There are occasions in life where it is important to dress up in suit and tie and present ones best. It’s not to look good for others, but the occasion is important and crucial as to warrant one’s best effort in behavior and thought.
I attended such an occasion – I thought - when invited to hear a senior and renowned economic advisor to a major bank and money lenders. The presentation was on America’s and the worlds credit crises and stock market volatility.
The Talk was,
“The [sub-prime] Crises in Perspective”
The purpose of the talk was to better understand the “American economic crises and its relation to Canadian housing lending markets to reduce fear and uncertainty of clients.”
I’ll be writing this verbatim, as I remember the words and the notes I took. I’ll touch on some of the highlights.
“Has the economic cries we are experiencing bottomed out? I won’t pretend to know it all. No one can know it. However, looking at history, this is the worst crises since 1929. This is serious! Taking over [American] banks was the last thing governments do, but government is taking over banks.” Take over” were the words used.
In the 1929 depression there were mistakes made which we have learned from. In 1929, they suffered a similar crisis, but ended up in not enough liquidity being made. That was the policy error. Today, we want to ensure there is enough liquidity. We must do everything to prevent the take over of banks. It’s the last thing to do but there was nothing more to do. The government has tools, but with this crisis, there was nothing left to do but take over the banks.
The speaker then went into how the government (central bank) bought up bank shares, - I’ll add here – at their bankrupt rate, “and will sell them later at a higher price.”
“The 700 billion dollar injection was necessary to set the conditions for recovery. There was nothing left to do. The Government has a wonderful set of economic tools. The only thing left is to lower interest rates. What they had to do, I believe they are right!”
“Europe’s in recession, so is Japan along with Britain and Australia. Ice land has collapsed. The rest of the world is down or going down. Nobody dreamt of this big issue.”
“The core of the problem was the house prices. That was the core of the problem. House prices were way out of whack! Now, for every 1% decline in the house price, there is a 25 million dollar loss on the market. Prices have fell 80% in 2006. That represents billions lost! You do the math”
House prices will stop falling and when you see house prices stop falling; then you will see recovery. You will see economic recovery.
Pre 1978, the ratio between house prices and incomes in the United States, you saw they were roughly equivalent. However, after 1978, as disposable income rose steadily, house prices sagged below the income average. By 2004, [greedy investors and borrowers] neutralized any balance that existed and house prices shot way above average incomes. The graph showed house prices shooting up from 2004 and peaking around 2006 and dropping quickly 2007/2008.” He was showing house prices created an imbalance in the relationship between average house prices and incomes.
“Now, no one cares about socialism or capitalism – only about the financial system. This is not the time to be concerned about socialism or capitalism, only about the financial system – only about this crisis! It’s not about economic philosophy.” Those are the exact words from a seasoned, experienced, senior economist - a spokesman - of one of Canada’s leading banks. Those are undoubtedly words echoed from his committee that sits with government leaders and bank leaders. In Atlas Shrugged, that exactly was the very same panic.
He then goes on to talk about how he expects the house prices to continue falling but to soon reach a balance that is in line with incomes, thus correcting the situation.
I’ll also mention the, “TED spread.” The TED spread is a three month European dollar average versus the American three month T-Bill. In 2006 it was stable, 2007 it started movement upwards, and 2008 climbed almost straight up.” He expects the spread to go back down. I missed much of this since my associates were talking to me. He continued that the Canadian banks were suffering from the spreads.
“This is a rate crisis now, a recession time. The spreads will go down. Borrowing was crazy!” The senior economist then shows a graph of U.S home equity withdrawals. The graph shows it has gone a high, to a steadily sloping from 700 billion loss in 2006, to zero in 2008.
“The good news is there is nothing left! You can’t go below zero. There is nothing there. The only way to go now is up. Everything is at the margin.”
Then car sales are shown to drop drastically from 1991 to now. He explains a 40% reduction in sales for some manufacture’s.
The difference between Canadian and American GDP drop is shown to be 1.05% (Canada) to 3.0% (America). “Canada is more stable.”
He showed commodity prices world-wide as down. He mentioned the fact that once China slowed down due to this global recession, - then commodity prices started going down. He gave oil as an example.
As far as rate cuts, he expects perhaps more but small, around half a percent or less.
“When the economy gets moving again, those cuts will be taken away just as quickly as they were given. They were emergency cuts.
Inflation, especially energy and food prices will go up. Where there is increased demand, those prices will go up. The bush Administration spent millions subsidizing corn producers in America for ethanol, but this was to subsidize the farmers. The total expected outcome of ethanol would only reduce gas dependency by 3%! The ethanol program was to subsidize the farmers. Energy prices will go up. Inflation will be the concern and higher interest rates 2011.
Recently the Bank of Canada did not cut interest rates and this was a surprise to many. Why didn’t the Bank of Canada cut rates? The difference was the growing spread between what is called the core inflation rate (rising cost of all things – food and energy because of their volatility) and the inflation rate that includes food and energy. The spread is at 6.7%. Demand is rising. Supply is diminishing. Inflation is foreseen so the rates in Canada were not cut.
For the last 7 or so years, interest rates have been the big concern for Mortgage brokers and banks. Everybody more or less took rising house prices for granted. The increase has been around 14%. Now the growth rate of houses will be 3%, 4%, 5% outstanding. That will be a more balanced growth in the industry. We want this kind of correction.
Inflation will be the governments concern with interest rate increases around 2010 – 2011. For now, interest rates may even go down by a few basis points, there is a stable housing market in Canada. Inflation will be the going concern.
We don’t want to see a “bubble.” You’ll have to work harder to get sales.”
My main disappointment was the content of the topic, which was not at all an independent judgment of the economic crisis, but mere following of political Keynesian philosophy based on consumerism.
What is particularly eye opening to me was the blatant disregard for principles in economics, especially when principles would be most needed. I would have thought at a time of crises, governments would have mustered up its best, most hard thinking economists and politicians and let the principle of freedom reign. Instead, the direction of nationalization of banks was the order of the day. The decision to take over the banks was not even pragmatic, it was mindless and literal bankrupt panic. Bankrupt ideas have led to literal bankruptcy, yet the same leaders will not let go of their empty ideas.
Ayn Rand was and is an absolute genius in her perceptions. She depicted such bankruptcy of soul decades ago. It is awe full. It is inspiring to me that she had the courage to name and identify rational principles and to call evasion the worst corrupting evil on the face of the earth.
My question now is, will America have to collapse before correcting back to its original founding principles? Or is there time? What can I do?
When this 700 billion dollar printing of money runs out, the next crisis will be higher, - in the trillions! There isn’t much time left before the west collapses into socialism or a new kind of fascism. This centuries old crisis has been building and proper principles must be spoken or we are all in dark trouble. O, let me fight! I will speak.
