The Federal Reserve’s balance sheet reached a record $4 trillion, as the central bank pushed on with its unprecedented asset-purchase program.
The Fed’s holdings rose $14.1 billion to $4.01 trillion in the past week, the Fed said today in a statement in Washington. Policy makers said yesterday they will slow monthly purchases of Treasuries and mortgage bonds to $75 billion in January, the first cut to the $85 billion pace they maintained for a year.
“We’re going to be living with a big Fed balance sheet for a long time,” said Josh Feinman, the New York-based global chief economist for Deutsche Asset & Wealth Management, which oversees $1.2 trillion, and a former Fed senior economist. “They’re still missing their dual mandate on both sides and that would call for easy monetary policy with unemployment too high and inflation too low.”
Chairman Ben S. Bernanke has raised assets from $2.82 trillion before the third round of quantitative easing began in September 2012 and quadrupled them since 2008 to attack unemployment after the 2008-2009 recession. He said yesterday the Fed may take “similar moderate steps” at each meeting to slow QE, which also carries potential risks.
“As the balance sheet of the Federal Reserve gets large, managing that balance sheet, exiting from that balance sheet become more difficult,” Bernanke said at his press conference. “There are concerns about effects on asset prices, although I would have to say that’s another thing that future monetary economists will want to be looking at very carefully.”
The assets exceed the U.S. government’s budget and are bigger than the gross domestic product of Germany, which has the world’s third-largest economy. Still, the European Central Bank, Bank of Japan and Bank of England hold more assets relative to the size of their economies, third-quarter data compiled by Haver Analytics show.
Policy makers said yesterday even expanding the balance sheet at a slower pace would keep supporting the labor market.
“The committee’s sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery,” the Federal Open Market Committee said in its policy statement.
To contact the editor responsible for this story: Chris Wellisz at email@example.com
By Nia Williams
CALGARY, Alberta (Reuters) – As Wall Street’s giants pull back from the energy business, Canadian banks are stepping forward, aided by booming domestic oil production and a reputation for prudence.
Bank of Montreal (BMO.TO: Quote), Canadian Imperial Bank of Commerce (CM.TO: Quote) and Bank of Nova Scotia (BNS.TO: Quote), long-time niche players in energy trading, hedging and dealmaking, are expanding their operations both north and south of the U.S. border, executives told Reuters.
In total, commodity trading revenues at the three banks rose by 30 percent last year, according to a Reuters review of their annual reports. Executives say it has been a struggle to match that performance this year, but that they are still gaining ground.
“We have been able to pick up market share not only in our home market but able to rapidly grow our business in the U.S. and overseas in places like the North Sea,” said Adam Waterous, a veteran oil banker who heads Scotiabank’s global investment banking team, which is based in Calgary, Canada’s oil capital.
With their reputation for caution, Canadian banks say they are unlikely to copy their U.S. counterparts and start amassing physical assets such as metal warehouses or oil storage terminals. Big Wall Street banks including JPMorgan Chase & Co. (JPM.N: Quote) and Morgan Stanley (MS.N: Quote) are looking to sell their physical trading desks as regulatory scrutiny increases and returns diminish.
“This is the fourth time in my career I have seen Americans come and go,” Waterous said.
Scotiabank is by far the biggest commodity trader in Canada, due in large part to its long-held ScotiaMocatta precious metals venture. Scotia reported a 26 percent rise in commodity trading revenues to C$425 million ($397 million) last year.
Of the other “Big Five” Canadian banks, Toronto-Dominion Bank (TD.TO:Quote) does not break out commodity trading revenue figures, but Royal Bank of Canada’s (RY.TO: Quote) trading revenues for foreign exchange and commodities climbed by 11 percent last year.
Canadian banks have a long history in the energy sector as a result of their involvement in the expansion of Alberta’s oil sands and the country’s status as the world’s sixth-largest producer of crude.
That opportunity is now expanding as more producers look to hedge output in Canada, which is expected to more than double to 6.7 million barrels per day by 2030. New products, such as CME Group’s Edmonton Sweet oil futures, which was launched this week, open new avenues for trading.
Thanks to a culture of conservative and cautious lending, Canadian banks emerged from the global financial crisis with reputations intact and some of the strongest credit ratings in the world.
“There’s a coming of age. In Canada there is the oil sands and in North America there’s the shale revolution that provides a great opportunity for our skill set and our history,” said Shane Fildes, head of global energy at Bank of Montreal, whose commodity trading-related revenues surged 65 percent to C$66 million in 2012.
Fildes said BMO’s energy trading desk expanded recently to five people from three, and its energy business as a whole employed 65 people in Calgary and 45 in Houston. The bank recently hired Paul Dunsmore from Barclays (BARC.L: Quote) to beef up its commodities derivatives team.
“The counterparty credit of being a Canadian bank is a very smart calling card in this environment,” he said.
At CIBC, commodity trading income rose 20 percent to C$52 last year and headcount has also increased across sales, trading, research and analytics, said Arden Majewski, who joined the bank two years ago to run its global commodities business after working for Swiss-based merchant Mercuria and for Merrill Lynch.
