A mention in the Globe & Mail led me to an IMF publication (Chapter 3 of of the April, 2012, World Economic Outlook) titled Dealing with Household Debt:
Does household debt amplify downturns and weaken recoveries? Based on an analysis of advanced economies over the past three decades, we find that housing busts and recessions preceded by larger run-ups in household debt tend to be more severe and protracted. These patterns are
consistent with the predictions of recent theoretical models. Based on case studies, we find that government policies can help prevent prolonged contractions in economic activity by addressing the problem of excessive household debt. In particular, bold household debt restructuring programs such as those implemented in the United States in the 1930s and in Iceland today can significantly reduce debt repayment burdens and the number of household defaults and foreclosures. Such policies can therefore help avert self-reinforcing cycles of household defaults, further house price declines, and additional contractions in output.
…
Macroeconomic policies are a crucial element of forestalling excessive contractions in economic activity during episodes of household deleveraging. For example, monetary easing in economies in which mortgages typically have variable interest rates, as in the Scandinavian countries,
can quickly reduce mortgage payments and avert household defaults. Similarly, fiscal transfers to households through social safety nets can boost households’ incomes and improve their ability to service debt, as in the Scandinavian countries.
Clearly, it is better to avoid such a situation in the first place, but there is only ineffective policy in place in Canada to do so at this time. Buying a larger house (or a small house or condominium instead of renting) is a means of capital formation, which is encouraged by low interest rates. That’s what lower interest rates are supposed to do, for heaven’s sake! However, housing is non-productive capital; so much so that it can almost be considered consumption.
So the question really is: in times of economic downturns, how should policy act to promote “good” capital formation as opposed to “bad” capital formation?
I suggest that both monetary and fiscal policy are very blunt tools – too blunt to address the issue. Instead, a regulatory response is required:
- Don’t be so damn eager to raise the limits on explicitly (Canada) or implicitly (US) government guarantees of mortgage debt. Set a limit, based on historical experience and rising with nominal GDP, of the amount of such guarantees. In 2006, CMHC insurance outstanding was $291-billion. In 2010 the plan was to have total outstanding of $533-billion. Why? Why do What-debt? and Spend-Every-Penny want to create a housing bubble? I can only assume that it is because this will give them more opportunity to micro-manage the economy, with credit-rationing and rule changes by government fiat, rather than the unexciting process of raising insurance prices when a reasonable limit is approached.
- Impose a capital surcharge the banks when their loan books get distorted. Mortgages are now 40% of the balance sheets; they used to be 30% not so very long ago. Such a sudden change indicates to me a strong possibility that this is simply regulatory arbitrage (why lend to Jimmy’s Barber Shop, with a risk-weighting of 100%, when you can lend to Jimmy himself as a mortgage, with a 35% risk-weight or maybe even a government guarantee with an even lower risk-weight?). So, in this case of distortion, and in every other case of material distortion, impose a surcharge. An extra 10% risk-weight (to 45% on mortgags) on loan book elements in material excess of their historical norms is my prescription.
Three cheers for offshore wind power!
Offshore wind costs about $232 a megawatt-hour of power generated, according to data from Bloomberg New Energy Finance. That compares with about $80 for onshore wind, $62 for gas-fired plants and $77 for coal. The government supports the industry with incentives for power produced by renewable energy sources.
It’s not clear if the price figures include provisions for back-up power and demand-timing differences (the wind tends to blow at night, when demand is relatively low, can sometimes die at highly inconvenient moments and electricity can’t be stored very well. This has a huge effect on honest cost assessment, and no effect on – shall we say – other assessments).
It was a mixed day for the Canadian preferred share market, with PerpetualPremiums losing 4bp, FixedResets gaining 2bp and DeemedRetractibles down 2bp. Volatility was low. Volume was a little below average.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.2858 % | 2,399.3 |
| FixedFloater | 4.42 % | 3.83 % | 37,343 | 17.57 | 1 | 1.0818 % | 3,527.4 |
| Floater | 3.01 % | 3.01 % | 47,315 | 19.71 | 3 | -0.2858 % | 2,590.6 |
| OpRet | 4.75 % | 2.74 % | 48,136 | 1.16 | 5 | 0.1609 % | 2,509.4 |
| SplitShare | 5.26 % | -4.66 % | 81,958 | 0.68 | 4 | -0.1387 % | 2,687.6 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.1609 % | 2,294.6 |
| Perpetual-Premium | 5.48 % | 1.26 % | 85,762 | 0.15 | 23 | -0.0417 % | 2,217.6 |
| Perpetual-Discount | 5.17 % | 5.10 % | 133,510 | 15.24 | 10 | 0.2902 % | 2,412.4 |
| FixedReset | 5.02 % | 3.00 % | 185,702 | 2.20 | 67 | 0.0155 % | 2,392.0 |
| Deemed-Retractible | 4.97 % | 3.95 % | 205,560 | 3.06 | 46 | -0.0223 % | 2,301.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| GWO.PR.J | FixedReset | -1.18 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2013-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.70 % |
| BAM.PR.G | FixedFloater | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-10 Maturity Price : 22.31 Evaluated at bid price : 21.49 Bid-YTW : 3.83 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| TRP.PR.A | FixedReset | 299,184 | Nesbitt crossed 290,000 at 26.00. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-12-31 Maturity Price : 25.00 Evaluated at bid price : 26.00 Bid-YTW : 3.12 % |
| ENB.PR.H | FixedReset | 90,363 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2042-04-10 Maturity Price : 23.14 Evaluated at bid price : 25.15 Bid-YTW : 3.65 % |
| CM.PR.J | Deemed-Retractible | 72,214 | Called for redemption. YTW SCENARIO Maturity Type : Call Maturity Date : 2013-04-30 Maturity Price : 25.75 Evaluated at bid price : 25.97 Bid-YTW : 3.31 % |
| BMO.PR.K | Deemed-Retractible | 57,652 | RBC crossed 49,000 at 26.60. YTW SCENARIO Maturity Type : Call Maturity Date : 2012-11-25 Maturity Price : 26.00 Evaluated at bid price : 26.58 Bid-YTW : 2.47 % |
| ENB.PR.F | FixedReset | 54,167 | Nesbitt crosed 11,600 at 25.55; RBC crossed 20,000 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2018-06-01 Maturity Price : 25.00 Evaluated at bid price : 25.51 Bid-YTW : 3.81 % |
| GWO.PR.P | Deemed-Retractible | 41,810 | TD crossed 20,700 at 25.77; RBC crossed 15,000 at 25.75. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 5.16 % |
| There were 26 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| GWO.PR.F | Deemed-Retractible | Quote: 25.23 – 25.49 Spot Rate : 0.2600 Average : 0.1879 YTW SCENARIO |
| POW.PR.A | Perpetual-Premium | Quote: 25.11 – 25.35 Spot Rate : 0.2400 Average : 0.1694 YTW SCENARIO |
| BAM.PR.P | FixedReset | Quote: 27.15 – 27.39 Spot Rate : 0.2400 Average : 0.1785 YTW SCENARIO |
| GWO.PR.G | Deemed-Retractible | Quote: 25.00 – 25.21 Spot Rate : 0.2100 Average : 0.1553 YTW SCENARIO |
| CM.PR.L | FixedReset | Quote: 26.70 – 26.88 Spot Rate : 0.1800 Average : 0.1271 YTW SCENARIO |
| BAM.PR.K | Floater | Quote: 17.29 – 17.54 Spot Rate : 0.2500 Average : 0.1977 YTW SCENARIO |