Worthwhile Canadian Initiative

Too big a percentage to fail?

Suppose one big bank makes a mistake, and that big bank is 50% of the market? You have a problem.

Suppose lots of little banks make the same mistake, and those little banks are 50% of the market? You have a problem. The same problem.

Rambling thoughts on Canadian house prices and global savings gluts

This isn't a very focused post. There are two sets of thoughts bubbling through my mind this morning. The first is about Canadian house prices; the second is about global savings gluts. But the two topics are very definitely related.

There is a lot of anecdotal evidence of a pick-up in at least some Canadian housing markets over the last month or two. Like this story in today's Globe and Mail for example, about record sales, bidding wars, and rising prices in Toronto. I won't fully believe that these stories are real and representative of the whole housing market until I see it confirmed by a rise in the Teranet-National Bank price index, but the most recent Teranet numbers are for April, and show no rebound yet. (You can have accurate data or quick data: pick one.)

Asset price bubbles, monetary policy, and the Lucas Critique

"Tight money causes unemployment to rise, and loose money causes unemployment to fall. Therefore, if monetary policy had a 20% inflation target rather than a 2% inflation target, monetary policy would be looser, and unemployment would be lower". Wrong, and now obviously wrong. But 40 years ago most economists thought it was right.

"Tight money deflates asset bubbles, and loose money inflates asset bubbles. Therefore, if monetary policy included asset prices in its inflation target, an incipient asset bubble would cause tighter monetary policy, deflating the bubble, and so asset bubbles would be less common". Is that statement equally wrong, and for exactly the same reasons?

What monetary policy cannot do, and so cannot be blamed for having done

We have learned, after long and painful lessons, that there are some good things we wish that monetary policy could do that monetary policy in fact cannot do.

But we don't seem to have learned the corollary to that lesson: by exactly the same argument, there are also some bad things that monetary policy gets blamed for having done that monetary policy in fact cannot have done.

Because it's not summer if you don't go swimming in Lake Couchiching

Blogging will be light-to-non-existent until after July 16.

Greenspan and his critics, again -- with a Canadian twist

His critics blame Alan Greenspan for setting interest rates too low, which caused the house-price bubble, which then burst and caused the financial crisis. As I argued back in February, the critics are typically confused between interest rates that are low, and interest rates that are low relative to the natural rate.

The topic is making the rounds of the economics blogs again, with Brad DeLong cogently making the same point about the natural rate. I want to add a Canadian twist. Canada also had a big increase in house prices. But since average Canadian inflation over the same period was almost exactly equal to the Bank of Canada's 2% target, we know that the Bank of Canada did not on average set interest rates below the natural rate.

If you can't blame the Bank of Canada for the boom/bubble in Canadian house prices, how can you blame the Fed for the boom/bubble in US house prices?

The Alberta Premier's Council of Economic Strategy has no Alberta economists

U of Calgary's Aidan Hollis delivers the snark:

Twelve members, of whom one is an economist. Presumably the idea is that anyone is an expert in economics. Either that, or economists have not much to add.
 
No academics from Alberta. Two Oxford professors, one an expert in the ethics of post-conflict reconstruction, and another an immunologist. They are so smart at Oxford, that even their immunologists are experts in economics.

More and better snark at the link.

US dollar rises on bad employment news. And on good employment news.

I can never get enough of these sorts of articles:

Loonie weakens as jobless data spooks investors: Canada's currency weakened after a U.S. government report showed employers cut more jobs in June than economists forecast, diminishing prospects for the country's economic recovery.

"A worse number is going to be bad for risk appetite," said Shaun Osborne, chief currency strategist at TD Securities Inc. in Toronto. "The initial reaction has been to buy the U.S. dollar" against other currencies such as the Canadian dollar and the euro.

Very plausible, you might think. But here's the forex story from last month's US employment release:

Greenback rallies after jobs data signal recession abating: The dollar advanced the most against the euro since April and rose to a three-week high versus the yen after a U.S. government report showed employers cut fewer jobs last month than economists forecast.The greenback climbed against almost all of the other major currencies as a slower deterioration of the labour market supported bets dollar-denominated assets will gain as the U.S. leads the global economy out of a recession.

To summarise:

• Positive US jobs numbers raise the USD against other currencies.
• Negative US jobs numbers raise the USD against other currencies.

Stimulus? What stimulus?

Over here, I expressed confusion at Mark Carney's reported remarks to the effect that 'whatever good news existed was caused artificially by massive government and central bank stimulus':

What government stimulus? The 12-month moving average of federal government program expenditures has been falling since December. (The deficit is due to declining tax revenues.)

It occurs to me that I hadn't actually made that point here before. So here is a graph of the 12-month moving sums (the monthly data are very volatile and have significant seasonal elements) of federal government expenditures and revenues up until March 2009.

Ottawa has moved into deficit over the past few months, but not because it has been indulging in an increase in spending. The 12-month moving sum of program expenditures declined in the first three months of the year; the deficit is due to an even more rapid decline in revenues.

eta: Okay, the GM/Chrysler bailouts should probably be added, since the loans haven't been written off yet. But still.

Monetary stability vs financial stability

I want to compare and contrast the pursuit of monetary stability with the pursuit of financial stability. I am talking mainly about Canada, though much of what I say applies to other countries as well.