Scotiabank, whose commodity business is the largest and most established, has a history of stepping in when foreign banks pull back. Three years ago it bought much of UBS’s (UBSN.VX: Quote) Canadian commodities trading platform technology, when the Swiss bank exited Canadian energy trading. It bought U.S. energy investment boutique Howard Weale last year.
In September, RBC hired Kathy Kriskey from CIBC as head of commodity investor sales in New York to develop the bank’s commodity index products.
But in the scramble to pick up Wall Street business Canadian banks face competition from foreign banks such as Australia’s Macquarie MQG.AX and Brazil’s Grupo BTG Pactual SA (BBTG11.SA: Quote) as well as from private equity-backed merchants such as TrailStone and national giants such as Russia’s Rosneft (ROSN.MM: Quote).
While many Wall Street banks embraced physical energy trading, Canadian banks have so far shied away.
CIBC, Scotiabank, TD, and RBC do trade physical natural gas, a homogenous product that is easy to value. As well, BMO is in the middle of an approval process to trade physical natural gas, and the bank expects the process to be completed early in 2014.
None of the banks are involved in physical crude trading, however, which would entail greater investment in logistics and storage, Calgary market players said.
That makes them unlikely bidders for businesses such as JPMorgan’s physical commodities desk, which is in the second stage of a sale, or the asset-rich oil and power operations at Morgan Stanley, which has tried in vain for more than a year to find a buyer for that desk.
Instead, the Canadians concentrate on trading financials – crude derivatives contracts, usually based on the U.S. West Texas Intermediate benchmark – that enable clients to hedge their exposure to price swings in oil markets.
Client hedging activity tends to increase sharply in relation to oil market volatility. Bank traders in Calgary said they expect hedging demand to stay strong because of booming North American production and supply bottlenecks that exacerbate the discount on Canadian crude.
“With the U.S. investment banks that have pulled out of Canada, there would be more opportunity for these guys to fill that void,” said Brian Klock, equity analyst at KBW Inc.
(Editing by Jonathan Leff; and Peter Galloway)
TORONTO – A panel reviewing a proposed pipeline to the Pacific Coast that would allow Canada’s oil to be shipped to Asia is recommending the Canadian government approve the project.
On Thursday, the three-person review panel recommended approving the pipeline with 209 conditions.
Natural Resource Minister Joe Oliver said the government will thoroughly review it and consult with affected aboriginal groups before making a decision on the contentious pipeline.
There is fierce environmental and aboriginal opposition and court challenges are expected.
Prime Minister Stephen Harper has staunchly supported the pipeline after the U.S. delayed a decision on TransCanada’s Keystone XL pipeline that would take oil from Alberta to the U.S. Gulf Coast.
The Northern Gateway pipeline would be laid from Alberta to the Pacific to deliver oil to Asia, mainly energy-hungry China.
Since at least the 1980s, US policy has been to convince us to borrow as much as possible on pretty much anything we could think of. This worked brilliantly until 2008, when homeowners, consumers and businesses hit a wall and private sector defaults began to exceed new loans. Another Great Depression was imminent.
But instead of allowing this natural cleansing process to run its course, governments around the world stepped into the breach themselves, borrowing tens of trillions of dollars to replace evaporating private sector debt. The idea, to the extent that there was one, was to buy time for traumatized consumers and businesses to relax a bit and start borrowing again.
This appears to be happening. The latest Fed Z.1 report shows overall US debt growing again, with the private sector leading the way.
It’s not surprising that near-zero interest rates and trillions of dollars of newly-created currency would get people borrowing again. What is surprising is that anyone thinks this is a good thing. In 2013 total US debt, equity prices, household net worth, large-bank assets and derivatives books, and a long list of other debt-related measures pierced the records they set in 2007. In other words we’ve recreated the conditions that prevailed just before the world nearly fell apart.
Will the result be different this time? It’s hard to see how, especially since developed-world governments now have roughly twice as much debt as they did back then, so their ability to ride to the rescue will be limited.
As this is written the Fed is announcing that it will scale back its debt monetization to only $75 billion a month, or $900 billion a year. Its balance sheet, which just hit $4 trillion, will grow by nearly 25% in 2014, to nearly $5 trillion, which is a measure of how much new currency it is creating and pumping into the banking system.
The next stage of the plan is to get the banks to start lending this money, which would, through the magic of fractional reserves, produce loans in some large multiple of the original amount. So we might be on the verge of trading a nasty-but-comprehensible Kondratieff Winter for something a lot wilder.
The unelected central planners at the Federal Reserve have decided that the time has come to slightly taper the amount of quantitative easing that it has been doing. On Wednesday, the Fed announced that monthly purchases of U.S. Treasury bonds will be reduced from $45 billion to $40 billion, and monthly purchases of mortgage-backed securities will be reduced from $35 billion to $30 billion. When this news came out, it sent shockwaves through financial markets all over the planet. But the truth is that not that much has really changed. The Federal Reserve will still be recklessly creating gigantic mountains of new money out of thin air and massively intervening in the financial marketplace. It will just be slightly less than before. However, this very well could represent a very important psychological turning point for investors. It is a signal that “the party is starting to end” and that the great bull market of the past four years is drawing to a close. So what is all of this going to mean for average Americans? The following are 8 ways that “the taper” is going to affect you and your family…
1. Interest Rates Are Going To Go Up
Following the announcement on Wednesday, the yield on 10 year U.S. Treasuries went up to 2.89% and even CNBC admitted that the taper is a “bad omen for bonds“. Thousands of other interest rates in our economy are directly affected by the 10 year rate, and so if that number climbs above 3 percent and stays there, that is going to be a sign that a significant slowdown of economic activity is ahead.
