Accurate summary of what went wrong?

[SaulOhio]

Sure, I'd be in favour of repealing such subsidies if they encourage obesity. In Canada many agricultural subsidies are really hard to touch in part because of how we have elections (IMO). I imagine it would be similar in the US.

Have the HFCS health claims been vetted by the science forum on here?

I don't know, but there IS some controversy, now that I read up on the subject. The industry has presented some research which indicates it isn't any more unhealthy than refined sugar, but they are dismissed out of hand by some simply because the industry has a vested interest. That makes no difference to me. I'd like to just see the research and judge for myself. Everyone has their biases, and the only question is if they are letting those biases get in the way. But then some of the research pointing to a problem with HFCS looks convincing, though it is done on rats, not humans.

I do hate the taste of the stuff in fruit drinks, though.

 

[ponderingturtle]

This denial that free individuals can make correlated mistakes on a large scale is a joke. To prop it up you need to declare that "regulation" caused all manias and bubbles and panics and crashes in history. And then (as above) when you are presented with evidence that greater (smarter) regulation elsewhere prevented crises that showed up at home, you flail around looking for unrelated reasons why those regulations exacted a greater cost. It's pretence. You are not interested in understanding "what went wrong".

This raises an interesting question, what regulation caused Tulip Mania?

 

[JihadJane]

What went right?

Widespread fraud, corruption and cover-up.

 

[SaulOhio]

This raises an interesting question, what regulation caused Tulip Mania?

Remember that the Austrian theory is not simply that government regulation causes bubbles, but that it is an increase in the supply of money, usually caused by government intervention.

Early Speculative Bubbles by Douglas Edward French

The story of Tulipmania is not only about tulips and their price movements, and certainly studying the "fundamentals of the tulip market" does not explain the occurrence of this speculative bubble. The price of tulips only served as a manifestation of the end result of a government policy that expanded the quantity of money and thus fostered an environment for speculation and malinvestment. This scenario has been played out over and over throughout history. But what made this situation unique was that the government policy did not expand the supply of money through fractional reserve banking which is the modern tool. Actually, it was quite the opposite that occured. As kings throughout Europe debased their currencies, through clipping, sweating, or by decree, the Dutch provided a sound currency policy which called for money to be backed one hundred percent by specie. This policy, combined with the occasional seizure of bullion and coin from Spanish ships on the high seas, served to attract coin and bullion from throughout the world. The end result was a large increase in the supply of coin and bullion in 1630's Amsterdam. Free coinage laws then served to create more money from this increased supply of coin and bullion, than what the market demanded. This acute increase in the supply of money served to foster an atmosphere that was ripe for speculation and malinvestment, which manifested itself in the intense trading of tulips.

The Bank of Amsterdam, and the bank money it issued, served as the inspiration for John Law's early theories on money. The early seventeenth century episode in Holland, known as Tulipmania, was not only a bubble, driven by the same monetary features as later bubbles, but its catalyst, The Bank of Amsterdam, served to inspire the man who was to create two later (and more famous) bubbles, the Mississippi and South Sea Bubbles.

And Francesca: In order to prove your theory that Canada's banks were more stable because of the regulation, you have to show that Canada experienced the same kind of monetary shocks as the Fed caused in America. I say we would have had some kind of bubble in America even if America's banks were regulated as much as Canada's, because the Fed inflated the money supply. There would have been SOME kind of bubble. Maybe not a housing bubble, or any bank failures, but there would have been a bubble. As I remember, as the housing market was at its peak, Canada's dollar was worth more than America's for the first time in a long time, indicating more inflation in the US than Canada.

Have a look at the data for the US and Canada at RateInflation. Canada's inflation rate seems more stable than America's, but it did have inflation.

But since the theory is that inflation causes speculative bubbles, here is some evidence that Canada also experienced a housing bubble. Its banks may have weathered it better, but Canada still had a bubble: Canada Housing Prices

 

[Captain.Sassy]

But since the theory is that inflation causes speculative bubbles, here is some evidence that Canada also experienced a housing bubble. Its banks may have weathered it better, but Canada still had a bubble: Canada Housing Prices

Canada's house prices went down because something like 75% of final demand for our exports is in the US and our two economies are highly integrated. When the US imploded, Canada's exports declined and people started losing their jobs and demand for things like houses went down.

It was a decline in demand, not a bubble.

 

[SaulOhio]

If it is as you say, then it is a consequence of America's bubble. In fact, a part of the bubble. The decline in demand is what happens when a bubble breaks.

But my original argument stands, that the Bank of Canada did not inflate as much as America's Fed did. Have a look at Bank of Canada Interest Rates.

The Federal Reserve brought interest rates down to 1% in 2004, while the Bank of Canada had it down to only around 2.5%. Still low, but not as inflationary. So Canada's bank stability is just as easily explained by less inflationary intervention as by regulation.

