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.

The Housing Bubble ... *PoP!*

You knew the meme had to start somewhere - The US isn't to blame for the housing bubble.

Quoting from an IMF report, Neil Reynolds is busy arguing that the shockwaves we are now experiencing are actually global in their origins and not at the feet of poorly planned, questionable practices in the US market.

Canada fared well in these (and other) comparisons. But the much-maligned U.S. didn't fare all that badly. (The United States, the IMF report concluded, was among the middle-ranked countries in “vulnerability” to a bubble-busting correction.) Most European countries are decidedly worse off. Some confront the prospect of catastrophic house price crashes; some apparently confront the prospect of bankruptcy.

Really what this speaks to is the sheer size of the US economy, not the policies and practices that led to the housing bubble in the first place.

George Bush's economics (or lack of them) focused the US economy on two things - war and consumer spending. Ill-planned and misguided, the wars in Iraq and Afghanistan have driven the US government into record levels of debt and deficit.

What economic growth has occurred has depended primarily on consumer spending, not exports or manufacturing growth. This has allowed the US economy to hollow itself out from within - literally stripping it of its ability to fill the needs of its own citizens, much less produce meaningful growth. Worse, US consumers were encouraged to contribute to this growth by increasing their levels of indebtedness.

Short sighted is about as polite a characterization as I can come up with for 'Bush-o-nomics'.

An approach to economic policy by Alan Greenspan that is clearly based on the "everyone for themselves" thinking of Ayn Rand (If you haven't read Atlas Shrugged, I urge you to do so, it will give you a sense of insight into the policy and ethos we have seen among the so-called 'neoCons'.) hasn't exactly helped either.

In the last fifteen years (or more), the ethos of greed has come to characterize the US-based marketplaces. Ever more obscure "investments" were created to attract money, and obscure the investor's view of what was behind the investment. "ABC Paper" was used to bury the risks that lending institutions were taking on with Sub-Prime mortgages; NINJA loans (No Income, No Job or Assets) started to be made - purely to increase bank revenues. Both sub-prime and NINJA loans were written on terms that I can only politely call disastrous for the borrower. Interest rates that were ridiculously low to begin with would escalate well beyond the ability of most to pay - forcing people to either move, or dramatically refinance their homes constantly.

These are not mechanisms rooted in any reasoned, balanced sense of caring for those around you. They are mechanisms built to foster greed and are built upon the hubris of short term success. Banks were able to disconnect themselves (somewhat) from the consequences of making loans to people who couldn't pay them back; investment banks bought up those loans, and poisoned themselves in the process.

There were signs of this imploding two or even three years ago, as the lending practices became even more aggressive and predatory. Did the US Treasury step in and take steps to settle things down? No. Could they have? Yes, of course - but for an ethos of 'not touching the sacred free market'. The IMF is acting, as it so often has, as an arm of the US government in this report - and is attempting desperately to minimize the consequences of that government's economic policies.

I'm sorry, but Mr. Reynold and the IMF's apologetics for a failed laissez-faire, every man for himself, economics in the United States ring hollow.

Economics and the Ideology of Deep Integration

If you have been paying attention, there's an active movement afoot to tie Canada to the United States often called 'Deep Integration'. Think of it as Free Trade only with serious implications for Canada's sovereignty in many ways.

The HarperCon$ have been big on this for years - in fact they'd like to go a step or two further. Now, consider the current economic mess in the United States for a moment. It's not pretty, is it? So, someone explain to me Harper's utter lack of policy - or even proposals - to protect Canadians?

There's no policy there because doing anything would fly in the face of one of the tenets of Harper's ideological dogma. I'll take Dion's ideas over Harper's absenteeism on this one - even if Dion's ideas are incomplete.

Banking Meltdowns, The Free Market and Bailouts

There's a very natural, almost visceral response to the difficulties of the big investment banks in the United States - 'you created the mess, you clean it up!'. Especially when one hears about the mind boggling salaries that the top executives get.

I have huge reservations about simply handing nearly a $1 Trillion dollars over to the banks as a 'bail out' package without some strings on it - both for oversight and to put in motion a process to examine what happened and restructure the marketplace to control that kind of risk better.

Banking has always struck me as a fairly staid, risk averse business. Perhaps at its core it is, but clearly the so-called "investment banks" have clearly been running towards risk in the name of profits.

I disagree substantially with this economist on a key point:

The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

My disagreement is simple - this is the classic line of the "Free Marketeer" (sounds surprisingly close to "Privateer" - an archaic term for Pirate, doesn't it). Basically his entire argument hinges on the idea that government intervention in the markets is "bad". He's wrong. Very wrong.

The problem here is very much that the government has not thought to draw out the lines of the 'sandbox' that is the free market in the banking and lending arena. Consequently, this has allowed the banks to come up with some unique - if predatory - lending practices that are simply bad investment thinking.

I don't think you simply hand Wall Street bankers a bag of money either. Any bailout has to be accompanied with a few strings:

1. Accountability. Not just to the shareholders, but to the public. Sorry Mr. Banker, but you've proven that you are not mature enough to run about unsupervised.

2. Regulation. A process must be put in place that will lead to a balanced, regulated marketplace.

The "free market" is a concept, but it works fundamentally by being "just slightly" out of balance - rather like standing on a wobble board. Ideally it is always counterbalancing itself. Regulation does not exist to prevent the market from changing and adapting, but rather to identify when the situation is becoming unbalanced to to prevent it from doing so.

If you will, it should be the equivalent of speed limits on the highway - intended to keep things more or less in check, but recognizing that you cannot catch all of the cases where things go a little too nutty.