2. Home Sales Are Likely Going To Go Down
Mortgage rates are heavily influenced by the yield on 10 year U.S. Treasuries. Because the yield on 10 year U.S. Treasuries is now substantially higher than it was earlier this year, mortgage rates have also gone up. That is one of the reasons why the number of mortgage applications just hit a new 13 year low. And now if rates go even higher that is going to tighten things up even more. If your job is related to the housing industry in any way, you should be extremely concerned about what is coming in 2014.
3. Your Stocks Are Going To Go Down
Yes, I know that stocks skyrocketed today. The Dow closed at a new all-time record high, and I can’t really provide any rational explanation for why that happened. When the announcement was originally made, stocks initially sold off. But then they rebounded in a huge way and the Dow ended up close to 300 points.
A few months ago, when Fed Chairman Ben Bernanke just hinted that a taper might be coming soon, stocks fell like a rock. I have a feeling that the Fed orchestrated things this time around to make sure that the stock market would have a positive reaction to their news. But of course I absolutely cannot prove this at all. I hope someday we learn the truth about what actually happened on Wednesday afternoon. I have a feeling that there was some direct intervention in the markets shortly after the announcement was made and then the momentum algorithms took over from there.
Of course QE3 is not being ended, but this tapering sends a signal to investors that the days of “easy money” are over and that we have reached the peak of the market.
And if you are at the peak of the market, what is the logical thing to do?
Sell, sell, sell.
But in order to sell, you are going to need to have buyers.
And who is going to want to buy stocks when there is no upside left?
4. The Money In Your Bank Account Is Constantly Being Devalued
When a new dollar is created, the value of each existing dollar that you hold goes down. And thanks to the Federal Reserve, the pace of money creation in this country has gone exponential in recent years. Just check out what has been happening to M1. It has nearly doubled since the financial crisis of 2008…
The Federal Reserve has been behaving like the Weimar Republic, and this tapering does not change that very much. Even with this tapering, the Fed is still going to be creating money out of thin air at an absolutely insane rate.
And for those that insist that what the Federal Reserve is doing is “working”, it is important to remember that the crazy money printing that the Weimar Republic did worked for them for a little while toobefore ending in complete and utter disaster.
5. Quantitative Easing Has Been Causing The Cost Of Living To Rise
The Federal Reserve insists that we are in a time of “low inflation”, but anyone that goes to the grocery store or that pays bills on a regular basis knows what a lie that is. The truth is that if the inflation rate was still calculated the same way that it was back when Jimmy Carter was president, the official rate of inflation would be somewhere between 8 and 10 percent today.
Most of the new money created by quantitative easing has ended up in the hands of the very wealthy, and it is in the things that the very wealthy buy that we are seeing the most inflation. As one CNBC article recently stated, we are seeing absolutely rampant inflation in “stocks and bonds and art and Ferraris and farmland“.
6. Quantitative Easing Did Not Reduce Unemployment And Tapering Won’t Either
The Federal Reserve actually first began engaging in quantitative easing back in late 2008. As you can see from the chart below, the percentage of Americans that are actually working is lower today than it was back then…
The mainstream media continues to insist that quantitative easing was all about “stimulating the economy” and that it is now okay to cut back on quantitative easing because “unemployment has gone down”. Hopefully you can see that what the mainstream media has been telling you has been a massive lie. According to the government’s own numbers, the percentage of Americans with a job has stayed at a remarkably depressed level since the end of 2010. Anyone that tries to tell you that we have had an “employment recovery” is either very ignorant or is flat out lying to you.
7. The Rest Of The World Is Going To Continue To Lose Faith In Our Financial System
Everyone else around the world has been watching the Federal Reserve recklessly create hundreds of billions of dollars out of thin air and use itto monetize staggering amounts of government debt. They have been warning us to stop doing this, but the Fed has been slow to listen.
The greatest damage that quantitative easing has been causing to our economy does not involve the short-term effects that most people focus on. Rather, the greatest damage that quantitative easing has been causing to our economy is the fact that it is destroying worldwide faith in the U.S. dollar and in U.S. debt.
Right now, far more U.S. dollars are used outside the country than inside the country. The rest of the world uses U.S. dollars to trade with one another, and major exporting nations stockpile massive amounts of our dollars and our debt.
We desperately need the rest of the world to keep playing our game, because we have become very dependent on getting super cheap exports from them and we have become very dependent on them lending us trillions of our own dollars back to us.
If the rest of the world decides to move away from the U.S. dollar and U.S. debt because of the incredibly reckless behavior of the Federal Reserve, we are going to be in a massive amount of trouble. Our current economic prosperity greatly depends upon everyone else using our dollars as the reserve currency of the world and lending trillions of dollars back to us at ultra-low interest rates.