The US on the Index of Economic Freedom

Monetary Freedom 84.0

Inflation is relatively low, averaging 3.0 percent between 2005 and 2007. Price controls apply to some regulated monopolies; certain states and localities control residential rents; and the government influences prices through subsidies, particularly for the agricultural sector, dairy products, and some forms of transportation. Five points were deducted from the U.S. monetary freedom score to account for policies that distort domestic prices. Government interventions in late 2008 in housing and financial markets pointed to substantially increased price distortions in the future.

Canada on the Index of Economic Freedom

Monetary Freedom 80.8

Inflation is low, averaging 2.1 percent between 2004 and 2006. The market determines most prices, but the government regulates the prices of some utilities, provides subsidies to industry and agriculture producers, controls prices for some agricultural products, and may influence prices through state-owned enterprises. Ten points were deducted from Canada's monetary freedom score to account for measures that distort domestic prices.

See? Less inflation.

Overall, however, there is not all that much difference in government intervention between Canada and the US, and the only real difference you can point out between them in consequences is no bank failures. So no bankers lost their jobs. Big deal.

 

[Captain.Sassy]

The BOC does inflation targetting, last I checked (I don't think they've changed their policy in light of the recession). So the interest rate setting should be seen in light of trying to hit certain inflation targets. I think the Fed does inflation targetting too.

Look at this below: you see the BOC and the US federal reserve interest rates compared:

Now look at the CPI for both countries (which does seem to show a generally lower level of inflation in Canada):

In terms of 'less inflation in Canada', you have to consider not only interest rates but also stuff like what is imported and what is exported by a country. If Canada's terms of trade appreciate (for example, due to increased oil prices) then Canada's currency appreciates and imports become relatively less expensive, which can act as a damper on inflation.

Also note that your two averages between Canada and the US use different reference periods. From the graph above it might not make that much difference as Canada does seem to have had slightly lower inflation than the US over this period.

Now monetary policy is decidedly not my forte, so perhaps I'm getting this all wrong. But I don't think the charts I googled and copypasta'd above support the idea that the BOC pursued a much stronger anti-inflationary policy than did the US monetary authority.

 

[Captain.Sassy]

Also I don't think it makes much sense to say that Canada's housing market had a bubble the way the US housing market did. Saying that demand for houses in Canada decreased because of the recession caused by the US bubble is not the same as saying Canada's housing market was bubbled [sp?].

Now this being said, the US bubble was a Godsend to me. I just bought a house at a nice lowwww interest rate -sweet!- and definitely for less than I would have paid a year and a half ago -sweeeet-!!! Now let's go recovery!!!

 

[SaulOhio]

Also I don't think it makes much sense to say that Canada's housing market had a bubble the way the US housing market did. Saying that demand for houses in Canada decreased because of the recession caused by the US bubble is not the same as saying Canada's housing market was bubbled [sp?].

Now this being said, the US bubble was a Godsend to me. I just bought a house at a nice lowwww interest rate -sweet!- and definitely for less than I would have paid a year and a half ago -sweeeet-!!! Now let's go recovery!!!

I think you are confusing the bubble with the resulting crash. Look at the graph I posted of Canada's housing prices. There was a definite rise in prices that was not consistent with the fundamentals of the market, but with an increase in the money supply. And there was a subsequent crash caused by the monetary deflation. To say that demand dropped is the same as saying the bubble colapsed. Thats what happens when a bubble collapses, people's ability and willingness to pay drops. There is less money to go around and people are not as confident to spend money.

The graph you posted of the Fed funds rate and the Canadian rate does show that Canada kept its rate higher in the 2003-2005 time frame, so we might expect less of a boom-bust, but they still got some of it.

I distrust CPI figures as a measurement of inflation. A rise in consumer prices is a CONSEQUENCE of inflation, not inflation itself. Inflation is an increase in the money supply, so you have to look at such figures as M, M1, and M2. The increased supply of money could go into the housing market, stocks, or commodities and leave consumer goods untouched. Or an increase in productivity can create a situation where the supply of goods rises at the same rate as spending on consumer goods, so prices remain stable even with an expansion fo the money supply. This is what happened in the '20s before the Great Depression. Some Austrians have argued that the stable CPI misled Fed officials to think there was no inflation. Or if the increase in productivity is faster than inflation, it could look like deflation as consumer prices fall.

 

[Captain.Sassy]

"To say that demand dropped is the same as saying the bubble colapsed."

So every time there is a drop in demand it's cause a bubble popped?

In Smiths Falls, they closed the hershey factory and a bunch of people lost their jobs and moved. Now house prices have dropped. Was this a chocolate bubble?

US demand for Canadian goods may have declined precipitously because of a US housing bubble, but this is not the same as saying that Canada had a housing bubble.

There was a definite rise in [Canadian house] prices that was not consistent with the fundamentals of the market

I dunno about that. I think that the Canadian economy was growing quite well at that point. If you look at what was happening to house prices by city, I bet you'd find really strong growth in prices in Calgary, fuelled by booming oil exports.

