On Recession Economies

So, today the Bank of Canada lowered its prime lending rate to 0.5%.  Supposedly, this signals that Canada is sliding into a recession.

Those of us who have been watching have long ago figured out that the minute the bubble burst on oil prices, Canada was going to slide into a recession.  Arguably, if you aren't in the oil patch, Canada has been in a recession for the last four or five years.  What am I talking about here?

Jobs.  Sure, the government has posted "new jobs growth" regularly, but let's be honest with ourselves here.  Most of the jobs involved have been service jobs.  Jobs that pay poorly, have terrible hours and don't even provide a subsistence level of income.  If you're a skilled knowledge worker, you might luck out and get a contract job.  But guess what?  Contract work is unstable, and instead of paying a premium for your skills, you'll be lucky to get the same dollars you made as a full employee.

So, how do we end up with a long running "jobs recession" but still have economic growth for the last few years?  It's not really difficult to see.  If you have money invested in companies, they end up looking like they are posting profits, and the GDP numbers improve.  Basically, we're measuring two different things.  Growth in the size of the economy has become the rising tide that only floats the boats of the truly wealthy.  The rest of the "boats" are so far away from the water that the tide isn't even going to reach them.

Lower interest rates?  Well, it makes it easier to borrow money, right?  Sure ... except you need to have the income in the first place to support the loan.  So who benefits?  Once again, it makes it easier for business to borrow.  Oh, great, that means they can create jobs, right?  They could, but in today's world, they have been funnelling those funds into projects which eliminate jobs like automation projects; and as much as possible, new work that requires people gets shoved offshore wherever it is cheapest, or (until recently) assigned to temporary foreign workers instead of Canadians.  

The net effect of Harper's lovely little war on the middle class has been that those who aren't part of the privileged classes are screwed.  Lose your job?  Chances are the next one won't replace your previous income, and most certainly won't have any stability to it.  The problem is that business has decided that people are a risk, not an investment.  They are no longer willing to invest in people to solve problems.

Harper can deny that we're in a recession all he likes.  The cold, brutal reality is that we have never recovered from the consequences of the 2008 downturn, and the current crude oil price war being waged by Saudi Arabia and others is going to continue to keep things depressed.  Business may well post profits, the GDP will seem to grow, and workers will continue to be left behind.  

Did Ignatieff Cave?

... or is there a more coherent plan afoot?

Yesterday, the government was able to pass its emergency stimulus fund without the accountability provisions that the Liberals had been demanding.

On the surface, it appears as though Ignatieff has caved in here and backed down from what is a perfectly reasonable demand. Certainly one that any reasonable PM would have acceded to as a "political bargain"

If I was to step back for a minute from this and ask myself "why did the Liberals let this one go by?", I come up on a couple of reasons.

The first is purely tactical. Financially, the Liberals are not in great shape yet. Triggering an election when they are in a bad financial state could easily trigger exactly what Harper has been aiming to do for years - wipe them out. Harper has said on many occasions in the past that he wants to eliminate the opposition parties - especially the Liberals, and he's certainly made plays for this in the past.

The second reason is more strategic. If you are looking for a chink in the Conservative armor, it's Harper's hypocrisy on accountability. If the Liberals play this right, the HarperCon$ are apt as not to walk into a trap of their own making. The first pieces of that puzzle fell into place with the Budget amendments which the HarperCon$ agreed to. This is a second piece of that same tactic - demand that the government be accountable in fact, not just claim, to the House of Commons (and therefore the public at large) on another large spending bill. Harper has fought this accountability issue tooth and nail. There's lot's of room in there for casting doubt on Harper's motives during an election ... and all of it comes falling forth from Harper's own mouth.

Whether I'm right in this guess is hard to say ... I hope I am, it would be good for North America to shed the last of the NeoCons from positions of power.

Yikes!

Someone at the Globe and Mail decided to do some real journalism, and went digging into the subject of Subprime Mortgages in Canada.

What they found - at least in Alberta and BC calls into question the statements made by many of our politicians to the effect that Subprime Mortgages aren't a problem in Canada.

I remember seeing ads for what sounded like dubious lending offers in the early 2000s - especially in e-mail. I had always assumed that these ads were simply misdirected garbage out of the United States. Apparently, I was quite mistaken, as these lenders were moving into Canada - or at least Western Canada.

Despite having just a share of about 7 per cent of the national market, subprime lenders in Alberta accounted for 56 per cent of the foreclosures in 2008. In British Columbia, the tiny subprime market laid claim to 42 per cent of the province's 2008 foreclosures. In comparison, Canada's five largest banks accounted for 33 per cent of the foreclosures in Alberta in 2008, even though the country's chartered banks account for about two-thirds of Canada's total outstanding mortgages.

Okay, 7 percent of the total mortgage market isn't that much, but, the impact of that seven percent on the housing market in Alberta and B.C. has the potential to be significant - especially when they account for over half of the foreclosures in the region.

We would be ill advised to ignore the medium and long term impact of these loans on the rest of us. Those whose properties are being foreclosed by these predatory loan companies have been taken to the cleaners. The rest of us stand to see our investments in property devalued quite considerably while the housing market tries to absorb a sudden influx of foreclosures.

