It's not just Canada. It's not housing supply and demand. It's not immigration. It's not regulations and red tape. It's all around the world and central banks are 100% to blame.
I don't have a problem with Tommy Douglas or Ed Broadbent or Jack Layton. I do have a huge problem with pro-Iraq-war Michael Ignatieff. Seems like the merits of a party depend on who's in it. Hence my original question.
I think about it in terms of my own conviction and principles, and given what I know of the actual history of the party, not its PR, there is no overlap.
Yeah usury is perverse. But lowering the rate does not "drive up" asset prices, it moves asset prices once, it is a one-time adjustment. Natural rate of interest is ZERO.
I read the situation with the markets as more like the house prices are more about all sorts of other institutional forces as well as rates, like greed. Banks will make loans to only credit-worthy customers (if they don't want to get caught). But what are the prudential regulations? Who is enforcing them? Has there been a "relaxation" back to fraudulent appraisers and real estate commission grifters and all that scam side of things? That has to be a huge part of the price of a house. It's all disgusting form every side you smell it from.
Dropping interest rates creates a feedback loop which continually ratchets asset prices higher, by placing more and more debt under each price increase.
Interest rates drop >> banks issue more credit, driving up asset prices. As asset prices rise, banks are willing to issue more credit, driving up asset prices.
When interest goes up or down, a central bank is effectively altering the entire landscape of who can get credit in the economy.
When they push interest rates down, that means people who weren't credit-worthy become credit-worthy, and people who qualified can borrow much more, and that varies across the income and wealth distribution.
When they raise interest rates, it reduces the size of loans available to everyone as well as cutting people off again.
When banks issue mortgages, they consider them to be assets. So it increases the value of the banks' assets; everyone in the FIRE economy (finance, insurance, real estate) makes much more money, and it increases government revenues at every level.
So the "prudential" rules are overwhelmed because of the apparently "positive" economic signals, which are actually quite highly concentrated.
It is the FIRE Sector - finance, insurance and real estate that benefit, because they are able to make more and more money, because people are taking out colossal amounts of debt to fuel price increases, not investment in value creation.
Having benefited from the bubble, the folks who are doing well seek policy changes in order to keep the party going. The entire culture is telling these people they are successful, clever and deserving.
Interest rates are a price on uncertainty - the more certain a loan will be repaid, the lower the interest rate, even when the initial or existing distribution of income and wealth is a result of chance.
Where there is no risk, there is no reward. If an investment is 100% guaranteed, the expected rate of return should be zero.
Similarly, if the interest rate is zero, the implication is that there is total certainty about repayment.
There is no total certainty; certainty for some is purchased at the price of uncertainty for others, and the initial distribution of wealth and income means that access to credit is already distorted based on a power law where roughly 20% of the population has 80% of the wealth.
I think you are missing the income flow story (and many other factors). If income supports the interest then it can be paid. Zero rate policy is like currency at par, you simply are writing nonsense if you think lower rates are inflationary, even for assets the interest rate is a mild effect and does not multiply as you say, you are being blinded by empiricism and not thinking about the entire macro picture I think. Almost all the asset price hiking is institutional and greed, not a low interest rate effect. Try putting a moral lens on too. Usury is no damn good, and should only reflect credit risk. So has nothing to do with credit-worthy borrowers whose incomes have been assessed.
If there were a ratchet effect then you simply cannot explain Japan asset prices. They should have "exploded" by your logic. Which should tell you the main effect is from other institutional and financial practice factors, not the interest rate. Keep it zero mate. Regulate asset prices elsewhere, where they should be regulated. Stamp out greed and fraud. To aim your gun at only the central bankers you might hit some felons but will miss all the biggest criminals.
I cannot believe you are saying rate increases are better. Thing is, there is no middle road because the central bank chooses the interest rate, it is a policy variable, not market determind, banks operate on a spread rate, because legally they are permitted to do so, policy, not markets. Don't accept the dumb-dumb ISLM/Loanable funds nonsense.
Don't bother replying, I've had my say. I will admit I could be entirely full of horesh*t.
It was all great as incomes kept pace with housing costs relatively.
One massive policy miss for all of Canada where housing is a provincial issue is protection of rental housing with zoning rules. The BC NDP have tried a band-aid solution but it's too late. Developers are not incented to build anything but condos as they use those down payments to offset the building costs.
These days corporate greed is leaving people behind.
It won't benefit me but I'm in favour of at minimum a guaranteed income scheme and in future a universal basic income scheme. If not for the pandemic we'd be closer. Also, getting people to grasp that this is good for the economy and overall well being and won't make us all lazy.
Great article. This is the kind of economics that should be taught to everyone since it impacts everyone. Since textbook economics is quite wrong in my view how can these non dogmatic evidence based economics make it into MBA programs and classrooms everywhere?
Thanks Dougald. Your articles are extremely informative and useful to 'connect the dots'. Perhaps correcting this issue is more than simply a political party policy? This needs a coalition of political smarts across the spectrum of philosophy and likely various countries? There is already a practice of Citizen Assemblies including in Canada. The question is: can this have change influence sooner than later - as the economic gap is growing and people are getting ever more pissed-off and likely not focusing their anger in the right direction. I think it's possible if we leave our partisan politics aside.??
With respect, I don't see ending the fed as the solution. I've written some other pieces with my views on the economy, money creation and the rule of law.
Ever considered getting back into politics, this time at the federal level? The NDP could really use you.