And there are signs that this is already starting to happen. In fact, China recently announced that they are going to quit stockpiling more U.S. dollars. This is one of the reasons why the Fed felt forced to do something on Wednesday.
But what the Fed did was not nearly enough. It is still going to be creating $75 billion out of thin air every single month, and the rest of the world is going to continue to lose more faith in our system the longer this continues.
8. The Economy As A Whole Is Going To Continue To Get Even Worse
Despite more than four years of unprecedented money printing by the Federal Reserve, the overall U.S. economy has continued to decline. If you doubt this, please see my previous article entitled “37 Reasons Why ‘The Economic Recovery Of 2013’ Is A Giant Lie“.
And no matter what the Fed does now, our decline will continue. The tragic downfall of small cities such as Salisbury, North Carolina are perfect examples of what is happening to our country as a whole…
During the three-year period ending in 2009, Salisbury’s poverty rate of 16% was about 3% higher than the national rate. In the following three-year period between 2010 and 2012, the city’s poverty rate was approaching 30%. Salisbury has traditionally relied heavily on the manufacturing sector, particularly textiles and fabrics. In recent decades, however, manufacturing activity has declined significantly and continues to do so. Between 2010 and 2012, manufacturing jobs in Salisbury — as a percent of the workforce — shrank from 15.5% to 8.3%.
But the truth is that you don’t have to travel far to see evidence of our economic demise for yourself. All you have to do is to go down to the local shopping mall. Sears has experienced sales declines for 27 quarters in a row, and at this point Sears is a dead man walking. The following is from a recent article by Wolf Richter…
The market share of Sears – including K-Mart – has dropped to 2% in 2013 from 2.9% in 2005. Sales have declined for years. The company lost money in fiscal 2012 and 2013. Unless a miracle happens, and they don’t happen very often in retail, it will lose a ton in fiscal 2014, ending in January: for the first three quarters, it’s $1 billion in the hole.
Despite that glorious track record, and no discernible turnaround, the junk-rated company has had no trouble hoodwinking lenders into handing it a $1 billion loan that matures in 2018, to pay off an older loan that would have matured two years earlier.
And J.C. Penney is suffering a similar fate. According to Richter, the company has lost a staggering 1.6 billion dollars over the course of the last year…
Then there’s J.C. Penney. Sales plunged 27% over the last three years. It lost over $1.6 billion over the last four quarters. It installed a revolving door for CEOs. It desperately needed to raise capital; it was bleeding cash, and its suppliers and landlords had already bitten their fingernails to the quick. So the latest new CEO, namely its former old CEO Myron Ullman, set out to extract more money from the system, borrowing $1.75 billion and raising $785 million in a stock sale at the end of September that became infamous the day he pulled it off.
So don’t believe the hype.
The economy is getting worse, not better.
Quantitative easing did not “rescue the economy”, but it sure has made our long-term problems a whole lot worse.
And this “tapering” is not a sign of better things to come. Rather, it is a sign that the bubble of false prosperity that we have been enjoying for the past few years is beginning to end.
Define “Market” Irony: When JPMorgan’s Chief Currency Dealer Is Head Of An FX Manipulation “Cartel” | Zero Hedge
Now that everyone is habituated to banks manipulating every single product and asset class, and for those who aren’t, see this explanatory infographic…
Regulators are looking into whether currency traders have conspired through instant messages to manipulate foreign exchange rates. The currency rates are used to calculate the value of stock and bond indexes.
Banks have been accused of manipulating energy markets in California and other states.
Since early 2008 banks have been caught up in investigations and litigation over alleged manipulations of Libor.
Banks have been accused of improper foreclosure practices, selling bonds backed by shoddy mortgages, and misleading investors about the quality of the loans.
…revelations that this market and that or the other are controlled by a select group of criminal bankers just don’t generate the kind of visceral loathing as 2012’s Libor fraud bombshell.
As much was revealed when the second round of exposes hit in the middle of 2013, mostly focusing on manipulation in the forex market, and the general population largely yawned, whether due to the knowledge that every market is now explicitly broken (explaining the abysmal trading volumes and retail participation in recent years) or because nobody ever gets their due punishment and this kind of activity so not even a perp-walk spectacle can be enjoyed, this is accepted as ordinary-course action.
Nonetheless, we are glad that the actions of the FX cartel continue to get regular exposure in the broader media, in this case Bloomberg who, among other things, reminds us that it was none other than JPM’s Dick Usher who was the moderator of the appropriately titled secret chat room titled “The Cartel” which we noted previously. It is this alleged criminal who “worked at RBS and represented the Edinburgh-based bank when he accepted a 2004 award from the publication FX Week. When he quit RBS in 2010, the chat room died, the people said. He revived the group with the same participants when he joined JPMorgan the same year as chief currency dealer in London.”
Yes, the chief currency dealer of JP Morgan, starting in 2010 until a few months ago when he quietly disappeared, was one of the biggest (allegedly) FX manipulators in the world. Define irony…
What are some of the other recent revelations?
