Wednesday, April 21, 2010

A thought to share...

I was thinking about my previous post and the reluctance of the Bank of Canada to raise rates from their current near zero.

When they dropped them over a year ago, it was chop, chop, warning. We have to save our speculators!!

Now that the time has come (and passed) to raise them, they change the language slowly, they warn, they cajole, they play coy and then MAYBE they raise a teenie weenie bit.

All I can say is THINGS MUST BE REALLY BAD! Why else would they pussy-foot around so much. We have never been here before. No precedent exists for such low rates. Basically we are saying to folks- don't save money, spend it, invest it in over-priced real estate or stocks, but if you put it wisely in your bank account for retirement- you will lose 1.5% a year or more!!

The only other recent time when I know of rates being so low - is Japan who have had low rates for almost a decade.

Of course their real estate hasn't been that hot for a very long time too:


We are not Japan, there are many differences but let me remind you of something important.

When the Japanese RE bubble burst in the early 90's, Japan hit the wall. The rates were dropped to zero and they let Japanese banks lie and pretend their loans were still viable so they would not be insolvent. The Japanese government pumped billions into their banks.

THE USA and especially Greenspan and Rubin derided them. They told them to let their banks fail, take the losses, and move on. Short sharp medicine.

Fast forward to 2008. The exact same thing happens in the US. What do they do?
Rates are cut to 0.25%, banks are bailed out, mark to market rules are suspended (which allows banks to lie and pretend a loan is still viable).


And now in Canada we are wagging our finger at the US and saying...

How could you have let things get so out-of-hand in RE, and bubble up so much. How could you have the tax-payer on the hook directly, by having Freddie and Fannie buy all these crap mortgages. What idiots!

Fast forward to 2011....