Canadian misesians! I would like a brief overview of the Canadian Banking system and financial market. A summary or link to resources would be much appreciated.
Some say Canada’s bank is ranked #1 in the world…
The Bank of Canada is #1? They are only Bernanke’s lapdogs. They don’t make decisions.
There are 5 large banks in Canada, then the central bank.
It is the “most sound” banking system in the world because the malinvestment in the economy (and especially housing) hasn’t been revealed.
As soon as housing prices drop and people start getting delinquent, we will find that a lot of the assets of these banks are trash. It will then be known as another crappy banking system.
The housing market has a steady, than accelerating increase in prices from about 1992 until 2008. When the credit bubble burst, the government of Canada allowed banks to give out 40-year mortgages with 0% downpayment, and the Bank of Canada dropped the overnight rate to 0.25%. (IIRC) The banks gave out such silly loans, because they know that if the person stops paying for their house, the CMHC will cover the bank for their loss. It’s win-win for the banks. They have zero risk.
The CMHC (Canadian Mortgage and Housing Corporation/Canadian Moral Hazard Corporation) covers all of the banks losses on any loans. Essentially, most mortgages in Canada are government-backed securities.
In the US: Gov’t → Fannie/Freddie → Banks
In Canada: Gov’t through CMHC → Banks
So the reason the banking sector is so strong is that the value of the assets (mostly housing) hasn’t dropped in value yet. But that’s because that sector of the economy is being flooded with money. And that’s happening because even if the banks lose on the loans, they don’t lose. The government covers the difference between what is outstanding to the bank, and what the bank sells the house for.
So If a bank is owed $200k on a house, and the bank reposses it and sells it for $10k, the government has to give the bank $190k to cover its loss. Now, there are rules about how low a price a bank can sell a house, so my example is absurd, but it works for illustration. We’ll see how things go. I’m guessing the Canadian taxpayer will be out $50-$150 billion as a result of housing depreciation over the next few years. Relative comparison: that would be like the US gov’t being $500 billion - $1.5 trillion more in debt as a result of housing.
Thanks so much GJ
Is there any way we can see these malinvestments impacting the economy?
The Canadian banks did get bailed out, but it got almost no publicity.
http://www.globalresearch.ca/index.php?context=va&aid=12007
In that manner, they truly are efficient. Canada has a huge credit-housing bubble also, but it lags the US bubble. Mish Shedlock covers this topic from time to time, perhaps later today I can find some links and post them.
For coverage of the Canadian financial markets, I like the Financial Post the best. http://www.financialpost.com/
Yahoo (Canada) Finance is another good site. http://ca.finance.yahoo.com/
Thanks for the links. They will come in use.
Housing sales have been in a realy funk since late July. Instead of being up about 5% over last year, they’re down about 40% from last year. We’ll see price decreases soon enough. I think the hardcore slashing of prices comes in around spring-summer next year.
Recently, in Vancouver, the median price of a single family home was $1,000,000 CAD. (About $930,000 USD)
Home prices across Canada are 5.1 times annual income. In the US, the highest it got was about 4.6 times.
Are these signs of malinvestment, or should I be listening to every other person on the street who says “the house pays for itself!”
True. Even though it was as big a bailout, per capita, as the US one, no one here complained. $700 billion > $70 billon. People have trouble understanding relative terms.
I tend to check out http://www.greaterfool.ca/ every day. Neat stories about the real estate market, and I sometimes come across neat info from some of the commenters.
Sieben,
OK, here are the Mish links. I hope they will be useful to you.
http://globaleconomicanalysis.blogspot.com/2010/01/housing-bubble-comparison-us-uk-canada.html
http://globaleconomicanalysis.blogspot.com/2010/05/hosed-in-canada-housing-crash-is-given.html
http://globaleconomicanalysis.blogspot.com/2010/05/canadas-household-debt-reaches-record.html
http://globaleconomicanalysis.blogspot.com/2010/03/canadian-credit-bubble-in-pictures.html
http://globaleconomicanalysis.blogspot.com/2009/11/canadian-says-short-canada.html
Joe, thanks for link to Greater Fool, I will check it out.
Bottom line is that Canada is virtually identical to the U.S. It’s just hollow propaganda that attempts to establish a qualitative difference, such as the trash you hear from Obama.
It’s spooky to watch it happen here. I’ve come to realize not only how a bubble is economic, but psychological. I just can’t prick the bubble in people’s minds that makes them believe housing is a great investment.
It’s not that people can’t find the truth or the answers, because those are right in front of them. It’s just that they’re not willing to accept it, or even entertain the idea.
Thanks for the links. They will come in use.
Seconded!
If you read anything on policy from the Bank of Canada it refers to Ben Bernanke. They believe everything he says and copy everything he does.