Here is a reminder of the prehistory from Bloomberg. First came the chat rooms:
At the center of the inquiries are instant-message groups with names such as “The Cartel,” “The Bandits’ Club,” “One Team, One Dream” and “The Mafia,” in which dealers exchanged information on client orders and agreed how to trade at the fix, according to the people with knowledge of the investigations who asked not to be identified because the matter is pending. Some traders took part in multiple chat rooms, one of them said.
The allegations of collusion undermine one of society’s fundamental principles — how money is valued. The possibility that a handful of traders clustered in a closed electronic network could skew the worth of global currencies for their own gain without detection points to a lack of oversight by employers and regulators. Since funds buy and sell billions of dollars of currency each month at the 4 p.m. WM/Reuters rates, which are determined by calculating the median of all trades during a 60-second period, that means less money in the pension and savings accounts of investors around the world.
One focus of the investigation is the relationship of three senior dealers who participated in “The Cartel” — JPMorgan’s Richard Usher, Citigroup’s Rohan Ramchandani and Matt Gardiner, who worked at Barclays and UBS — according to the people with knowledge of the probe. Their banks controlled more than 40 percent of the world’s currency trading last year, according to a May survey by Euromoney Institutional Investor Plc.
Entry into the chat room was coveted by nonmembers interviewed by Bloomberg News, who said they saw it as a golden ticket because of the influence it exerted.
And after that came unprecedented hubris and a sense of invincibility:
The men communicated via Instant Bloomberg, a messaging system available on terminals that Bloomberg LP, the parent of Bloomberg News, leases to financial firms, people with knowledge of the conversations said.
The traders used jargon, cracked jokes and exchanged information in the chat rooms as if they didn’t imagine anyone outside their circle would read what they wrote, according to two people who have seen transcripts of the discussions.
Since nobody investigated, next naturally, come the profits and the crimes:
Unlike sales of stocks and bonds, which are regulated by government agencies, spot foreign exchange — the buying and selling for immediate delivery as opposed to some future date — isn’t considered an investment product and isn’t subject to specific rules.
While firms are required by the Dodd-Frank Act in the U.S. to report trading in foreign-exchange swaps and forwards, spot dealing is exempt. The U.S. Treasury exempted foreign-exchange swaps and forwards from Dodd-Frank’s requirement to back up trades with a clearinghouse. In the European Union, banks will have to report foreign-exchange derivatives transactions under the European Market Infrastructure Regulation.
A lack of regulation has left the foreign-exchange market vulnerable to abuse, said Rosa Abrantes-Metz, a professor at New York University’s Stern School of Business in Manhattan.
“If nobody is monitoring these benchmarks, and since the gains from moving the benchmark are possibly very large, it is very tempting to engage in such a behavior,” said Abrantes-Metz, whose 2008 paper “Libor Manipulation” helped spark a global probe of interbank borrowing rates. “Even a little bit of difference in price can add up to big profits.”
… along with a lot of banging the close:
Dealers can buy or sell the bulk of their client orders during the 60-second window to exert the most pressure on the published rate, a practice known as banging the close. Because the benchmark is based on the median value of transactions during the period, breaking up orders into a number of smaller trades could have a greater impact than executing one big deal.
… and much golf and “envelopes stuffed with cash”
On one excursion to a private golf club in the so-called stockbroker belt beyond London’s M25 motorway, a dozen currency dealers from the biggest banks and several day traders, who bet on currency moves for their personal accounts, drained beers in a bar after a warm September day on the fairway. One of the day traders handed a white envelope stuffed with cash to a bank dealer in recognition of the information he had received, according to a person who witnessed the exchange.
Such transactions were common and also took place in tavern parking lots in Essex, the person said.
Personal relationships often determine how well currency traders treat their customers, said a hedge-fund manager who asked not to be identified. That’s because there’s no exchange where trades take place and no legal requirement that traders ensure customers receive the best deals available, he said.
In short – so simple the underwear gnomes could do it:
- Create a cartel
- Corner and manipulate the market
And that’s why they (and especially Jamie Dimon) are richer than you.
Threatened with a credit rating downgrade within the next three years that could result in higher lending costs and more burden on taxpayers, York Region is working to cut the amount it borrows over the next decade and beyond.
The region will likely approve its nearly $3 billion 2014 fiscal plan today, but much of the focus throughout this year’s budget process has been on reducing its debt.
York’s debt stands at about $2.26 billion and while credit rating agencies Moody’s Investor Service and Standard and Poor’s recently gave the region Aaa/AAA standing for the 13th consecutive year, the latter firm also revised its outlook from stable to negative, which could be a harbinger of a credit downgrade within the not-too-distant future.
Regional finance committee chairperson and Richmond Hill Mayor Dave Barrow described the move by S&P as a wake-up call.
“I think it’s a big deal,” he said. “As the issuer of the debt, we don’t want to be seen as more of a risk than others.”
Even before S&P revised its outlook, there had been fretting about the size of the region’s debt load. Much of the $2.26-billion figure, around 80 per cent of it, will be recovered through the collection of development charges, Mr. Barrow said, but the fact remains it’s a huge amount of money.
In any case, the region is taking steps to try to reduce the amount of debt it intends to take on, York treasury office director Ed Hankins explained.