These loans should never have been created in the first place. Now that we know that they do exist as a measurable fraction of Canada's mortgages, it is time for us to examine how best to remediate these loans. These are truly toxic assets, both for the borrowers and for the rest of Canadians. I think I would like to see a program for converting these loans into more conventional mortgage structures, and reset the payment history on the revised loans. I'm not saying that the borrowers get off the hook at all, but rather that we remove the most predatory aspects of these loans (such as the surprise changes in payments) from the picture, and give the borrowers a chance to succeed in paying off the debt that they have incurred.

There will be some who simply cannot pay their debts, and those will still go into foreclosure. But we can at least remove the worst aspects of these loans from the picture and do something constructive with it all.

Crumbling PMO Organization?

There's been quite a flurry of departures from the PMO in recent weeks, and even The National Post is commenting on it.

But strange things are happening in Prime Minister Stephen Harper's close-knit office. A senior advisor and at least one strategist are moving on, which has some Conservative observers concerned about internal morale and questioning the operation's top official.

This is interesting all by itself. When senior advisors start jumping ship, one of two things is wrong. Either the ship is sinking, or the captain is coming unglued.

Harper is a micromanager in the extreme, and micromanagers tend to fall apart when the number of issues that they have to deal with exceeds their ability to get a grasp on each and every one individually.

When a country is blasted by the kind of economic storm currently blowing around the world, the number of issues goes up dramatically. It can come as little surprise that things are rapidly exceeding Harper's ability to manage.

MPs confide there's a darkening mood in the big guy himself, hardly surprising given the stormy economic challenge Mr. Harper faces. One source says there was a blowup between a furious Prime Minister and key players last week. And PMO chief of staff Guy Giorno is now plotting the second major internal shuffle in eight months.

Uh huh. In short, Harper's losing his cool because things aren't going his way. Hardly the mark of strong leadership.

My counter-argument to saddling the Conservatives with the crumbling economy is that none of the other federal leaders would have managed affairs much differently if confronted and confounded by an imported global recession shedding jobs and creating bankruptcies at such a horrific speed.

Here's where I disagree with columnist Don Martin. All of the other parties were running the flag up the pole last fall, while Mr. Harper was blithely promising Canadians that the "fundamentals of our economy are solid". Anyone with their eyes open could see the storm clouds gathering on the horizon, although few would have guessed the pervasiveness and severity of them.

Second, Mr. Harper has not managed this situation well at all. Instead of managing things to the benefit of Canadians, he has tried to turn it into another weapon in his constant, ongoing partisan warfare. The November FU was nothing more than a bunch of vacuous statements, followed with actions designed to inflame the situation - mere weeks after he was reluctantly re-elected by a Canadian public forced to choose between three marginal leaders.

Then he suspended the management of Canada's affairs for almost two months in order to draw up a budget that just might be passed by the House of Commons - if he didn't try to poke another stick in the opposition's eyes.

Harper hasn't managed a damn thing yet. He has, however, overseen the most vicious partisan warfare I've ever witnessed in this country; and now is poised - like his predecessor, Brian Mulroney, to plunge Canada still deeper into debt. (and, I wonder, just what kind of accountability the HarperCon$ will be demanding of those who are the beneficiaries of the government's sudden largesse?)

You Don't Say...

Tell me it isn't so...Calgary's house prices are overvalued.

Markets in Regina, Saskatoon, Vancouver, Victoria, Calgary, Edmonton, Sudbury and Montreal are all more than 10 per cent overvalued, as calculated by economists David Wolf and Carolyn Kwan.

Anybody who has lived in Calgary in the last five years knows too well how nutty the housing situation was getting. House prices more than doubled in the space of less than five years - you had to know that was overheated.

I don't know why anybody is surprised by either a cooling of the housing markets or news of significant job losses.

The reality is that with oil over $100/barrel, the only people that really win are the big oil companies. Other sectors of the economy have to pull back when the end prices they pay for energy begin to reflect the inflated commodity prices. There will be a cycle of consumer inflation that we have yet to experience as well - this will further stretch the demands on people's paychecks. I expect 'big ticket' purchases such as homes, cars etc. to slow down dramatically as people adjust to the realities of economic uncertainty.

Whether this turns into a full blown recession or is just pull-back in our economy to reflect the changing situation on the world stage is yet to be seen. I suspect it may produce a "regional" recession - with parts of Canada getting hit harder than others.

I have always been a proponent of Canada expanding its trade network to diversify beyond the massive dependence we have on trade with the United States. Sadly, in the last ten years, none of our governments have acted on that - content to ride the short term wave of a housing-bubble fired spending boom in the United States. Since oil is a 'global commodity', the current price spike is affecting economies around the world, and a more diversified trading network would still result in a net exporter country like Canada experiencing a significant economic slowdown. What it would do is make the recovery cycle smoother, and likely faster as the various regions of the world will recover at different rates. (I fully expect Europe and Asia to recover from the current slowdown quite a bit faster than the US - the US economic picture has depended for too long on growth due to 'bubble spending', and it's going to take quite a while for the economic engine to start producing product again)