No. The NDP? Their actual record in office is appalling.
I don't have a problem with Tommy Douglas or Ed Broadbent or Jack Layton. I do have a huge problem with pro-Iraq-war Michael Ignatieff. Seems like the merits of a party depend on who's in it. Hence my original question.
I think about it in terms of my own conviction and principles, and given what I know of the actual history of the party, not its PR, there is no overlap.
Yeah usury is perverse. But lowering the rate does not "drive up" asset prices, it moves asset prices once, it is a one-time adjustment. Natural rate of interest is ZERO.
I read the situation with the markets as more like the house prices are more about all sorts of other institutional forces as well as rates, like greed. Banks will make loans to only credit-worthy customers (if they don't want to get caught). But what are the prudential regulations? Who is enforcing them? Has there been a "relaxation" back to fraudulent appraisers and real estate commission grifters and all that scam side of things? That has to be a huge part of the price of a house. It's all disgusting form every side you smell it from.
Dropping interest rates creates a feedback loop which continually ratchets asset prices higher, by placing more and more debt under each price increase.
Interest rates drop >> banks issue more credit, driving up asset prices. As asset prices rise, banks are willing to issue more credit, driving up asset prices.
When interest goes up or down, a central bank is effectively altering the entire landscape of who can get credit in the economy.
When they push interest rates down, that means people who weren't credit-worthy become credit-worthy, and people who qualified can borrow much more, and that varies across the income and wealth distribution.
When they raise interest rates, it reduces the size of loans available to everyone as well as cutting people off again.
When banks issue mortgages, they consider them to be assets. So it increases the value of the banks' assets; everyone in the FIRE economy (finance, insurance, real estate) makes much more money, and it increases government revenues at every level.
So the "prudential" rules are overwhelmed because of the apparently "positive" economic signals, which are actually quite highly concentrated.
It is the FIRE Sector - finance, insurance and real estate that benefit, because they are able to make more and more money, because people are taking out colossal amounts of debt to fuel price increases, not investment in value creation.
Having benefited from the bubble, the folks who are doing well seek policy changes in order to keep the party going. The entire culture is telling these people they are successful, clever and deserving.
Interest rates are a price on uncertainty - the more certain a loan will be repaid, the lower the interest rate, even when the initial or existing distribution of income and wealth is a result of chance.
Where there is no risk, there is no reward. If an investment is 100% guaranteed, the expected rate of return should be zero.
Similarly, if the interest rate is zero, the implication is that there is total certainty about repayment.
There is no total certainty; certainty for some is purchased at the price of uncertainty for others, and the initial distribution of wealth and income means that access to credit is already distorted based on a power law where roughly 20% of the population has 80% of the wealth.
I think you are missing the income flow story (and many other factors). If income supports the interest then it can be paid. Zero rate policy is like currency at par, you simply are writing nonsense if you think lower rates are inflationary, even for assets the interest rate is a mild effect and does not multiply as you say, you are being blinded by empiricism and not thinking about the entire macro picture I think. Almost all the asset price hiking is institutional and greed, not a low interest rate effect. Try putting a moral lens on too. Usury is no damn good, and should only reflect credit risk. So has nothing to do with credit-worthy borrowers whose incomes have been assessed.
If there were a ratchet effect then you simply cannot explain Japan asset prices. They should have "exploded" by your logic. Which should tell you the main effect is from other institutional and financial practice factors, not the interest rate. Keep it zero mate. Regulate asset prices elsewhere, where they should be regulated. Stamp out greed and fraud. To aim your gun at only the central bankers you might hit some felons but will miss all the biggest criminals.
I cannot believe you are saying rate increases are better. Thing is, there is no middle road because the central bank chooses the interest rate, it is a policy variable, not market determind, banks operate on a spread rate, because legally they are permitted to do so, policy, not markets. Don't accept the dumb-dumb ISLM/Loanable funds nonsense.
Don't bother replying, I've had my say. I will admit I could be entirely full of horesh*t.
It was all great as incomes kept pace with housing costs relatively.
One massive policy miss for all of Canada where housing is a provincial issue is protection of rental housing with zoning rules. The BC NDP have tried a band-aid solution but it's too late. Developers are not incented to build anything but condos as they use those down payments to offset the building costs.
These days corporate greed is leaving people behind.
It won't benefit me but I'm in favour of at minimum a guaranteed income scheme and in future a universal basic income scheme. If not for the pandemic we'd be closer. Also, getting people to grasp that this is good for the economy and overall well being and won't make us all lazy.
Great article. This is the kind of economics that should be taught to everyone since it impacts everyone. Since textbook economics is quite wrong in my view how can these non dogmatic evidence based economics make it into MBA programs and classrooms everywhere?
Thanks Dougald. Your articles are extremely informative and useful to 'connect the dots'. Perhaps correcting this issue is more than simply a political party policy? This needs a coalition of political smarts across the spectrum of philosophy and likely various countries? There is already a practice of Citizen Assemblies including in Canada. The question is: can this have change influence sooner than later - as the economic gap is growing and people are getting ever more pissed-off and likely not focusing their anger in the right direction. I think it's possible if we leave our partisan politics aside.??
Excellent dissertation on a vital subject missed by 99.9% of the population. I wear a T-shirt END THE FED! Thank you
With respect, I don't see ending the fed as the solution. I've written some other pieces with my views on the economy, money creation and the rule of law.