Canada

Error message

Deprecated function: The each() function is deprecated. This message will be suppressed on further calls in _menu_load_objects() (line 579 of /var/www/drupal-7.x/includes/menu.inc).

The Minister of Housing’s Mandate Letter

Published by Anonymous (not verified) on Tue, 11/01/2022 - 12:56am in

On 16 December 2021, mandate letters for Canada’s federal ministers were made public. The letter for Canada’s Minister of Housing and Diversity and Inclusion contains an important set of marching orders.

I break it down in this ‘top 10’ blog post: https://nickfalvo.ca/the-minister-of-housings-mandate-letter/

The Minister of Housing’s Mandate Letter

Published by Anonymous (not verified) on Tue, 11/01/2022 - 12:56am in

On 16 December 2021, mandate letters for Canada’s federal ministers were made public. The letter for Canada’s Minister of Housing and Diversity and Inclusion contains an important set of marching orders.

I break it down in this ‘top 10’ blog post: https://nickfalvo.ca/the-minister-of-housings-mandate-letter/

Interest Rate Policy Versus Alternatives

Published by Anonymous (not verified) on Tue, 23/11/2021 - 3:45am in

Tags 

Canada, Housing, MMT

One of the ongoing arguments about Modern Monetary Theory (MMT) that I run across is the general disdain for monetary policy among MMT proponents. (At one extreme, Warren Mosler argues that interest rate policy works in a way that is backwards versus the consensus.)

Interest Rate Policy Ineffectiveness

The MMT position is straightforward, yet critics seem incapable of framing it correctly. Although Mosler is not alone in his views, many academics have a more nuanced position: interest rate policy has mixed effects, and is much weaker than the mainstream assumes is true. (This is in line with many post-Keynesians, although post-Keynesians are all over the map in terms of specifics. I believe it is safe to say that some post-Keynesians have views about monetary policy that are extremely hard to distinguish from conventional ones.) Whether or not MMT proponents’ policy prescriptions have merit, the argument that interest rate policy is largely ineffectual is a stand alone area of debate.

To quickly recap Mosler’s argument, a good portion of it relies on the basic accounting fact that raising interest rates increases the interest payments on government debt. Funnily enough, if you spend any time looking at the incoherent mess that is neoclassical analysis of fiscal policy, this actually should not be controversial. Neoclassicals love warning about “debt spirals” and “fiscal dominance” — which is what Mosler argues, except that they present it in with the maximum amount of obfuscation possible. The obvious explanation for the obfuscation is that this observation blows a hole in the conventional logic about interest rate policy. The neoclassical view is that increasing interest rates lowers inflation — except when it doesn’t.

However, the interest rate expense channel is not the only thing driving the economy. This is where the “mixed effects” comes in. In my case — which may or may not reflect other MMT proponents — I am sensitive to the housing market in the “anglo countries,” and the housing market is interest rate sensitive.

The problem for analysis is that the housing market is indeed a market. Neoclassicals love setting up models with “step/impulse responses” (as per control systems), and so they can make scientific-y statements like “a 25 basis point rate hike lowers the inflation rate by 7.3547 basis points in the following quarter.” The problem with the housing market is that nobody would treat such a statement seriously. House prices act like other risk assets — they typically march up steadily, until they drop like a rock. At best, one can hope for the Goldilocks scenario of a “soft landing.” (When you are describing your policy outlook using a character from a fairy tale, it is a safe bet that you are not working with a settled science.)

Canadian Example Canadian Construction Employment %

The situation in Canada offers a good example of the box that New Keynesian central bankers constructed around themselves. Construction employment (figure above) has marched to high levels relative to past history — despite somewhat sluggish population growth. Admittedly, there was considerable under-investment in infrastructure in the 1980s and 1990s in Canada, and there has been a catch-up effect in non-residential construction. Nevertheless, residential construction is perky, and a major driver of economic growth.

