PerFi 3: Manulife, Cyprus, and a Broke Millionaire

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This week was another big one for personal finance-related news. The PerFi 3, to reiterate, is not a permanent feature. It’s just been an exciting fortnight.

#1: Manulife Gets the F-Hammer

A year ago this week I said that the CMHC is a fundamentally socialist institution: it’s a massive subsidy for the housing market because it protects lenders from losses on loans to high-risk borrowers. I actually said this (and much more) in the form of an email to the the federal Minister of Finance, Jim Flaherty. Instead of cutting off the CMHC, the minister tightened mortgage insurance requirements — which he himself had loosened just a few years before — thus putting a tiny band-aid on the sliced Carotid of Canada’s economy. Sure, mortgage amortizations have gone down (from a maximum of 40 years to a max of 25 years), downpayments are up a bit from Flaherty’s insane 0% policy, and there’s no longer insurance available for million dollar homes. The banksters still want to lend money. This is an intelligent, profit-maximizing reaction to the government’s continued socialist stimulus. How can financiers incentivize borrowing in a housing market that is now collapsing? By making credit cheaper. Yes, credit that is insured by suckers (a.k.a. taxpayers) like you and me, because Flaherty refuses to end the root cause: perverse incentives.

Seeing the slow-motion disaster of plummeting prices, empty condos, increased defaults, and disappearing CMHC equity, Minister Flaherty isn’t pleased about the “race-to-the-bottom” being run by Canada’s banks. He decided to scold one particular lender, Manulife, for undercutting its competitors with a posted rate. While I’d normally be disgusted by a government’s socialist intervention in a free market, I’m far more disgusted by the original socialist intervention (the CMHC) that has necessitated further government interference. At this point, the Feds aren’t even trying to prevent the inevitable disaster. This latest policy of scolding companies won’t work, and they know it, but it’s part of building their alibi that will help them pin the approaching disaster on the Big Evil CorporationsIt’s no surprise that Garth Turner picked up on this, with even more joy than usual (I get the feeling that Flaherty wasn’t Garth’s Caucus BFF). But when an observer as unobservant as Andrew Coyne notices the fundamental problem, you know the gig is up. I couldn’t have asked for a better birthday present.

#2: Cyprus is like a Soap Opera for Economists

Last week, I relayed the story of the Cyprus bank bailout. It wasn’t big news last weekend when I wrote the original post. Then, on Monday, it entered the news cycle as the biggest story (up until Obama’s Israel visit). I apologize that my original analysis on Cyprus was incorrect; I treated the bailout, and its necessary condition of a bank account tax, as foregone conclusions. Apparently the Cyprus Parliament needed to approve it. Like any politicians asked to make unpopular decision, they refused.

Monday is now the deadline for Cyprus to provide a solid plan that closes the multi-billion dollar funding gap necessary to get a bailout. Banks have remained closed for a week which, I’ve heard, isn’t considered a “business-friendly” policy. Grocery stores and gas stations are refusing non-cash payments. Cyprus has been working on a solution to fund the almost $6 billion required to obtain a $10 billion bailout. As of Saturday, the proposal goes something like this:

  • Create a “national solidarity fund” that won’t do a damn thing; and
  • Tax the **** out of rich peoples’ bank deposits.

I understand why average people are refusing to share in the pain of a bailout. If the banks simply went belly-up, then deposits up to the insurable limit of $100,000 should be protected by the EU’s deposit insurance, if I understand the situation correctly. Wait, is it possible a government-run financial insurer doesn’t have sufficient equity to cover significant defaults? Nah.

Like I said before, the possible failure of a tiny socialist nation is mostly irrelevant. I learned this week that Cyprus is only 0.2% of the EU’s economy. The real disaster is that the EU’s demand for a bank account tax could strike fear into the hearts of citizens in other nations that are wobbling or have previously gotten bailouts; specifically the Debt PIIGS (Portugal, Ireland, Italy, Greece, and Spain). The Cypriot banking sector is also deeply intertwined with the Greek economy which certainly doesn’t need to experience any more shocks.

Monday morning update: deal reached.

#3: Earth Hour Sucked

Human Achievement Hour was Better

#4: Rags-to-Riches-to-Rags

Canadian newspapers publish a steady flow of money-related human interest stories. Sometimes a story is about understating how incredibly screwed a particular elderly couple is. Other times, it’s about a couple that is well-prepared in terms of assets, but the “objective” analyst gives horrible advice that serves the interests of overpriced investment advisors. And then, sometimes, an article really stands out. One of these stand-out examples of journalism was the Toronto Star’s profile of a woman who won $10 million in the lottery and who, less than a decade later, is broke. (Credit to Adam P for, yet again, delivering an interesting finance story to my Facebook news feed.)

The woman’s rags-to-riches-to-rags story has a ton of factors. Multiple sports cars. A half-million dollar house in Ancaster with a mortgage. Gigantic familial gifts. Poor investments. But all of these poor choices come back to her fundamental ignorance about money. She didn’t know how to deal with cash when she was a struggling working Mom and, surprise, she didn’t know how to deal with 1% of a billion dollars. Do I need to mention she’s from Hamilton?

Speaking of financial ignorance, check out my post on Thursday for a discussion of personal finance curriculum in Ontario’s high schools (or the lack thereof). Between now and then, Dear Readers, enjoy the posts from Sara and Adina.

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2 Comments… Share your views

  1. It sounds like closing banks for a week and the associated uncertainty could have a worse effect than just taking 8% of everyone’s cash (or 20% of balances over 100k). In a similar way, we could end this game of “when will interest rates” rise by putting them up 2 points. Who is really going to finance a massive investment at 1% but would go broke at 3%?

    Ok, I admit that’s really just my personal bias and I have no idea whether it would be better for the economy. I wonder if the ministers are trying to extend a peace offering to all the people who voted for the NDP by pursuing the kind of policies we’re seeing recently. If you can’t beat them, scare them so they start doing what you would have done!

    All lottery winners seem like good material for a show about how not to manage your finances. Shows like Dragon’s Den and Shark Tank go back and do updates on people who have been successful since being on TV, which is generally a good marketing move. In contrast I’ve never seen a lottery sponsor talk about people who won 5 or 10 years ago. Those two observations are just about all you need to know about the process. Or another fun one: since there are occasional repeat winners, a lot of people who win the lottery must feel that they need to keep playing it so they can be rich one day.

    • News stories #1 and #2 speaks to a clear, disturbing trend: fawning acceptance of government interference in the operation of free markets and, when “it” hits the fan, an immediate anti-free market response. Just like in the US; a housing bubble was created by Fannie / Freddie and legislation imposed on the banks, and then people blame Wall Street for the ensuing disaster.

      As for the lottery winner thing, you’re right. It’s all marketing, plain and simple. Must be nice to have a monopoly on an inferior good like the lottery. Or alcohol distribution. Etc.

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