Housing Doom

This weekend I've been busy in Igor's dungeon digging into the early going of Doom's in-progress Sub VI Hotel transcript.  This one's a bit special, because my own compatriots are on display.

About this post's title.  There's been some controversy about Canada's Own The Podium effort at the Vancouver Winter Olympics.  That program just feels a little off.  CBC quoted one of the team's coaches as saying, "Canada — a fourth to be reckoned with," which I thought brilliantly encapsulated our doubts on this, besides being a world-class terrible pun

Well, I've just finished coding Bank of Canada bureaucrat Graydon Paulin's presentation from last Thursday, and it was truly a class act.  Canada's banking system got the gold, as it were, finishing as evidently the most stable banking sector in the world to this point in the crisis.  Graydon's victory lap was just about picture perfect, with clear slides and a smooth presentation.  He used for an aphorism a quote often attributed to Stephen Leacock, Canada's most beloved humourist, and one thing that he didn't say (and how he resisted the temptation I don't know) was that Leacock was in "real" life of all things a turn-of-the-20th-century reactionary political economist at McGill University.

There's a guy from CMHC (a sort of Canadian Ginnie Mae) and an IMF analyst who's ex-Bank of Canada.  Balancing them will be AEI regular Bert Ely and the chief economist of the American Bankers Association.  Should be some interesting discussions ahead on the tape.

Finance Minister Jim Flaherty has headed off any last chance of a housing bubble developing in Canada. // Not that there was much likelihood of a bubble forming, despite the astonishing recovery in Canadian house prices in recent months, fuelled by pent-up demand and record-low interest rates. The fears on that score are overblown. So are those of a crash in prices when the non-existent bubble implodes. annoying Toronto Star¹ biz columnist

No bubble, eh?  Well Vancouver is just about the most unaffordable city for housing on Earth, and over here on the Right Coast you just have to walk around a bit to confirm that things are definitely out of hand.

For example, facing the Hydrostone Market is a transitional / light industrial neighbourhood with …

• new condo nearing completion on the old Rent-a-Wreck property;
• new condo nearing completion on the old auto glass property;
• new condo nearing completion on the medical supplies store property; and last but not least,
• an enormous hole in the ground bearing dreams of a new condo tower where just recently stood this (clic the pic for details) …

I've got lots of thoughts on the new Canadian mortgage regime and the state of housing finance here, but The Washington Express dumped a foot of snow on Doom North overnight, so Mrs. M would prefer that I find our driveway first before I do that and provide a few more links

Anyway, it turns out tomorrow's AEI seminar "Canadian versus U.S. Housing Finance: Comparison and Implications" was very timely, and I hope to deliver a Doom transcript Sub VI Hotel on that in due course.

MORE:

Very quick comment before I pull on the boots again.  Canada has essentially no community banks, although a light dusting of credit unions.  There are five huge institutions, and they, the government, the Bank of Canada and the financial regulators together form a nice cozy club.  Imagine the US with one commercial bank chartered per state.

The world credit crunch actually started right on Bay Street, and it's unlikely any of those institutions would have failed anyway, but the very first thing that happened was that the first world domino, Canada's C$32 billion ABCP market, froze in such a way that the holders of that paper provided a subsidy to the paper's sellers (guess who?) for something like 19 months before they started seeing some of their money.  It's as if all the customers in America's $300-odd billion auction rate securities (ARS) market had been hung out to dry.  Of course the system is sound.

There are no 30-year fixed mortgages, or anything like that.  The typical loan is a 5-year adjustable rate mortgage (ARM).  And mortgage interest payments are not tax deductible.  Pretty heavy down payments are expected, too …

Anyway, here's the three-pronged tightening of Canada's mortgage finance world, summarized from a CBC story.²

"There is no evidence of a housing bubble, but we're taking prudent steps today to prevent one," he said at a news conference in Ottawa. "If some lenders aren't willing to act themselves, we will act."