To do that, it is employing a three-pronged approach that will reschedule some components of the region’s 10-year capital plan to ensure they’re ready when they are needed rather than years in advance, establish a debt-reduction reserve and put more money aside for asset replacement.
The re-aligning of the capital plan will see certain projects shifted into future 10-year plans, while the latter two initiatives will expand the reserve balances and cut the amount of tax levy-supported debt that will be required, Mr. Hankins said.
If adhered to, Mr. Hankins estimates the new approach will help the region avoid $1.5 billion in debt during the next decade.
York’s debt was projected to exceed $5 billion as of 2020 under its original long-term capital plan, but, as per the new strategy, the revised forecast anticipates the region’s debt won’t reach $4 billion.
At the same time, the region plans to boost its reserve balances from the current $1.6 billion to nearly $4.7 billion by 2023.
Interestingly, while the region’s debt is forecast to climb upward, it is expecting a year-end surplus of $19.1 million on the operating side of the ledger.
The current policy with respect to surpluses, dictates any funds left over from a given year’s operating budget be allotted to cover contingent liability reserves, such as working capital and insurance, then fuel-stabilization, if required, with the remainder assigned to the general capital reserve fund.
Under a proposed policy, future surpluses would be assigned to the aforementioned reserves, such as general capital and others, on an as-needed basis, with the rest being assigned to the new debt-reduction account.
The supplementary tax policy would also change to assign half of the funds collected through it to the asset replacement fund, with the remaining amount dedicated to debt reduction. The operating budget would also list a debt-reduction line item starting at $11.8 million, all to help establish the new fund.
In the past, some have suggested municipalities would do well to avoid taking on debt and, instead, compel the developers to pay the costs of servicing their projects up front.
Mr. Barrow and Mr. Hankins agree that can work on a relatively smaller scale, but isn’t practical at the regional level.
Some of the water and wastewater projects the region builds to serve new growth, for example, come with price tags in the hundreds of millions of dollars, if not more, Mr. Hankins said.
“You’re not building something that will support one subdivision, but hundreds of subdivisions over the next 20 to 30 years,” he said. “Obviously, the cost of doing that is much larger.”
A certain amount of debt is unavoidable in a municipal context and shouldn’t be cause for too much concern as long as there’s a sound plan in place to pay it back, Centre for Urban Research and Land Development professor and director David Amborski explained.
S&P’s revision of its outlook from stable to negative isn’t intended to set off the alarm bells, but it is meant to get the region’s attention.
“That’s an early warning,” he explained. “It’s to get the decisionmakers thinking about doing some things differently.”
It would be a different story if S&P were to downgrade the region’s credit rating, he added.
As it stands, provincial legislation caps what a municipality can borrow, with an annual repayment limit that states total financial obligations can’t exceed 25 per cent of revenue.
The region, however, has a special arrangement with the province that gives it an additional cost supplement over and above this limit, equating to 80 per cent of the average development charges collected over the previous three years.
Regardless, anything a municipality can do to mitigate debts, be it deferring some projects or exploring public-private partnerships, is a good thing, Mr. Amborski said.
Even so, an increase in development charges isn’t the solution to helping municipalities, such as York Region, diminish their debt, Mr. Amborski said. Ontario has among the highest development charges in the world, so if growth isn’t paying for growth here, it isn’t anywhere, he said.
“You can’t just treat development charges as a bottomless pit,” he said. “They do get passed on to the homeowner at the end of the day.”
Higher development charges also result in higher home prices which, in turn, can lead to a dearth of affordable housing, he added.
That being said, not all growth is created equal, Mr. Amborski continued.
Employment growth pays a relatively hefty development charge in most municipalities, but puts significantly less pressure on municipal services, especially in the recreation and leisure side of things, compared to residential construction, Mr. Amborski said. As a municipality, you want a healthy supply of residential growth coming in, as employers generally follow people, he said, but if a town, city or region is having to constantly approve new housing to pay down the debt accrued from servicing previous residential developments without adequate employment growth occurring that could certainly spell trouble.
“I would argue residential growth does pay for itself if you have employment growth along with it,” Mr. Amborski said. “You need that balance in the assessment between employment and residential.
“You don’t want to be a bedroom community.”
An economist recently recommended that I read a paper by three Fed researchers titled: “Why Did So Many People Make So Many Ex Post Bad Decisions? The Causes of the Foreclosure Crisis.” It was presented at a major conference last year and made the rounds again in the economics blogosphere this year with generally positive reviews. It seems to have been influential.
The authors – Christopher Foote, Kristopher Gerardi and Paul Willen – argue that the financial crisis was caused by over-optimistic expectations for house prices, while other factors such as distorted incentives for bankers played only minor roles or no roles at all. In other words, it was a bubble just like the Dutch tulip mania of the 1630s or South Sea bubble of the early 1700s, and had nothing to do with modern financial practices.
Then the authors make absolutely sure of their work being well-received by those who matter. The financial crisis is surely a touchy subject at the Fed, where the biggest PR challenge is “bubble blowing” criticism from those of us who aren’t on the payroll (directly or indirectly). But Foote, Gerardi and Willen are, of course, on the payroll. They tell us there’s little else that can be said about the origins of the crisis, because any “honest economist” will admit to not understanding bubbles.
