Monday, April 5, 2010

The Law of Unintended Consequences

From Wiki:

Any intervention in a complex system may or may not have the intended result, but will inevitably create unanticipated and often undesirable outcomes.

This is a common occurrence in the world. Some people think they are smarter than they are and can intervene in a very simplistic manner in a complex situation, with many variables and still expect to have a linear outcome. OK before you leave from boredom let me give you an example:

Ronald Reagan decides to arm the hodge podge of fundamentalist factions in Afghanistan to fight the Russians in the 1980's. They win and twenty years later they are using some of those weapons against US troops. Who would have thought that would happen?

Here's another example:

Think back to September 2008. Lehman brothers had just gone bankrupt in the US, the world stock exchanges were collapsing, the financial ponzi scheme in Wall Street was unwinding.

There was a sudden realisation that the RE bubble in the US had burst and a large proportion of the mortgages given on those properties would never be paid back.

We were still in pretty good shape in Canada. yes, we had a bubble in Vancouver which was deflating, but many other parts had already corrected to more reasonable affordability levels. There was never any concern about widespread defaults in Canada.

However the Central Bank and the Government had to act! DO SOMETHING. ANYTHING. NOW

SO they followed the crisis-ridden Fed and chopped rates to ZERO:

Then they doubled the CHMC lending capacity.

Not too surprisingly the result of these activities was a rip-roaring trans-Canada housing bubble and debt binge which has the Bank of Canada wringing it's hand.

The problem arises not from evil-doers in Government, but by mis-guided do-gooders. The normal capitalist business cycle requires booms be followed by busts. This penalizes speculators and capital is then redirected from the latest craze, Dot-coms or RE into other areas which have been starved of capital due to the frenzy. If this cleansing doesn't happen, speculative behaviour is reinforced.

The bubble then gets so big that it has to be sustained at all costs or it will down the whole house of cards.

However along came a fellow called Alan Greenspan who convinced us all that he could defy the business cycle. It was an lucky by-product that his supporters in Finance also had their most lucrative two decades ever under his leadership. Every time they speculated too much and a bust seemed imminent- he lowered rates or bailed them out directly.

Unfortunately our own Mark Carney came from the Temple of financial expediency itself, Goldman Sachs and so he followed the same play book.

Cut rates and boost spending, support financial institutions and allow them to reap wind-fall profits from the huge gap between what they pay borrowers and what they charge lenders.

The result however has NOT been more stability. In fact we have reached the moment of maximum instability. We now have a huge RE bubble across the country in which the riskiest mortgages have tax-payer liability written all over them.

IE- we have been brought by our Greenspan-clones to the very place where the US was prior to it's financial collapse.

I would suggest you read that last sentence again. We are currently the flavor of the month -as you can see from the huge rally in the Canadian dollar. We are stable, we have commodities- yes we have a few deficits here and there- but they are manageable.

Well how about a decade of deficits.

How about a situation so perilously on the edge that a small increase in rates or a small weakening in employment could lead to a daisy chain of lower prices and defaults which reinforce each other.

We missed a great opportunity. We could have thanked our lucky stars that we were in such good shape, and told Canadians to buckle up for a few years and deal with the pain, but instead we decided to push the gravy-train a little further along the line, we are now close to where the US train went off the tracks and hurtled down the canyon.


  1. Van RE has been out of control since 2005 when I was first outbid on a leaky condo with no conditions. After all the years of leaky condo scandal all of a sudden people didn't care anymore and were ready to risk it all.

    It started to crash last year and people were starting to get scared but crashing the interest rate put a stop to that temporarily. I expect it to crash this year and there's nothing that can prevent it.

    But have no fear after the foreclosures settle down in a few years we will be rushing back up to $2 million dollar houses on the west side.

  2. No Condo in the 604April 6, 2010 at 4:33 PM

    i can feel the tide turning. these are halcyon days for real estate. the end is near. [insert other metaphor that hints at an ending, or likely, an apocalypse.]

    there won't be another rush up to million dollar houses on the west side (or 1.5 million apartments in Woodwards in the Downtown Eastside) after 2010. because the reckless first-time home buyer (i.e. "suckers") will have dried up, leaving only "responsible" buyers on the sidelines in no hurry to jump in. because Carney + friends cannot uncreate what they have created. because unemployment isn't going away. because things have not been what they've seemed for a long time. because, like Fish said, all booms need a bust.

    and it's going to bust wide open.

    that said, there ARE FTHBs out there. the smart ones. the ones who have resisted all temptation so far; people with REAL MONEY SAVED, diversification, excellent credit, and most importantly, NO DEBT. the days of some chump with 5% down offering $50,000 over asking, while a couple with 20% down balks, are coming to an end.

    p.s. FISH: keep up the good work. will look forward to your analysis as the fireworks start.

  3. The fireworks in the US has led to 3,000,000 people losing their jobs. Hopefully ours will be more benign, but be careful what you ish for :)

  4. Speaking of jobs, our company had a handful of entry level apprentice jobs targeting university grads. The jobs were posted on the internet and the cut-off was the 1st 120 applications. In the 3 hours, we had over 600 applications.... the job ad then got pulled. Tells me there aren't too many jobs out there!

  5. Wow- was that in Vancouver?

    Lots of similar stories from the US where I read of kids moving back from University into mom and dad's house and end up playing Nintendo all day- in between sending out resumes that are never answered.

    Another lost generation?