse - how do you think you get inflation? Does it have something to do with "creating money out of thin air" and charging interest on it?
Of course the Bank of Canada is in control. How could they not be? They're dictating the rules of the game, the play. They are out in front. They control the interest rate, which, while we've all been suffering from way higher inflation than is being reported, they have kept too low, following Bernanke's lead.
You "suppose they could 'lose it' and veer into oncoming traffic". Jesse, how is that going to happen? They're the only car on the road.
"we've all been suffering from way higher inflation than is being reported"
Listen there are two things here, and the analogy is as follows: you go to your boss and ask for a raise because your sh!t is getting more expensive to buy. Your boss shows you a drawer full of resumes of qualified people begging for your job. You don't get the raise. You spend less on your sh!t by buying less sh!t.
Or, you go to your boss and ask for a raise. He's busy as heck, and needs you to make him money, with no other candidates available to do the job. You get the raise. Now you can afford more sh!t, and maybe even some new sh!t.
Situation #1 is not inflationary in net. We are taxing people who have no terms of negotiation on their wages with higher prices, but in terms of corporate profits in net they are stagnant -- with no wage hikes we consume less; the pie right now is fixed and commodities are taking up a bigger share of the pie. And make no mistake, there are a great many people making TONS of money right now so IMO the commodity price inflation is more a symptom of unhealthy capital distribution than real inflation.
Just thought I'd point out the distinction when talking about "inflation". When you start making arguments about "inflation" you need to define what you mean.
But I'm on board with the derivatives thing, as well as off-balance-sheet and mark-to-market assets/liabilities. That's a big problem, but doesn't invalidate FRB or Canada's close equivalent.
Jesse said, "...commodity price inflation is more a symptom of unhealthy capital distribution than real inflation." But it's all inflation, and we all suffer.
From Bruce Krasting:
"The President can yell all he wants. He can sick the Attorney General on the players. The CFTC (and all the other exchanges) can play around with margin rules all they like. Those Senators making a fuss are crying to the moon. None of these steps will make a damn bit of difference.
If the President of the United States truly believes that volatility/speculation in commodities is a problem that has reached a critical level and that the situation requires policy response(s) he should call Ben Bernanke and tell him to raise the Federal Funds rate to 2%. That would solve the problem as far as excess speculation goes. But it will not happen as Bernanke has his foot planted firmly on the ZIRP gas pedal.
ZIRP causes all manner of speculation. It's insane to think that Bernanke can target this powerful force so that it only has positive effects like boosting stocks and corporate bonds. With those pluses come some minuses.
If the country wants cheap money and strong equities it also has to have overvalued commodities and high volatility of prices.
You can’t have one, and not the other. Blame the Fed for the speculation, not the speculators who have been drawn to the light that Ben Bernanke is shining."
The Central Banks are causing the inflation: in houses, in commodities, in everything. The pimps are pushing ZIRP.
And who is doing the speculating, who is participating in the carry trades? Do you think you and I are going to make a difference? It's the big banks, the big players, using ZIRP. And as Bernie Madoff said, "They ALL have insider information. Insider information is rampant. It's a joke to think it's guarded against and policed."
No need to explain. They just made a movie about it.
http://www.youtube.com/watch?feature=player_embedded&v=GTfUENx6uRs#!
Greg - can't wait for that movie. I hope it's a good one. Slowly the corruption is leaking out to the public. Thanks for posting it.
"The Central Banks are causing the inflation: in houses, in commodities, in everything"
With respect to houses, it all depends where you are. In terms of "everything", for certain businesses, the price they pay for labour is not inflating in any significant way.
jesse - of course the price they pay for labour is not inflating. There's a glut of labour. Increases in productivity, technological advances, outsourcing of jobs to cheaper labour countries, huge influx of immigrants - labour can't go anywhere. Isn't that nice for business?
I wonder if anyone knows all of this, or if it's just a coincidence and the people who control this are going to say, "Whoops, we didn't know this was happening."
No, they couldn't know this. My government would never allow prices to rapidly escalate without allowing some favorable conditions for workers. No, they wouldn't do this. (Sarcasm off).
"There's a glut of labour"
I was just pointing out that labour is an input just like commodities, so "everything" inflating isn't entirely correct, for certain legal entities.
I agree with you that a weak labour market is seen as "good" for businesses. The next 5-10 years will be a giant test of conservative theories on economic growth and trickle down wealth creation.
It is a myth that banks and other corporations work hard to generate profits for the benefit of general shareholders. They do so because their executives are large shareholders and their obscene "compensation" packages relate to profits as well as having a heartbeat. Up to 10% of the shares in a corporation can be handed out to executives and directors every year. Compound that over 10-20 years and it is no wonder that there is little scope for growth of profits. None of the directors are independent because they hold or are paid in part with shares. Executives and directors set the compensation for each other. Share offerings in bought deals are equivalent to printing money. Banks and large private funds get such shares at reduced prices and the small shareholder shut out. Thats the system, baby, and its not likely to change.