 Canadian Household Debt Service Burden

I was never too happy with publicly available Canadian house price data, but by all reports, house prices have been taking off like a rocket. This is not entirely an accident, as interest rates have being confounding the bond bears and steadily marched lower for decades. The chart above shows total debt service expenses for Canadian, mortgage and non-mortgage. (I am working from memory, but I believe that lines of credit are in the non-mortgage service component, but the only reason banks are so generous with them is that they know that borrowers have housing assets.)

The debt service burden has been stable. This is the result of interest rates dropping, as well as the reality that only a small percentage of the housing stock turns over in a given year. Anyone who bought housing years ago is in much better shape than new buyers.

The concern is that Canadians (unlike the Americans) cannot lock interest rates for 30 years. The de facto maximum rate lock period is 5 years, after which the interest rate terms of the mortgage needs to be rolled over. A secular increase in interest rates would make the debt service chart ugly. This means that the “pick a policy rate level out of thin air” — very popular among the commentators that I ignore — guesses about interest rates (e.g., 6%) tend to end up much higher than realised outcomes.

What are the Alternatives?

MMT critics love picking out MMT statements about taxes from primers, and assume that the only policy lever available is tax policy. This means that if Canada wanted to cool the economy, a tax hike is allegedly the only option.

This is not even remotely correct. The Canadian housing bubble was launched by monkeying around with the Canada Mortgage and Housing Corporation (CMHC) limits on mortgage insurance. (Under Canadian law, any mortgage with a loan-to-value greater than 80% must get insured.) If policymakers wanted to cool the housing market, all they need to do is move the mortgage insurance limits back to more sensible levels. (They did make steps in that direction, which helped slow housing in the 2010s).

Such a policy has obvious risks, but so would rate hikes. Meanwhile, adjusting lending standards would be a fine-tuned policy aimed exactly at a problem area within the economy.

To what extent it matters, my view is that inflationary pressures are largely transitory, and so I am unconvinced about the need to tighten policy. The housing market is overheating, and it is probably time for responsible adults to dunk that market in cold water. As noted, we do not need interest rate policy to do that. A broad-based tax hike would only be needed to deal with widespread inflationary pressures, which I am unconvinced about.

Email subscription: Go to https://bondeconomics.substack.com/ 
(c) Brian Romanchuk 2021

More supportive housing for semi-independent seniors

Published by Anonymous (not verified) on Sat, 13/11/2021 - 5:09am in

The Canadian Centre for Policy Alternatives asked me for a ‘big idea.’

I wrote about the need for more supportive housing for semi-independent seniors.

Here’s my submission: https://nickfalvo.ca/more-supportive-housing-for-semi-independent-seniors/

More supportive housing for semi-independent seniors

Published by Anonymous (not verified) on Sat, 13/11/2021 - 5:09am in

The Canadian Centre for Policy Alternatives asked me for a ‘big idea.’

I wrote about the need for more supportive housing for semi-independent seniors.

Here’s my submission: https://nickfalvo.ca/more-supportive-housing-for-semi-independent-seniors/

Bank of Canada Comments

Published by Anonymous (not verified) on Fri, 29/10/2021 - 1:42am in

The Bank of Canada released its October 2021 Monetary Policy Report, and I just want to make some brief comments.

I would summarise the report as follows: the Bank of Canada has ended its balance sheet expansion (“Quantitative Easing/QE”) in order to have the capacity to raise rates if needed in 2022. Although the bond perma-bears that dominate “serious” economic discussion will welcome this, this can also be seen as a statement of the obvious. Inflation has been running above target for some time, and that is not immediately expected to turn around. If inflation is not back closer to target by the end of next year, it would be very hard for the BoC to claim that it is an inflation-targeter. However, for the bond bears to have anything other than short-term vindication, inflation indeed has to not settle down in 2022.

Central Bank Watching the Easy Way

I will start with two disclaimers. The first to note is that when I was in finance, I always was in firms with senior employees who were previously at the Bank of Canada. The best career strategy in such a situation is to keep your head down when BoC watching comes up. The second point is to remind readers that I am not a forecaster, and thus do not do the work to stay continuously up with the news flow.

That said, I can relay my trick to central bank watching: read their reports, and take most of the contents as being representative of the internal consensus of the bank. This would be viewed as amateurish by professional central bank watchers. Instead, they want to dissect every word, and try to work out the hidden details.

