Economy Archives - Page 81 of 136 - the patient investor

July 17, 2013

Canadian housing bubble looks ripe for popping | Toronto Star

Adam Peterson writes the Canadian housing bubble is headed for a “slow-motion” crash:

My gravest concern is that Canada is fast approaching a 5:1 home-price-to-income ratio, a benchmark achieved by the U.S. at the peak in 2006. Since the correction, the U.S. ratio now hovers at approximately 3:1.

To compound the problem, household debt in Canada has breached 150 per cent of income and continues in the wrong direction; households are not cushioned against a blow.

Australian household debt is also hovering around 150% of disposable income.

Australian household debt to disposable income

While the price-to-income ratio varies between 4 and more than 6 depending on whether you use national averages or median data.
Australian house price-to-income ratio

July 11, 2013

US banks face tougher capital requirements

Yalman Onaran and Jesse Hamilton at Bloomberg report on a new joint proposal by the Federal Deposit Insurance Corp., Federal Reserve and Office of the Comptroller of the Currency:

The biggest U.S. banks, after years of building equity, may continue hoarding profits instead of boosting dividends as they face stricter capital rules than foreign competitors.

The eight largest firms, including JPMorgan Chase & Co. (JPM) and Morgan Stanley (MS), would need to retain capital equal to at least 5 percent of assets, while their banking units would have to hold a minimum of 6 percent, U.S. regulators proposed yesterday. The international equivalent, ignoring the riskiness of assets, is 3 percent. The banks have until 2018 to fully comply.

The U.S. plan goes beyond rules approved by the Basel Committee on Banking Supervision to prevent a repeat of the 2008 crisis, which almost destroyed the financial system. The changes would make lenders fund more assets with capital that can absorb losses instead of using borrowed money. Bankers say this could trigger asset sales and hurt their ability to lend, hamstringing the nation’s economic recovery.

While the authors term the new regulations “harsh” on bankers and likely to freeze bank lending, existing lax capital requirements give bankers a free ride at the expense of the taxpayer. Their claims are baseless:

existing bank leverage is way too high for a stable financial system;
US banks are flush with funds, holding more than $1.8 trillion in excess reserves on deposit with the Fed and $2.6 trillion invested in Treasuries and quasi-government mortgage-backed securities, so talk of a lending freeze is farcical;
banks can function just as well with equity funding as with deposit funding;
higher capital ratios will make it cheaper for banks to raise additional capital as lower leverage will reduce the risk premium.

So why are bankers squealing so loudly? In a nutshell: bonuses. Higher capital requirements and no free ride at taxpayers’ expense would mean that shareholders claim a bigger slice of the pie, with less left over for management bonuses.

For a detailed rebuttal of bankers’ claims see Anat Admati and Martin Hellwig.

The big four Australian banks should take note. They currently maintain between 4.1% (CBA) and 4.5% (WBC) of capital against lending exposure. Raising the ratio to 6.0% would require 33% to 50% new capital.

July 10, 2013

Basel committee willing to rethink complex bank rules | FT.com

Brooke Masters reports:

The Basel Committee on Banking Supervision said in a discussion paper released on Monday that it shares the concern of critics who believe the main measure of bank safety – the core tier one capital ratio – is too complicated and makes it difficult to compare banks.

Its own research shows banks are using wildly different models to calculate the risk-weighted assets that make up the denominator of the ratio, resulting in some institutions holding 40 per cent less capital against the same kinds of banking assets as their peers.

July 10, 2013

Making banks hold more capital is not going to wreck the economy

Mark Gongloff quotes Anat Admati and Martin Hellwig of the Max Planck Institute, authors of the recent book The Bankers’ New Clothes: What’s Wrong With Banking And What To Do About It, from their point-by-point rebuttal of bankers arguments that they should not be required to hold more capital:

“Many banks, including most of the large banks in the United States, are not even using all the funding they obtain from depositors to make loans,” Admati and Hellwig write. “If banks do not make loans, therefore, the problem is not a lack of funds nor an inability to raise more funds for profitable loans, but rather the banks’ choices to focus on other investments instead.”

July 9, 2013

NYSE Euronext to Take Over Libor | WSJ.com

Libor, the scandal-tarred benchmark that underpins interest rates on trillions of dollars in financial contracts, is being sold to NYSE Euronext, NYX -0.78% the U.S.-based company that runs the New York Stock Exchange. The deal, designed to restore Libor’s international credibility, was announced Tuesday by a British government commission and the NYSE.

From DAVID ENRICH and CASSELL BRYAN-LOW.

July 8, 2013

Rude Awakening Awaits Western Economies | WSJ

Michael J. Casey at WSJ interviews HSBC group chief economist Stephen King, author of When the Money Runs Out: The End of Western Affluence:

Mr. King’s thesis….. is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the U.S., we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year. Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already. ”Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the U.S., Europe and Japan with long-term debts.