John in Ottawa:
"How to Spend $1.25 Trillion"
"In the face of the financial crisis, the Federal Reserve decided to buy $1.25 trillion of mortgage-backed bonds as part of its effort to prop up the economy."
In other words, to bail the bankers out.
http://www.npr.org/blogs/money/2010/08/26/129451895/how-to-spend-1-25-tr...
John in Ottawa:
The above article also says:
"The program’s intent was to keep interest rates low, and slow the decline in housing prices. The team ended up buying more than a fifth of all of the government-backed bonds on the market."
The truth of the matter is: household debt will become the governments responsibility while the government's debt is due to the lack of people's responsibility.
Either way you spin it, the debt will exist on the country as a whole and it is by far too late to reverse. The only good outcome will be a managed retreat that could take another two decades of deflation. We just lost our first.
I believe Steve Keen dealt with the very subject of banks creating money: you can read it here:
http://www.debtdeflation.com/blogs/2009/01/31/therovingcavaliersofcredit/
Ben you should look into widening out these blog columns. These posts are getting longer and more busy.
John K Galbraith, one of the more eloquent economists (may he rest in peace) wrote a clear dissertation on Money, it's history, it's relation to governments, war and inflation; how it's created, abused and historically at least, how it has always failed - including gold. It's titles: "Money - Whence it Came, Where it Went" 1995. (Bonus, he was a Canadian)
Don, I agree with you entirely about what motivates the managers and directors of our banks to profitability. That's the same for most corporate entities and more recently even "cooperatives" (e.g. Mountain Equipment Co-op) and "Not-for-profit" entities as well. My question was really posed to discuss whether or not banks must be put on the list of national essential services and more comprehensively regulated like education, healthcare, utility services in part, and until recently, postal and telecommunications.
Unfortunately, I fear the trend is in the opposite direction. High bank profits have and will be used to horizontally and vertically extend financial services under one roof - eg insurance, investment advice and management, bankrupcy services, management consulting, accounting, auditing, divorce counsel and legal counsel regardless of the conflicts of interest between these services. This can only lead to problems like those in the US.
Avoidance will require stronger political will than I've seen demonstrated here and I doubt will see as we seem to be moving more to the US model of 1) socialism for the corporate entities, happy endings for others and 2) democracy among registered lobbyists, vacuous glad hand election promises for the citizenry.
I apologize in advance for political commentary, this is not a form for that, however I believe the serious consideration of what their Charter represents or should represent requires more than our politicos are cabable of delivering - hence serious discussion among ourselves.
Great discussion. One thing I would add is that most people tend to read the increased profit headline and leave it at that. Their profit could have gone from $1 to $2 and that would be 100% increase in profit. Very misleading, but that's what sells news. You're much better to look at the % profit per share. You'll find this is a much more reasonable number.
When it comes to management and board member salary that's where the real gripe is. CEOs make more and more than the average public on a percent basis all the time seemingly regardless of performance. That is a public company problem more so than a bank problem though.
Are 'ya all done yet?
Why stop at banks. Let's start ripping on the oil companies too. How about cell phone providers? Next up - unions. After that, I'm anxious to do some government employee bashing. Teachers are useless too and please don't get me started on politicians.
That should make for an "excellent" gripe session too. Sheesh!
In the meantime, consumer confidence is supposed to be at an all-time low with people reluctant to make big-ticket purchases, yet the latest TREB numbers indicate a whopping 23% increase in home sales over last August and a 10% increase in prices year over year, while new car sales are going through the roof. Go figure.
great comments and posts. And excellent blog Ben.
I've been doing some homework on our 'new world' and would like to share a bunch of books I have read that really nail (IMHO) what is going on financially and economically. I am no economist - actually UofT 1977 engineer, but trying to protect my principle and at least stay even with inflation/deflation and monitor what is going on.
As they say "may you live in interesting times". We have had it pretty easy in my 56 years, but now the shxx has it the fan and its going to be ugly......
Happy reading.
The End Game - John Mauldin
The Great Reflation - Anthony Boeckh
Probable Outcomes - Ed Easterling
Unexpected Returns - Ed Easterling
The Age of Deleveraging - Gary Shilling
Also just downloaded "This Time is Different" to my Kindle - looks good based on the first couple of chapters.....
clearest brief account of how frb works i've read is rothbard - the case against the fed. end the fed and repeal legal tender, 95% of the pb is solved. this would restore constitutional rights in the us. not sure what the equivalent would be in canada.