Juggling Dynamite

This is a necessary part of the solution. By demanding higher capital ratios of big banks, reckless bets will be curtailed, taxpayer risk reduced, and the too big to fail financial monsters will be incentivized to reorganize themselves to more responsible, self-insuring structures.

Federal Reserve Bank of Minneapolis President Neel Kashkari doesn’t accept the idea of letting an occasional financial crisis happen. Kashkari offers details on his plan to end the problem of ‘too-big-to-fail” banks on “Bloomberg Daybreak: Americas. Here is a direct video link.

A new report by Canadian environmental groups says annual government subsidies of $3.3 billion to oil and gas companies undermine Canadian Prime Minister Justin Trudeau’s plans to impose a price on carbon dioxide emissions by 2018. Oil Change International said, “This system is like taxing consumers when they buy cigarettes while giving massive tax breaks to tobacco companies that encourage them to produce more cigarettes. It doesn’t make sense.”

Report: Canada’s $3.3B in Oil & Gas Subsidies Undermines Climate Action https://t.co/Q82m8PVz9q pic.twitter.com/EZIEP3zZ7q

— Democracy Now! (@democracynow) November 17, 2016

As we consider the recent CMHC warning about a likely 30% drop in Canadian home prices should interest rates rise significantly, we should consider this long term table from the Bank of Canada, showing 5 year mortgage rates since 1951. In short, no one should be surprised that mortgage rates today at 100 year lows, are likely to move ‘significantly’ higher going forward. Rates have always moved in secular periods that trend up for years following a sustained downward trend, and repeat.

CMHC found that just a 1% increase in mortgage rates would leave 1 million Canadian homeowners unable to maintain their mortgage payments (never mind other higher interest rate debts they are carrying).  But a 1% increase from present levels would be very  modest in historical terms.  A much larger 50% rise that returns 5 year mortgage rates to the 5% range would be appropriate historically. Unfortunately the increased carrying costs would also be impossible for many of today’s highly indebted households to withstand.

Bottom line:  higher credit rates going forward should be expected and factored into prudent financial planning today. Higher rates will be no black swan event–but entirely predictable.

CMHC warns rapid interest rate rise would cause ‘severe’ home price drop. Here is a direct video link.

Also see: Toronto home prices up over 50% in 12 months in GTA’s hottest neighborhoods.
Speculative madness is not sustainable or healthy for real households and the economy. The mean reversion costs will be painful and widespread.