Yesterday, I promised to write a letter to Jim Flaherty. In this letter, I’ve detailed my strategy to reduce the negative impact of the impending Canadian housing recession. I’m posting it here before emailing it to Mr. Flaherty so that, if any of you would be so generous, you can provide feedback. Without further ado:
Dear Honourable Minister Flaherty,
I believe in free markets. If my proposal in this letter is partisan, I assure you it’s not leftist. I firmly oppose socialism.
I am greatly concerned about the Canada Mortgage and Housing Corporation (CMHC).
This Crown corporation guarantees over half a trillion dollars in mortgages by way of its insurance products. Their mortgage insurance assures its holders that, in the event of default, loans will remain profitable regardless of market conditions. The CMHC will step in to help collect owed debts and pay out any loss of interest or principal. The holders of this insurance are the mortgage lenders and investors – mainly banks and institutional investors.
The CMHC was established over half a century ago with good intentions. The CMHC has allowed people who would not otherwise receive an affordable mortgage to do just that. These folks are known as “sub-prime” borrowers. As a result, CMHC insurance has distorted lenders’ evaluations of risk. It has rendered moot the profit-maximizing risk management afforded by a real free market.
This CMHC-caused distortion might seem innocuous at first glance. But it has infected much more than the market for mortgages.
CMHC insurance has pushed demand for housing to the extreme. Prices have predictably followed suit. Artificially low interest rates and larger hypothetical “home equity” have been used by borrowers to obtain Home Equity Lines of Credit (HELOCs). The HELOC has become a tool critical to the conspicuous consumption of the middle class for, without cheap credit, they’d need to live within their means. Consumer spending is now three quarters of our GDP whereas, just a decade ago, it was only two thirds. The housing ‘wealth effect’ has depressed savings rates. Investors now flip units for seemingly guaranteed profits, crowding out equity investments in productive ventures. Home-related employment has been a shining star in an otherwise bleak jobs picture.
The CMHC’s balance sheet is dismal. Some analysts claim that it’s worse than the balance sheets of Fannie Mae/Freddie Mac before they went bankrupt. The CMHC has an insufficient amount of equity – only about 1.5%. Keep in mind that this 1.5% equity backstops over half a trillion worth of subprime mortgages. Even the Office of the Superintendent of Financial Institutions has now expressed public concern about banks’ lending habits and, by consequence, the CMHC’s liabilities.
It all seems very reminiscent of a time not so long ago, in a powerful nation not so far away.
Nostalgia aside, the CMHC’s extraordinary distortion of Canada’s economy is damage done. There will be deleveraging and home price deflation. The CMHC’s good intentions have paved a well-known road, down which it now travels.
My big problem, however, is that taxpayers will be along for the ride.
If the CMHC can’t meet its obligations after the housing bubble bursts, then the federal government will be obliged to bail it out. This bailout could be to the tune of billions and billions of dollars, all of which will come from Canadian taxpayers. Let’s not mince words. Taxpayers like you and I would pay billions of dollars to the banks, to compensate them for their own foolish lending practices. This bailout would occur after the banks enjoyed the recent run-up in prices. The run-up in prices has surely been due, in part, to CMHC insurance. Higher prices created ever-larger mortgages and tons of imaginary ‘home equity’. Banks could lend more money against this “equity” by way of HELOCs. The CMHC insures a lot of HELOCs, too.
This bailout for the banks would be a massive wealth transfer. The transfer of money would be from middle class taxpayers to the banks. This would constitute a perverse travesty. If I can borrow a phrase from hippies, it would be “socialism for the rich.”
It’s evident from recent comments, like those of TD Canada Trust, that the banks are setting up the Canadian federal government as a scapegoat when the housing bubble comes crashing down. The banks will wring their hands and point to their half-hearted cautionary statements (despite years of pumping up the markets with Realtors and their ilk). They’ll cry crocodile tears and moan “We were prudent. The feds did this to you, Canada,” as they take billions of our tax dollars from the CMHC trough.
You responded to the banks’ ploy by saying:
“I find it a bit odd that some of the bank executives are taking the position that the minister of finance or the government somehow should tell them how to run their business… We have bank executives in Canada going and saying ‘really, the rules on insured mortgages should be tightened up.’ They must forget that they are actually the ones that issue the mortgages. It’s their market. It’s not my market.”