1. Ottawa will require that all borrowers meet the standards for a five-year fixed-rate mortgage, even if they choose a variable mortgage with a lower rate or a shorter term;
2. rules would lower the maximum Canadians can withdraw when refinancing their mortgages to 90 per cent of the value of their home, from 95 per cent; and,
3. Ottawa will now require a minimum 20 per cent down payment to qualify for CMHC insurance for non-owner-occupied properties purchased as an investment.

I'm sure Jim's mom believes his statement in the above quote, but the rest of us can read the tea leaves in his actions and just shrug.

Canada's economy is fundamentally resource-based.  I'm sure all the grownups have by now figured out that what's painting the county's numbers so positively is non other than Nouriel Roubini's world-wide coordinated asset bubble, and when that puppy blows they'll need to have taken shelter in a storm cellar.  That, I expect, is what the tightening is for.  We're going to be in enough trouble when lumber and oil comes back to earth without the complication of a half a million upside-down households.

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Where is the outrage? Where is the justice? Where are the gold medals that rightfully belong to our Canadian girls? – Vancouver Province (letter¹)

I'm sure this Alexandre Bilodeau fellow is very nice, it's just that he's just south of 34 years too late.

As it happens, Nancy's dad Nick was the life insurance rep who served the M family for many years. I can report at first hand that he was always very proud at what his kid accomplished as a 14-year old Junior High student.

Turns out it was a lot more than was appreciated at the time, or what a systemically corrupt international sports establishment will acknowledge even now 

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… Last year, on Thanksgiving Day, Christmas Eve, Christmas Day, New Year's Eve, New Year's Day, Zero Hedge was spitting out stories like an unemployed, single, Canadian atheist. … – ZeroHedge¹

Looks like twist will just have to make due with a retired, 30+years-married presbyterian maritimer, but you get the idea

Doom isn't all we do up here, though.  Later today we're getting together for a concert,² heavy on the schmaltz for the occasion but sprinkled with a few spine-tinglers like the Mitchell / Jeffers SATB "I Have Had Singing,"  a choral arrangement (different from this one) of "Go, Lassie, Go." and the Michael Larkin arrangement of "He's Goin' Away," a beautiful Appalachian folk tune.

I found an excerpt of the '08 version of the concert (before I joined up — Alan Manchester anchoring the basses, that must have been cool), when Allen was still leading the group.  Doomer's may recall the haiku I posted late that year after he died overnight, as it happens just hours after a memorably upbeat rehearsal.

If you're near Halifax you shouldn't miss the opportunity, especially as Mrs. M managed to talk me through the making of a pretty decent plate of chocolate fudge that we're contributing for the refreshment time.  But try calling the number in the following details first before you go, this year's version was nearly sold out when I checked last.

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The document was an annual report on [minister Christian Paradis'] Public Works' massive real-estate portfolio, which contained factual information on high vacancy rates and weak returns on investment. Such reports had never been made public before. // The department's real-estate branch had consented to the full release, and the Access to Information office at Public Works had determined after extensive consultation that there was no legal basis to withhold any of the report. [however ...] – Canadian Press¹

This rather creepy straw-in-the-wind showed up as front page news this morning on Doom North's snowy front doorstep.

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Jim Flaherty can serve seal heart to his buddies all day, and Greenpeace will never know

Plus, they'll all come back with the answer to that eternal riddle — What colour was the bear?

Astute Doomers will note that the south coast of Baffin Island is actually 2 degrees (C) warmer than Doom North this morning …

… and look where's the only place in the country above (well above ) freezing. That's what happens when you turn governance over to the Conservative-Reform Alliance Party …

UPDATE: I just can't shake the feeling that our government is simply playing an elaborate practical joke on the rest of the world.  This from a story in the Globe & Mail.¹

[Canadian Finance Minister] Mr. Flaherty spoke in front of a lit gas fireplace in a hotel nightspot with a white polar bear hide on the wall behind him. Above him, caribou antler chandeliers added to the image of an informal retreat setting that Mr. Flaherty has advocated.

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China’s currency reserves grew by more than the gross domestic product of Norway in 2009. Its $2.4 trillion of reserves is a bubble all its own, one growing before our eyes with nary a peep out of those searching for the next big one. – Bloomberg⁴

… but perhaps not since mid-December. The level of foreign central bank holdings of Treasury Debt has barely budged for seven weeks, of Agency Debt for twenty. Sometimes silence speaks in a very loud voice, even if the noise and crosstalk often makes it difficult to interpret the message.