 

[lomiller]

I say we would have had some kind of bubble in America even if America's banks were regulated as much as Canada's, because the Fed inflated the money supply.

The Fed controls M0 money supply while the economy responds most closely to the M2 money supply. Because M2 money is a function of how the banks operate regulation plays a big role what the M2 money supply looks like. Between 2000 and 2008 the M0 money increased by $250 billion while M2 increased by ~$4000 billion.

 

[SaulOhio]

"To say that demand dropped is the same as saying the bubble colapsed."

So every time there is a drop in demand it's cause a bubble popped?

No. In the specific case we are talking about, it was because of the bubble.

US demand for Canadian goods may have declined precipitously because of a US housing bubble, but this is not the same as saying that Canada had a housing bubble.

You could blame the declining economy and trade with an America that was experiencing a recession if the Canadian housing market had fallen off after the recession hit in America. The American stock market, American spending and American employment would have to have fallen for your theory to be true. I need to find a more high resolution graph of unemployment, but I think housing prices in Canada dropped before the rise in unemployment in America.

And Canadian real estate prices were doing pretty much the same thing as American prices. Have a look at Canadian REIT firesale -- No Decoupling from US Real Estate

I dunno about that. I think that the Canadian economy was growing quite well at that point. If you look at what was happening to house prices by city, I bet you'd find really strong growth in prices in Calgary, fuelled by booming oil exports.

You do have a point there. Vancouver especially had a rise in housing prices, even more than Calgary, while Toronto, Edmonton and Ottowa experienced very little, if any. There was a similar pattern in America, where places which had strict housing and land use regulations such as California experienced much greater increases in hosuing prices.

 

[lomiller]

The BOC does inflation targetting, last I checked (I don't think they've changed their policy in light of the recession). So the interest rate setting should be seen in light of trying to hit certain inflation targets.

Basically correct, though the BoC also needs to worry about the value of the C$. All other things being equal, the Canadian bond market needs to pay higher returns to attract similar levels of investment because so much of the world is valued/traded in US$. All countries face this to some extent, but it’s particularly important for Canada because the two economies are highly integrated.

In the early part of this decade the C$ was trading around $0.60USD while fair value based on purchasing power was around $0.85. This forces the BoC to keep interest rates higher then the US in order to support the C$ which in turn may end up keeping inflation and economic growth slightly lower.

 

[Captain.Sassy]

And Canadian real estate prices were doing pretty much the same thing as American prices. Have a look at Canadian REIT firesale -- No Decoupling from US Real Estate

Those are a comparison of indices of real estate holding companies. A lot of the TSX traded ones have (had?) extensive US and international holdings.

http://www.investcom.com/tse300/s&preal.htm
/\/\/\
Check it out

Maybe this has something to do with things i.e. why the indices in your link show no decoupling while US real estate fell considerably more than Canadian prices?

Here's a report from RBC from 2008 on Canada's real estate:
http://www.rbc.com/economics/market/pdf/housingmkt_can_0708.pdf
Of note:
Low speculative and sub-prime exposure leave Canada in good shape
From a structural perspective, conditions in Canada’s housing market are markedly different from the U.S. market, with very limited sub-prime mortgage activity, a relatively small speculative sector and no significant supply overhang despite the robust construction activity. In addition, affordability is forecast to improve this year with the Bank of Canada having cut the overnight rate by 150 basis points since December, mortgage rate spreads showing some signs of narrowing and the pace of house price gains slowing.

 

[Captain.Sassy]

Also, here's what RBC had to say not too much later:
http://www.rbc.com/economics/market/pdf/housingmk_can_0209.pdf

Of note:
To be sure, some of the arguments favouring a continued deterioration in Canada’s housing market are compelling. The economy is in recession with significant pockets of weakness, including Ontario, where slumping U.S. demand is hurting exports and a weakening labour market paints a picture of stunted growth. Consumer confidence is at an all-time low and, after a sustained period of robust job growth, the labour market is easing, with a record-breaking 129,000 jobs lost in January alone.

 

[Tumblehome]

No ... I'm speaking of self-driving emotionally based buying/selling. Once one of those panic sessions gets started it's pretty much hard to stop it before it goes too far.

Emotion-driven buying and selling sprees might cause a blip in the market, but as long as regulations were in place to limit the damage, they never threatened to bring the whole system down. Now, imagine if regulations were loosened and emotions were given a freer rein...

We don't have to imagine it now. We just found out for real.

 

[JihadJane]

An accurate summary of what went wrong:

'Tying It Together: Massive, Pernicious Fraud'


"The entire finance and real-estate 'industry' is filled with massive, pernicious fraud, and we now have only one question remaining - will The Government do its lawful and mandated job, that of prosecuting the bad actors, or has it joined with the fraudsters, become one with them, and thus, declare itself as a gang of mobsters rather than a legitimate government?"

http://market-ticker.denninger.net/archives/1514-Tying-It-Together-Massive,-Pernicious-Fraud.html