You’re right. It is the banks’ market insofar as they profit from it. But you’re also wrong – the banks face none of the market’s risk. It is not truly their market. It is merely their cash cow.
I’m not sure who will get blamed in the aftermath of the CMHC’s spectacular end. Regardless, the real scapegoat will be taxpayers. Like I mentioned before, as soon as the CMHC’s 1.5% equity has sublimated into the banks’ bottom lines, ‘We the People’ are on the hook. I have a strong suspicion that the next election will be a lot tougher for incumbents who failed to protect taxpayers.
But the worst of the disaster is still avoidable, Mr. Flaherty, if you decide to protect the Canadian people.
I have an idea. I’d sincerely appreciate if you gave it more than token consideration.
I’m not going to tell you to throw money at the problem. Please don’t try to solve the supply side of the bubble by bailing out homeowners. It won’t work any better than cash-for-clunkers. I think we’ve got enough watchdogs in Canada. We certainly don’t need a new Crown corporation or a Housing Czar.
My idea is simple:
Remove the taxpayer’s guarantee for the CMHC.
This could get a little messy in execution, but Canada elected a majority government to do what needs doing. The fancy “mortgage-backed securities”, constructed by the CMHC and the banks, might take a valuation hit (their prices are surely artificially buoyed by the taxpayer guarantee). At least one bank, if not all of them, will want to sue the feds. Tough for them. My heart doesn’t bleed at the idea of taking subsidies away from Canadian banks. Pass a law that protects the government. Invoke the “Notwithstanding” clause if you need to. You can make it work.
Why not?
If I’m wrong about the CMHC, good. Maybe the CMHC has only been prudent and risk-averse in its lending operations. Maybe 1.5% equity is plenty. Maybe the Realtors and Big Banks have been telling us the truth all of these years. Maybe a personal home truly is an investment, even though it doesn’t produce rent or dividends or interest. Maybe Canadian home prices only go up. I didn’t buy a condo in Toronto yet, so maybe I’m priced-out forever. Maybe it really is different this time. Maybe the CMHC can stand on its own two feet without its hand in the taxpayer’s pocket. This would prove that there’s no price bubble. We’d chalk it up to a little irrational exuberance that got out-of-whack with fundamentals. Equilibrium would be restored and the market would reign. I’d be proven wrong. I promise I’ll shut up about it and Canada will be better off.
On the other hand: if I’m right about the CMHC, then removing the guarantee is the only responsible choice to protect taxpayers.
Banks want us to protect their profits. I have zero problem with banks making money. As I said, I’m not a socialist. What I dislike is that Canada is subsidizing bank profits. It’s extremely perverse. If the government represents the interests of the taxpayers then this practice must end. Right now the banks get all of the rewards and taxpayers get all of the risks. Let investors take on the risks and the rewards. That’s how a free market works effectively and efficiently.
The CMHC is a market-distorting institution. Its role in creating the Canadian housing bubble is a mistake that cannot be undone. The blame game is irrelevant. The CMHC is not ‘too big to fail’. It is too big to save. Let’s look forward because it is not too late.
There’s a clear choice to be made. The government can risk taking billions from hard-working Canadians to give it all to the banks, or you can protect taxpayers like me.
Mr. Flaherty, I started this letter by saying that I believe in free markets. Now, I ask:
Do you?
Sincerely,
Joseph Wood
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I’m going to send this to the Minister of Finance after it’s finalized. I’ll copy the Leader of the Opposition (Thomas Mulcair), and The Right Honourable Prime Minister Stephen Harper. I’m also going to copy Bob Rae (Leader of the Liberals); I know he’s read my favourite book on economics, “The Efficient Society” by Joseph Heath.
Here’s a list of those email addresses, in case you want to share your CMHC concerns with the same Parliamentary officials:
jim.flaherty@parl.gc.ca, thomas.mulcair@parl.gc.ca, bob.rae@parl.gc.ca, pm@pm.gc.ca
I’d encourage you to copy your local MP (click here to find yours by typing in your postal code). I’m copying Dean Del Mastro who is the MP I know the best as I lived in his riding for years (and I hope to again, sometime soon).
Here’s a possible idea for an email to get the attention of elected officials. If you just want to copy and paste it, feel free:
Dear Mr. Flaherty,
I want you to protect taxpayers. The ability and willingness of a candidate to protect my interests will weigh heavily upon my mind in the next election.
