Tuesday, January 18, 2011

Avoiding The Inevitable

AFP — Finance Minister Jim Flaherty on Monday announced tighter mortgage rules in hopes of avoiding a "housing bubble" in Canada, as he hinted at fiscal restraint in his upcoming budget.

Too late.

Flaherty told a press conference mortgage default rates remained low, at 0.4 percent, but he added: "We're seeing people borrowing to the max, at low interest rates."

We could raise interest rates. That'd help pop the bubble and raise that mortgage default rate. There's no point in trying to delay it.

Canada did not experience "housing bubbles witnessed elsewhere," he noted. "We will continue to monitor the housing market and take proactive measures as needed to ensure that one does not develop."

I'm not an expert. I've read different reasons for why we avoided the bust. However since I was a teenager I've always maintained that whatever happens in the USA, we go through something similar a few years later. This can be translated into politics (they elected Bush, we hung onto Chretien/Martin until we finally went for Harper. They elected Obama and now we may have a socialist coalition on our hands). The same goes for the credit bubble.

If Flaherty wanted to ensure that we avoided a housing bubble, he probably shouldn't have guaranteed all of those mortgages back in 2008. Acting now is like taking away the keys of a drunk driver after he or she arrives home from the bar.

The new measures include reducing the maximum mortgage amortization period to 30 years from 35 years for government-backed insured mortgages; reducing the maximum amount that can be refinanced to 85 percent from 90 percent of the value of the property; and, withdrawing government insurance backing on home equity lines of credit.

It's hard to say where this will lead. These acts seem pretty minor, but it's impossible to predict how the market will respond, or how far Flaherty is going to take this. I think it's safe to say though that 2011 will be the year that the Canadian housing bubble finally bursts (and it's about time too, I've been arguing with people about it for two years now and I'm getting pretty tired of it).

The withdrawal of government backed insurance on home equity lines of credit is what interests me. It's important to never lose sight of the bigger picture, but government backing is what's helped keep this monster going.

The new rules aim to promote saving through home ownership and discourage repackaging consumer debt into mortgages, as well as force Canadians to pay off mortgages quicker and pay less total interest.

Sure, why not? There is no smooth way out of this, however. Plus, all these consumer debt mortgages have been repackaged by the government and sold in the market. Watch out mutual funds!

Flaherty also said his next budget, expected in February or March, could likely include measures to retrain older workers in Quebec's ailing forestry industry and changes to Canada's employment insurance program.

Uh oh. Changes to Canada's EI program? That will trigger opposition from....well, the opposition. I fear an election this Spring. And thus we fall into the “Canadian Delayed Reaction” symptom I mentioned before:

The USA experienced a recession under Bush and then as it grew worse during the election campaign, Americans saw Obama has their saviour and “elected” him (elections are frauds, but I digress). Likewise, Canada experienced a recession under Harper and now that it's getting worse, we're going to elect our leftist leader. Although neither Layton nor Iggy have the charisma or public support that Barack Obama experienced. However, a Left coalition – backed by media propaganda – could persuade Canadians that socialism is the answer. Coalitions are rare in Canada, as are black presidents in the USA.

"We have to get back to a balanced budget," he added. "This is not a year for big new spending programs."

Let's just default and get it over with. We can balance the budget, but we can never pay off the debt. It's fiscally impossible. Plus, State spending requires theft on a massive scale.

Flaherty has said he would balance the budget by 2015-16 after overseeing Canada's largest ever deficit last year of CAN$55.6 billion (55.0 billion US).

As Paul Martin showed us, balancing the budget is simple. Flaherty could do it tomorrow if he really wanted to. Just downgrade all of Ottawa's expenses to the Provinces and Territories, but keep all the tax revenue. And va-la! A balanced budget.

Or we could take the honest route: Return to sound money and slowly but surely, dismantle this government thing.

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