While I agree that we are unlikely to see a resumption of the rapid debt growth of the last 3 decades, this should contribute to lower inflation and greater stability, without a credit-fueled boom-bust cycle, that could partially offset the negative effects. I also question whether productivity gains are really exhausted, or if this is a temporary after-effect of low, post-GFC capital investment. There is ample evidence that the global economy is slowing and productivity gains will fall — if one is prepared to ignore evidence to the contrary such as the rise of automation, advances in genetics, nanotechnology, sustainable energy and slowing global population growth — which should alleviate the poverty trap that many countries are still in. The researcher has to beware of confirmation bias, where they gather data to support a preconceived opinion.

July 7, 2013

It’s Time to Levy the Land | naked capitalism

There are growing calls for increased use of land value taxes to replace income taxes and corporations taxes as a major source of government revenue. Yves Smith points out:

Income and sales taxes add to the price of doing business, and hence reduce their supply and competitiveness. Most economists – even Milton Friedman – recommend that the more efficient tax burden is one that collects economic rent – property rent, fees charged for using the airwaves, monopoly rent, and other income that is basically an access charge. If you tax land rent, for instance, this doesn’t raise the price of housing or office space. The rent-of-location is set by the market place……

I agree with Michael Hudson that our income tax system encourages the use of debt, over-use of which was one of the primary causes of the recent GFC:

Our tax system favors debt rather than equity financing. By encouraging debt it has prompted a tax shift onto the “real” economy’s labor and capital. The resulting interest charge and tax shift mean that we’re not as efficient and low-cost producers as we used to be…..

But I have two concerns:

Introducing new taxes without abolishing the old leaves scope for government to increase tax revenues as a percentage of GDP over time. And few things are more inefficient — and more harmful to growth — than government spending.
Focus on land value taxes alone, while neglecting other rent-producing assets such as patents, copyright ownership, rights to airwaves, and even brand ownership may skew investment towards, and inflate the price of, these lower taxed assets.

July 4, 2013

What’s wrong with inequality?

Robert Douglas summarizes the argument against inequality presented by Andrew Leigh, economist and (Labour) parliamentarian, in his book Battlers and Billionaires:

Leigh sees inequality as a socially corrosive force undermining the egalitarian spirit that has been one of the positive defining characteristics of Australian society. He argues that unequal wealth demands attention from our political system and that there are a variety of ways in which it can be addressed.

There has been much hand-wringing from the left about rising inequality, but I believe this is an attempt to frame the political debate along class lines — the rich against the rest — as Barack Obama succeeded in doing, with the able assistance of Mitt Romney, in 2012. Framing the debate in relative terms is shrewd politics. An attempt to distract voters from the real issues:

Is poverty rising or falling?
Is general health, as reflected by life expectancy, improving or deteriorating?

Poverty is a subjective concept, as Thomas Sowell points out:

Most Americans with incomes below the official poverty level have air-conditioning, television, own a motor vehicle and, far from being hungry, are more likely than other Americans to be overweight.

Life expectancy, however, is difficult to fudge.

Inequality, as I said earlier, is relative: we can have declining poverty and rising life expectancy while inequality is growing. In fact when the economy is booming and employment rising, inequality is also likely to be growing. Do we really want to kill the goose that lays the golden eggs? Raising taxes to discourage new entrepreneurs? That is what targeting inequality can succeed in doing: harming the welfare of all rather than improving the welfare of the poor at the expense of the rich.

Instead we should focus on job creation and health improvements. And if that means creating incentives to encourage entrepreneurs, so be it, provided we all benefit.

The fact that inequality rose after the GFC is an anomaly that is unlikely to persist in the long term. The wealth of the masses are predominantly represented by real estate, while the rich hold a far higher percentage of their wealth in financial assets: stocks and bonds. Housing was hardest hit by the GFC and has taken longest to recover, causing a surge in inequality readings. That is not the fault of the rich — apart from a few investment bankers — and in fact we should learn from their experience. Real estate investment may have served us well in the past, but that is likely to change with the end of the credit super-cycle. We will need to concentrate a far higher percentage of our investment in stocks and bonds.

July 4, 2013

Surprise as BOE, ECB Give Forward Guidance | WSJ

New [BOE] governor Mark Carney has already made changes. In a statement accompanying the widely-expected decision to leave both rates and asset purchases unchanged, the BoE said that rising market rates had shifted expectations for the Bank Rate above levels that were justified by the economic situation.

The fact that there was a statement at all indicated a change in policy. The old BOE just announced its decision and left interpretation to the markets.

This was a clear attempt to talk the markets down and it worked.