The CMHC is a taxpayer-backed Crown corporation that ensures over half a trillion dollars in subprime loans. I am unhappy that I may have to reward banks for poor behaviour with a multi-billion dollar bailout.
Please take the time to consider the information presented at http://www.timelessfinance.com/2012/03/28/the-cmhc-and-me/
Protect taxpayers by ending the CMHC guarantee that rests on our backs.
Sincerely,
A Concerned Citizen
Excellent idea. I did not even know you could send a letter to the Finance Minister to express this concern. I read about HELOC a couple of years ago and realized the risks. However people who are taking HELOCs maybe taken by greed. A well written letter to express this concern. I will definitely express my concern too. I know Mr. Flahrety will listen.
I am not an expert in English grammar but doesn’t “governement” start with a capital ‘G’? Thanks for sharing.
Thanks very much for your support and for being a vocal citizen. I’d love to hear about any response that you get.
I think it’s capitalized when you say “Government of Canada” but not “the federal government in Canada”.
This is an issue that cannot be buried anymore by the media or our government. It is high time that we as Canadians should have an open discussion on this issue. Thank you Joe for being such a strong voice in this issue and presenting such compelling arguments for the steps that need to be taken in order to stop this
By sending this letter, NONE of the party leaders can claim ignorance on the problems underlying this issue. I’ll be enjoying the coverage of the next federal election when they try desperately to save face!
Wow. I knew there were tons on Canadians that were over leveraging themselves with huge mortgages and I thought they were just stupid. If I had realized that I was on the hook for their stupidity and the bank’s excessive greediness I wouldn’t have just laughed at them I’d be yelling at them.
Here is what happens. Property bubble pops. Stupid people and flippers with unrealistically low sub prime mortgages go broke. Banks aren’t affected at all. Then people like you and me that weren’t stupid enough to get mixed into the mess along with the rest of Canadians have to pay for it! That is so not reasonable.
This really makes me mad at Canada and banks. Seriously why is Canada letting banks swindle us?! That property bubble is going to pop at some point and now I find out taxpayers are paying for it! How the heck are we going to manage bailing out the bank? Isn’t it the average Canadian has like 150% debt! Where is the imaginary money going to come from?
This also makes me wonder if the price of housing wasn’t so over inflated then how much would that debt % go down for the average person.
Thanks alot Canada for letting the CMHC give banks an easy excuse to #### us over.
People are money-stupid, the government is always trying to intervene in the economy (almost always resulting in bizarre distortions) and the banks are all too happy to make a billion, even if it’s destroying the country.
What more can be said Joe, your analysis sums it up and please send the letter. Canadian taxpayers should not be on the hook yet again but apparently are. What is the silver lining going to be for the banks cause they are not going to let tax dollars slip away easily as you know. Our politicians would “sell their souls to the devil” to remain stay in good with the banks. Looking forward to the response you letter receives.
Thanks very much. I’m going to send it in before I go to bed. PLEASE send in your own email to your local MP and the politicians I listed. With many emails, this issue may get heard. Without any, I guarantee that it will not.
Awesome post joe… Have you thought about sending this to the President or the board of CMHC?
EXCELLENT question John.
The Board of CMHC is composed of people with various levels of vested interests in seeing the Cdn housing bubble expanded. There are no economists on that board. It’s laughable and insulting to taxpayers.
Further, while they all have pretty bios which you can read at http://www.cmhc-schl.gc.ca/en/corp/about/cogo/cogo_004.cfm they have not published an email address list. Unlike politicians, they are completely unaccountable. The CMHC should not have a role in deciding its own destiny – it’s already proven itself to be a dangerous, untrustworthy institution. I will take my concerns to their political masters, and hope they have the common sense to avert disaster.
Thanks for the representation, I am sick and tired of this scheme.
No problem Shawn. If you contact anybody, please share. I think a lot of people recognize this scam for what it is, but think they’ll look like a quack if they speak out.
I realize I am way late to the discussion but was trying to figure out how the CMHC insurance plays into the Canadian financial bailout and I stumbled onto your article so I thought I would offer my 2 cents (for what it is worth, and realistically I am guessing not much, but sometimes I hope it is worth my effort in an attempt to get people who are already thinking progressively to take it further).