Historically, such an in-depth approach made sense. Central banks used to be opaque, and back in the money supply targeting days (when many of the senior economists started their careers), it was almost impossible to tell what the current policy stance was, never mind what the central bankers were thinking.

The “expectations management” fad among New Keynesians ended that; nowadays, you cannot get central bankers to shut up.

This explains why taking the reports at face value works as a analysis strategy: if there is hidden information, it might only matter for a few months horizon. Near the start or end of a hiking cycle that matters, but not so much when policy direction changes are a year away. It does not matter what the central bankers think will happen next year if the data evolves differently than they expected — they will have to react to realised data, not what they thought would happen. If you want to do macro trading, you just need to see where forecast errors might occur.

In the current situation, what probably matters is whether inflation settles down by the end of 2022. What the central bankers think inflation will do in October 2021 will not matter in June 2022.

Goodbye QE, We Hardly Knew Ye

I was surprised by the adoption of QE by the BoC, such a move did not make sense in the context of the institutional framework in Canada. (The fact that it moves Canada away from the simplified system described in Understanding Government Finance added to my annoyance.) The stopping of the growth of the balance sheet ices the policy off; the balance sheet could run down on its own due to maturing bonds.

I view QE as having very little effect on much of anything, a view that attracts rebuttals from all corners. Since the debate about QE bores me, I will largely leave it at that.

However, based on comments floating around on Twitter, Canadian fiscal conservatives (who dominate the Establishment) are treating this as a signal that the BoC is throwing fiscal policy under the bus. Although I think this is silly, the Canadian Establishment is very happy repeating the same myths to itself, and so this interpretation will end up as the received wisdom.

In addition to probably not helping Canadian policymakers, this myth-making underlines the flimsiness of the neoliberal policy consensus. Fiscal policy makers are supposed to somehow make decisions which can then be vetoed by the Bank of Canada because the Bank suddenly decides that they pose inflation risks. Why not talk to each other? That said, that neoliberal consensus about the structure of policy options appears to be shifting, so perhaps this is no longer a concern.

Elephants in Rooms, and Housing

I am in the camp that small changes in interest rates have ambiguous effects on the economy. However, the housing market is a market that is interest rate sensitive. My views on the Canadian housing market might be affected by living amidst a construction boom around a new commuter rail station, but it seems to me that construction is extremely perky. Construction is also one of the sectors hit by supply chain disruptions.

Cooling the housing market would probably help relieve some of the bottlenecks in the economy. The concern is that housing is a market dominated by leveraged investors, and so “soft landings” may be wishful thinking. This concern, coupled with the possibility of the CAD/USD exchange rate taking off would probably keep the pace of hypothetical rate hikes tepid.

Email subscription: Go to https://bondeconomics.substack.com/ 
(c) Brian Romanchuk 2021

The Generalized Crisis Requires a Generalized Struggle

Published by Anonymous (not verified) on Fri, 22/10/2021 - 12:17am in

Tags 

Canada, strikes

image/jpeg icondaycare-strike.jpg

Leaflet distributed by Klasbatalo during the CPE daycare workers' strike in Quebec.

read more

Ice Breaker Imperialism

Published by Anonymous (not verified) on Fri, 22/10/2021 - 12:15am in

image/jpeg iconicebreaker.jpg

Article from 1919 #2 (mcmxix.org), the journal of the North American affiliates of the ICT.

read more

A 13-city scan of homelessness planning

Published by Anonymous (not verified) on Thu, 21/10/2021 - 12:11am in

I’ve just written a 13-city scan of homelessness planning across Canada.

A summary of the report is available here: https://nickfalvo.ca/innovation-in-homelessness-system-planning-a-scan-of-13-canadian-cities/

A 13-city scan of homelessness planning

Published by Anonymous (not verified) on Thu, 21/10/2021 - 12:11am in

I’ve just written a 13-city scan of homelessness planning across Canada.

A summary of the report is available here: https://nickfalvo.ca/innovation-in-homelessness-system-planning-a-scan-of-13-canadian-cities/

Pages