Here’s their story:
[I]t is deeply unsatisfying to explain the bad decisions of both borrowers and lenders with a bubble without explaining how the bubble arose. …Unfortunately, the study of bubbles is too young to provide much guidance on this point. For now, we have no choice but to plead ignorance, and we believe that all honest economists should do the same. But acknowledging what we don’t know should not blind us to what we do know: the bursting of a massive and unsustainable housing bubble in the U.S. housing market caused the financial crisis.
We don’t often critique papers like this (who cares about Fed research outside of academic economists?) But what the heck, the bolded sentences above – in particular, the hypocritical reference to “honest economists” – deserve at least a few words of rebuttal.
We’ll limit our comments to two areas. First, we’ll offer a redline edited version of a key section in the authors’ conclusion, mostly to share a different perspective on the financial crisis. Second, we’ll point out an example of dishonesty from these economists who brazenly claim that their own perspective is the only one that can be called honest.
Where did the bubble come from?
In practice, the authors don’t completely “plead ignorance” about the causes of bubbles as they claim to do. They offer a few “speculative” ideas about the housing bubble, writing:
One speculative story begins with the idea that some fundamental determinants of housing prices caused them to move higher early in the boom. Perhaps the accommodative monetary policy used to fight the 2001 recession, or higher savings rates among developing countries, pushed U.S. interest rates lower and thereby pushed U.S. housing prices higher. Additionally, after the steep stock market decline of the early 2000s, U.S. investors may have been attracted to real estate because it appeared to offer less risk. The decisions of Fannie Mae and Freddie Mac may have also played a role in supporting higher prices…
This smells to us like a strategy of gently acknowledging criticism (of the Fed’s interest rate policies), while at the same time attempting to neutralize it. The authors imply that low interest rates were an unavoidable byproduct of the Fed’s recession fighting, and then shift some of the blame to foreigners in developing countries before moving on to other possible explanations.
But even if you believe the Fed’s anti-recession measures were worthwhile, the authors’ story is nonsense. It needs corrections for the facts that the Fed continued to slash rates nearly two years after the 2001 recession and then maintained an ultra-easy stance for a few years after that. It also begs the question of why the Fed responded to high foreign savings rates – which were the flip side to U.S. current account deficits and primary source of disinflation – with even greater stimulus. Moreover, there’s much more to the Fed’s role in the housing boom than these factors.
As we see it, the financial crisis validated certain principles that aren’t reflected in mainstream models but feature in fringe areas such as Austrian business cycle theory orbehavioral economics. Economists in these areas offer far more detailed explanations for the housing bubble than the “speculative story” above. For example, recent Nobel Prize winner Robert Shiller filled a whole book with bubble theories. While Foote, Gerardi and Willen would presumably call these economists dishonest, we beg to differ. Borrowing from non-mainstream ideas, here’s our edited version of the excerpt:
If this version is accurate, the Fed’s failures include three whoppers:
- Monetary policy was too stimulative throughout the boom.
- Two decades of Greenspan/Bernanke “puts” created a mentality that risky bets couldn’t lose (moral hazard).
- The Fed applauded rather than stopping the deterioration in lending standards, blithely disregarding its status as only institution that was mandated to set nation-wide lending requirements.
As you might expect, Foote, Girardi and Willen weave a story that either denies or diverts attention from all three failures. One part of the story is their claim that bubbles can’t be explained and anyone who thinks otherwise is dishonest. If the defining feature of the crisis can’t be explained, then it can’t be blamed on the Fed, right?
Other parts of the story are embedded in 12 “facts” that are said to describe the crisis. As written, many of the “facts” are strictly true. Some may have even added to the public debate because they weren’t widely known in policy circles, even as they were understood in the fixed income business. Others, though, can only distort that debate. The worst of the so-called facts are somewhere in between flat wrong and technically accurate but interpreted in ways that don’t stand up to scrutiny.
Lending standards didn’t really change during the boom?!?
We’ll point out a single example, from pages 9-11 of the paper and sub-titled, “Fact 4: Government policy toward the mortgage market did not change much from 1990 to 2005.” In this section, the authors deny that policymakers dropped the ball on lending standards. They don’t mention central bankers explicitly (that would be too obvious?), choosing instead to absolve the Clinton administration of blame for its ill-fated National Home Ownership strategy. Of course, their argument also exonerates the Fed if you happen to believe it.
The argument depends partly on a history lesson that begins like this:
It is true that large downpayments were once required to purchase homes in the United States. It is also true that the federal government was instrumental in reducing required downpayments in an effort to expand homeownership. The problem for the bad government theory is that the timing of government involvement is almost exactly 50 years off. The key event was the Servicemen’s Readjustment Act of 1944, better known as the GI Bill, in which the federal government promised to take a first-loss position equal to 50 percent of the mortgage balance, up to $2,000, on mortgages originated to returning veterans.
The authors then tell a nostalgic tale about loan-to-value (LTV) ratios in the 1950s and 1960s, before skipping ahead to the 1990s and 2000s. For the latter period, we’re told to believe that lending standards didn’t decline in a meaningful way:
Figure 6 shows LTV ratios for purchase mortgages in Massachusetts from 1990 to 2010, the period when government intervention is supposed to have caused so much trouble … But inspection of Figure 6 does not support the assertion that underwriting behavior was significantly changed by that program [Clinton’s National Homeownership Strategy].
