The Credit Crunch Hits Home?

What is going on out in Canada’s wild and woolly financial system? First, the Bank of Canada convinces the Department of Finance and the Conservatives that it “needs” expanded powers to purchase a broader range of securities (see my earlier post for why their arguments are not very convincing). And then, earlier this week, a small notice on my Scotiabank VISA bill advised me of the following:

“Effective on your May’08 statement, the interest-free grace period for new purchases will be reduced from 26 days to 21 days.”

Doesn’t sound like a big deal, especially for people like me who pay off their bill in full every month (and thus avoid the interest charges). But going from 26 to 21 days represents a 19% or so drop, fairly significant especially for those who don’t pay their bills on time. By my reckoning, that’s about 70 days worth of additional interest for these folks; or 70 fewer days of “interest-free” time for people like me. Add these extra costs up over a few thousand customers, and you’re talking some pretty serious money.

Something’s up here. The interest-free period’s been 26 days since Christ was a cowboy. Seems to me the only plausible explanation is that Scotiabank’s trying to fluff up its bottom line to cushion more losses in the future, probably tied either to the asset-backed securities collapse, the weakening Ontario economy, or economic conditions more generally. One way or another, it’s a small sign of how the intangibles of derivative contracts can take a very real bite out of all our standard of living.


  • Phillip Huggan

    I haven’t been paying attention to the Canadian credit contraction end of things. For mortgages in general, a tax would make sense. Tax mortgages and pool the revenues to be given to mortgage holders of falling house prices. Where housing stock drops, the tax pool can be used to keep mortgage holders always nominally in-the-money, thus reducing the incentive to voluuntarily default.
    The mortgage tax could be made to only be admissible to rediential home owners to limit real estate sceculation. Where home prices are over valued initially, this will put the tax pool in the red. In the black if home prices turn out to be undervalued initially. The tax could be offered voluntary, but this would increase speculation.

    I don’t understand why inflation is so intimately tied to housing stock fluctuations. You would think housing stock would be ammortized somehow, for this key metric. Housing cycles can be avoided and this would stabilize both housing markets and credit markets. Housing stock price should be increased by immigration, commodity and contractor price increases, and decreased by construction productivity gains and Western demographics.

    Without counter-cyclical housing credit institutions, what is the point of using inflation to measure anything? The rest of the economy ammortizes assets but housing, an ammortized asset, whips around the entire inflation metric and distracts central bankers.

  • Phillip,

    It seems you have it backwards. Housing is part of the broader consumer credit cycle not its cause…no?

  • Phillip Huggan

    The current credit contraction in the United States has its early roots in the late 1990’s when A.Greenspan et al decided financial actors didn’t need derivatives accounting regulation. This was made worse in the post 9-11 recession when US mortgage lenders offered mortgages to anyone at low rates for five years, knowing full well the rates would rise in the sixth year and the consumers wouldn’t have any additional repayment faculty. Then financial actors decided to use these mortgages as collateral to keep their balance sheets artificially robust and/or to make further loans.

    IDK about historic credit contractions. I’ve learned recently that housing prices are responsible for about two thirds the voliatility of GDP figures. This is silly.
    Part of monetary policy is to balance out inflation/currency-devaluation vs. unemployment/high-interest-rates. The goal being to increase GDP (as opposed to quality-of-living or longevity). The tacit understanding is that only rich people actually benefit from such an institution but enough spillover occurs to make everyone better off (much of the 3rd world has cell phone access, poor Canadians have access to middle-class medicine, and terrorists can now use the internet, originally built by the US DoD, to recruit). The other unstated goal of monetary policy is to pawn off economic crisisees onto someone else.

    Anyway, for the credit framework to function, crown bankers and finance officials need real GDP figures. Unemployment angers the masses and inflation angers the rich, lenders, and those on income schedules not indexed to inflation such as seniors (according to M.Carney) and cities. Housing prices rise and fall in a momentum-based non-linear fashion. For example, housing prices fall because of a crime spike or something, a person who is left with an out-of-the-money mortgage abadons the house, and housing prices fall further…
    Persons setting credit policy cannot respond to these non-linearities without poisoning the rest of the linear system. Say the city of Calgary sees wages growth off the chart, but somehow participated in the same teaser mortgage schedule (1st 5 years loan at 5%/yr, then the rates jack up to 8%/yr in year 6) that afflicted the US, causing home prices to crash after the bubble. The Bank of Calgary would normally want to increase interest rates to preemp inflation caused by wage growth, but bad housing price signals would mess everything up.
    In reality, people live in homes, not day-trade them. Because people pay mortgages for homes unlike for DVD players, GDP figures are really measuring the future ability of someone to pay off a mortgage. GDP is supposed to be a hard economic metric, but mortgages turn it into a derivative. GDP used as it is, needs to discount things like the education of mortgage lendees, the effects of globalization on a lendees middle/upper class career, demographics out to at least 25 years (old people like condos), urbanization trends, the odds a given nation will adopt inefficient mortgage policies and economic dogma in general (as far as I can tell, the sole goal of American Neoconservatism is to engender one very free person with all the capital of a given population and then to allow the winner and the rest to die off of old age as a legacy lesson to our pets to avoid Neoconservatism)…
    Because mortgages make the housing aspect of GDP a derivative, housing “punches above its weight” in initiating credit cycles. This hurts cities in that rich homes fund property taxes. Certainly Travis, credit contractions could have other causes. It is difficult to game how the US economy would’ve fared in the presence of no teaser mortgage loans, derivatives industry regulation. Maybe part of the present credit contraction is really because there was no Democratic government 2000-2008 intent on running surpluses and keeping taxes properly steep; investors just looking for any old excuse to bail on the USD.

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