Nice shirt, Cresswell

Twist's new treasuries-focus charts clearly show that an incipient top is continuing to form.

the Fed's own MBS holdings drifted back up $0.599 billion, canceling out a little more than half of last week's give-back, while the combined holdings by the cenbanks of US obligations moved just over a billion dollars, although the contrary moves of the two elements were modestly large. This week's Reuters report¹ was, as usual, based on the weekly update from the NY Fed's H.4.1 table site.² Here is Doom's updated CSV version³ of the agencies and treasuries foreign central bank holdings data set.

This week's treasuries buy was $4.150 billion, almost matching last week's selloff. The figure has edged down just $2.357 billion since December 16, 2009.

Agency Debt lost a significant $5.297 billion, but in the bigger picture we've had a mere $7.857 settling since September 16, 2009.

The combined holdings figure dropped a slight $1.147 billion.  For going on two months the cenbanks have been contributing very little support to America's bailout habit.

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What you say about consensus among your colleagues would have more impact if you said what expertise your colleagues have. It’s not that I’m doubting them — I just don’t know (and readers here won’t know) what the basis is for your consensus. – Professor Chris MacDonald, St Mary’s University, Halifax, Canada¹

Recently I was delighted to discover that Dr. MacDonald, an internationally respected ethicist teaching at the philosophy department of the same local university where I’ve been taking a smattering of courses, is in fact a fellow blogger.  Indeed he’s been posting for a bit longer than we have been here at Doom.

Anyway, on Saturday he posted a short article commenting on a Forbes piece (link at [1] below) by one of his colleagues, a former NYU Sterns Dean who’s deploying scatter plots (that Piggington’s Rich Toscano would die for) suggesting that generally speaking the compensation committees are doing pretty well, thank you, by shareholder value with how they are paying top management at financial and other big firms.

To which I replied, in part …

… Quantitative evidence for how well chosen compensation can enhance shareholder value is very good, but among my colleagues who are in general highly critical of management practice in Professor Cooley’s FIRE [== Fire, Insurance & Real Estate] sector, our consensus is simply that when it comes to greed, too much is too much.

Now my expertise in proposing a fair compensation package for Fortune 500 senior managment? zero. Twist’s? nil. Do you, Doom readers, have any expertise? (… and whether or not you do, did I at least generally represent faithfully our thoughts on this issue?)  I would assert that less than a year and a half after the AIG counterparties got bailed out, you don’t have to know much about the technicalities of it all to conclude that there’s got to be something very wrong with, e.g. record bonuses at Goldman and J.P. Morgan.³

LATER: As it happens, the comfortably domesticated syndicated curmudgeon who does the back page of our local Sunday Supplement weighed in⁴ on this issue today.

As chief executive officer of Thomson Reuters Corp., Glocer is No. 1 on a list of Canada’s 100 highest-paid CEOs in 2008. Economist Hugh Mackenzie compiled the rankings for the Canadian Centre for Policy Alternatives, and it reveals that — in a year when hundreds of thousands of Canadians lost their jobs, life savings, and much of their hope for their children — the average income of those 100 fat cats was no less than $7.3 million.

It would appear that our outrage at compensation may get touched off at a slightly lower snack-bracket than would be typical in NYNY

But does the good Professor have a point? Do we lack impact and weight precisely because we are amateurs? And on a related note, this² WaPo article casts doubt on whether even direct citizen action (as proposed by the uber-blogger, Adrianna Huffington herself) on bank policies would ever have any impact on the institutions. Compared with even massive numbers of ordinary folk, those guys are just too big.

Or, to sum up … 1) Why bother? … 2) How bother?