Here’s the key chart that goes with this claim:
Here are a few reasons why the thesis doesn’t fit the reality:
- The authors share data for only one state (Massachusetts), while failing to mention that it didn’t have much of a housing bust. Consider that Boston is one of only four cities (out of 20) in the S&P/Case-Shiller Home Price Index for which prices didn’t fall by more than 20%. During the bear market period for the full index, the Boston component fell only 16%, less than half the 34% drop in the national index.
- The authors’ sweeping argument relies on not only a single state, but also a single indicator (LTV ratios). You might wonder: What were the credit scores of borrowers at each LTV level? How did their incomes compare to monthly mortgage payments? Were their incomes verified? These types of questions need answers before you can draw general conclusions about underwriting behavior.
- Even the cherry-picked data – Massachusetts LTV ratios! – doesn’t support the authors’ conclusions. It shows that the incidence of ratios greater than 100% tripled during the housing boom, from about 8% of all Massachusetts mortgages to about 25%. The claim that this change isn’t significant is incredulous.
- LTV ratios in the 1950s and 1960s, while interesting, are irrelevant to the early 21stcentury housing boom. Different era, different circumstances, different implications.
Needless to say, the authors’ attempt at defending fellow public officials falls well short. Lending standards declined sharply during the boom, and this was encouraged by both the federal government and the Fed. No amount of data mining can change these facts.
Overall, the Fed staffers’ paper fits a common pattern. It’s stuffed with enough data to be taken seriously, but inferences are based more on spin than objective analysis. The approach aligns conclusions with an establishment narrative, while protecting the authors’ establishment status. The last thing you would call this paper is an honest piece of research.
As long as we’re at it, here’s an extra edit, this one offering another perspective on Foote, Gerardi and Willen’s conclusions about our knowledge of bubbles (from the first excerpt above):
What is $55 trillion between friends? Very little according to the CFTC. In perhaps the biggest under the radar news of the day – to be expected with every watercooler occupied by taper experts – theWSJ reports that the Commodity Futures Trading Commission said Wednesday that technical errors at two so-called swaps data repositories, which collect and supply regulators with transaction data, have led the CFTC to misreport the overall size of the swaps market by undercounting its size. Isn’t it curious how all these “glitches” always work out in the favor of preserving market calm and confidence and away from spooking investors and speculators? Either way, a better question is how big was the so called undercounting? The answer: as large as $55 trillion!
Regulators aren’t sure how much the repositories are undercounting. One CFTC official familiar with the matter said the discrepancy could be as high as $55 trillion, though another official said the figure is closer to $10 trillion once regulators cancel out certain transactions to prevent double counting.
One just has to laugh: the total US swaps market is what – roughly $400 trillion? So… just add enough notional to that number equal to the GDP of the entire world – or 4 times the size of US GDP – and call it a day. And in this environment somehow the Fed and other central planners are expected to have any clue what they are doing on a day to day basis?
Naturally this discovery makes a mockery of such transaprency enchancing initatives as Dodd-Frank.
The lack of clarity over the size of the market may undermine a key plank of the 2010 Dodd-Frank law aimed at bringing transparency to the opaque derivatives market. Swaps, which were at the heart of the 2008 financial crisis, are complex financial contracts that allow financial firms and their clients to hedge against risks or bet on an asset’s value.
The CFTC has issued a number of rules to bring transparency to swaps trading so regulators can detect risks that could pose a threat to a firm or the financial system.
It would appear that those rules, uh, failed. It gets better:
The CFTC said in a footnote to its weekly swaps report that the largest data repository, the Depository Trust & Clearing Corp., “has informed us that due to a…technical coding issue, the notional values in the interest rate asset class have been understated.” The agency also reported “a processing error” by a separate repository operated by CME Group Inc. A CME spokeswoman didn’t respond to a request for comment. A CFTC official characterized the data problems as “growing pains.” The agency formally began to report swaps data on a weekly basis just last month.
A technical coding issue with 12 zeroes?
Sure enough, the CFTC was quick to scapegoat someone for this epic clusterfuck – naturally, this someone was evil Congress for not spending even more money on the CFTC’s toothlessness, something popularized recently by the recently departedBart Chilton, who more or less told gold traders that manipulation in the gold market will continue because the government just doesn’t have the funds to stop it.
The official said the error also reflects the agency’s chronic lack of resources. Just two employees at the agency are charged with putting together the weekly swaps report and it takes them 12 days to prepare the data for publication compared with three for another report the agency publishes. The agency is reviewing the matter and hopes to have firmer figures by next week’s report, due Thursday.
In a statement, DTCC said: “We notified the CFTC immediately after we uncovered this matter and are working overtime to resolve these issues as soon as possible to ensure that the agency has timely access to the most accurate, highest quality market data.”
Oh that’s ok then, after all what’s a little eletronic $55,000,000,000,000 shuttling back and forth between insolvent counterpa…. oh hey look, over there everyone, the Fed just tapered!