I do applaud you and others who make an effort to try and understand present systems and attempt to offer suggestions for correction. Awareness and understanding are always the initial conditions required to escape any dogma and, at a critical mass scale, are probably the only real hope for any longer term human betterment (or worse case scenario the avoidance of horrible mass human suffering (global warming, resource depletion, environmental degradation, austerity etc.). Unfortunately (IMHO) CMHC insurance is just another symptom of a systemic problem (think public debt (explained somewhat in a video by Bill Abrams as one example). Black and white statements like “I believe in free markets. If my proposal in this letter is partisan, I assure you it’s not leftist. I firmly oppose socialism” are meaningless, particularly without defining the terms. I realize that would not work in the format of your letter so why bother throwing them out there except in an (vain) attempt to being more effective by letting the minister know “hey man, I’m with you I just seem to have found a glitch here”.
History shows us that the majority of people really do not “know the enemy”. If Marx had anything right it was certainly that “the history of all hitherto existing society is the is the history of class struggles”. The movie “Gangs of New York” also had a nice summary when one of the members of the ruling class (aristocrat or bourgeoisie), when confronted with the potential for civil unrest, said “you can always pay off one half of the mob to kill the other half”. Scott Walker liked the familiar phrase “divide and conquer”.
We can buy into jingoistic propaganda like “capitalism, free markets good, socialism, communism bad” and history shows that the masses, without any propaganda clout, mostly buy into the ideas spread by those with the the propaganda power (the ruling wealthy class) with very little critical thinking and regardless of how inimical it is to their interests. Except perhaps when you get a successful revolution which usually just results in changing the assholes at the top (e.g., The Soviet Union, which unknown to most (except people that have spent a little time studying it, like most scholars) was not socialism but state capitalism. It has, however, been used as propaganda ever since to denigrate any forms of social cooperation that might affect the status quo).
History also teaches that governments exist for the benefit of the ruling class and almost all headway towards betterment of the masses has been accomplished by incredible human struggle (sometimes led by progressive energetic individuals but often through mass movements).
I think the vast majority of people (minus the real psychopaths e.g., see Dr. Robert Hare and I think this may be causing more havoc than we realize) are “good” people hoping for a “better world” for all. With the internet we have the possibility to disseminate ideas outside the powered class and hopefully get people to start looking at the workings of the world in a more critical and independent fashion, but it does take a lot of effort. We have to start thinking outside the boxes we have all been placed in. We have to start understanding ourselves better (our physical needs and our psychological needs (e.g., Deci and Ryan’s Self Determination Theory and evolutionary psychology e.g., Stephen Pinker and others). We have to shed Orwellian double think. We have to start rebuilding societal systems based on the values of human flourishing and well-being for all (if we value peace at all) (e.g., Professor James McMurtry) apposed to a society by threat of violence.
I think I will leave it at that.
All the best.
Hi Brent, thanks very much for stopping by.
Having studied a lot of Marx’s original translated texts for courses like classical sociological theory, I say confidently that while Hegel’s dialectics have analytical value, Marx himself was wrong on a plethora of issues. If you read Kapital with any modicum of knowledge about econ, you quickly realize he was literally clueless about classical economics. He proposes, for example, an upward sloping demand curve; it’s all really quite laughable even in his context of the late 19th century. His ignorance has been born out time and time again as his ideas have been implemented and have resulted in tyrannies to various degrees (usually correlated positively with the extent to which his ideas were implemented).
The reality is that free markets are institutions created by people and — when shored up by other effective institutions like a court system — they create lower cost, higher quality products through competition, allocative efficiency, and improve quality of life. Respect for the free market is also respect for the most fundamental, basic human rights. While capitalism is not a SUFFICIENT condition for freedom (as seen in China) it is in fact a NECESSARY condition for freedom. Evidence includes the Democracy Index and HDI.
The problem I’ve endured debating with leftists is that when I point out tangible facts like the DI and HDI, they’ll say “THOSE ARE CAPITALIST NUMBERS PRODUCED BY CAPITALIST INSTITUTIONS”. Well, the left needs to produce some of its own numbers. Marx was an objectivist, he would have wanted quantitative facts to shore up his theories and expected his future disciples to do so. They’ve failed miserably for objective reasons aforementioned.
While it’s very “zeitgeist” to think “labels are what matter. If we just stop labeling things incorrectly we’d all stop being prisoners of our current reality.” Marx would have disagreed. I’d posit that, as a strong objectivist, Marx would likely have rejected communism after seeing the horrible plight it has caused in objective reality. He might have even embraced capitalism.