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The OSC says that based on Coventree’s unexpectedly high exposure to subprime debt, “certain dealers reduced or temporarily eliminated their market-making lines and adjusted their inventory holdings of Coventree-sponsored ABCP, in order to minimize their exposure to losses in the third-party ABCP market.” – Globe&Mail¹

What’s amusing about that little snippet is we’re talking about a period 3 weeks ahead of when all hell broke loose on August 13, 2007.  To get an idea of the size of the resulting **SPLAT** Doomers can check out Zimmerman’s commentary around his slides 10 and (especially) 11 from AEI subprime transcript II, a couple of months into the resulting world-wide credit crunch.

So a good deal of the blame for the recent meteor strike would seem to lie, after all, at the feet of a bunch of rocket scientists (real or imagined) at the Caisse, of all places.  Cute.

Ah the power of forced and precipitous balance sheet consolidation.  Waiter!  Another round of QSPE forbearance for everybody, please.

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1:36:34 … This crisis was caused by massive government subsidies to purchase homes by people who couldn’t really afford them. So what does Congress do? They pass an $8,000 tax credit for people who can’t really afford to buy a home to buy one. I mean, how stupid can you get? – John Makin

Doom Transcripts: Index & Guide

Housing Doom is pleased to present a complete unauthorized annotated transcript for the American Enterprise Institute’s October 22, 2009 event "The Deflating Bubble, Part VI: The Lessons of the Bubble and Crisis".¹ The event site has a variety of resources including both an audio and a video of the proceedings. There is as yet no official transcript.

Table of Contents

[link navigation works best when full article displayed]

1. 0:00:00 – Alex Pollock intro (preview post)
2. 0:11:43 – Tom Zimmerman presentation (preview post)
3. 0:26:50 – Chris Whalen presentation (preview post)
4. 0:37:03 – Nouriel Roubini presentation (preview post)
5. 0:54:19 – John Makin presentation (preview post)
6. 1:08:20 – Desmond Lachman presentation (preview post)
7. 1:21:56 – Panel discussion (preview post)
   1. 1:22:08 – Roubini discussion
   2. 1:22:59 – Whalen discussion
   3. 1:23:57 – Lachman discussion
   4. 1:25:24 – Makin discussion
   5. 1:28:01 – Whalen question
      1. 1:28:18 – Makin response
      2. 1:29:19 – Pollock response
   6. 1:29:51 – Pollock (with Roubini) aside on Canada
8. 1:31:26 – Q&A (preview post)
   1. 1:32:00 – Bert Ely question
      1. 1:33:04 – Zimmerman (with Roubini) response
      2. 1:34:29 – Whalen response
   2. 1:34:58 – Brian Gardner question
      1. 1:35:43 – Makin response
      2. 1:36:59 – Whalen response
   3. 1:38:18 – Steve Votaw question
      1. 1:38:59 – Lachman response
      2. 1:40:38 – Roubini response
      3. 1:41:22 – Zimmerman response
      4. 1:41:49 – Pollock response
   4. 1:42:11 – Jack Phelps[ph] question
      1. 1:42:54 – Makin response
      2. 1:43:24 – Whalen response
   5. 1:44:40 – John Serrapere question
      1. 1:46:02 – Roubini response
   6. 1:46:27 – Andrea Psoras question
      1. 1:47:44 – Whalen (with Pollock) response
      2. 1:48:44 – Roubini response
      3. 1:49:52 – Makin response
   7. 1:50:42 – Barry Wood question
      1. 1:51:12 – Roubini response
      2. 1:54:36 – Whalen response
   8. 1:55:02 – Christine Eisner[ph] question
      1. 1:55:24 – Zimmerman response
   9. 1:57:22 – Dale Kinsella[ph] question
      1. 1:57:55 – Makin response
   10. 1:58:44 – Pollock brief wrap-up
9. 1:59:06 (end)
   • Notes and References

Alex Pollock: [0:00:00] Good afternoon ladies and gentlemen. [slide² 1]

When in the course of financial events we have a huge bubble and the inevitable succeeding huge bust, a decent respect for the the opinions of mankind requires that we try to learn something useful from the painful experience. That’s the point of these deflating bubble series of AEI conferences, which you all have so kindly supported with your participation. So welcome to Deflating Bubble Roman numeral VI, "The Lessons of the Bubble and Crisis."

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