Well, that didn't take long! Mark Carney is still three months from taking over as Governor of the Bank of England, but already the tabloid press is sinking its claws into his wife, Diana.
Mrs Carney was foolish enough to tweet a response to the news that France's President, Francois Hollande, is scaling back punitive taxes on the wealthy, taxes that have led many rich French folk to relocate to London: "Maybe I'll be able to find a place to live in London after all".
It's perfectly clear that this is intended in jest, or at least, if there is a serious point, it's about the availability of housing, not the price. The top end of the market in London has been largely unaffected by the problems in the global economy, and the presence of an influx of wealthy Parisiens has only added to the scarcity of supply.
That's not how the tabloids have chosen to see it, though. This piece from the reliably venomous Daily Mail is typical, asserting that Mrs Carney has no right to plead poverty (which she wasn't) when her husband's contract provides a 5000 pound per week housing allowance in addition to his chunky salary. The Mail even provided its readers with a photograph of the Rockcliffe Park area in Ottawa, where the Carneys currently live, noting that "many residents enjoy river views". River views, indeed!! How very dare they??
The reader comments at the end of the article indicate that all of this concocted fury has hit a chord with the misanthropic knuckle-draggers that make up most of the Mail's readership*. Mrs Carney, who is a British citizen, is probably not entirely surprised by the reaction, but she may be starting to think that she's in for a long five years.
* And with one Labour MP, John Mann, who is a member of the Treasury Select Committee that grilled Mark Carney a few weeks ago. He's offering to rent out his London flat to the Carneys, for "just four percent of her housing allowance". Mann is MP for Bassetlaw, in Nottinghamshire, so the flat he's talking about is actually his second home. No word from the Mail on whether it, or his main home in t'Midlands, has a river view.
Thursday 28 March 2013
Monday 25 March 2013
The Cyprus precedent
Drinks all round -- mine's a Keo beer. A deal reached after difficult negotiations over the weekend has averted the possibility of Cyprus going bankrupt and getting forced out of the Eurozone. The deal will see the closure of the most egregiously dodgy of the country's bloated banks (Laiki, the second largest), though a "good" bank, for depositors with less than the insured limit of 100,000 euros, will be spun out from it first.
The key element of the plan is the revival of the haircut for depositors that was the core of the previous deal, the one that Cyprus's Parliament turned down last week. Smaller depositors (those with less than the insured limit) will now be spared, but those with larger sums face a much more severe scalping, possibly as high as 30%. For reasons that are not entirely clear, this new deal doesn't have to go before Parliament. Maybe that has something to do with the fact that most of the losses will be borne by foreigners with deposits in Cypriot banks. Most of these depositors are Russians, and the EU, egged on by the European media, seems happy to assume that they are all crooks, and thus deserve everything they get.
That assumption is not exactly contradicted by the reaction of the Russian government to this latest deal. Prime Minister Medvedev has said something to the effect that "what has previously been stolen is being stolen again". President Putin, who spoke out strongly against the earlier deal, appears to have agreed that Russia will renegotiate the terms of its existing loans to Cyprus in order to help the country out.
All good news then.....or is it? Stock markets initially reacted positively, but later sold off after the Dutch Finance Minister indicated that what was imposed on Cyprus might be a template for other countries. He later attempted to soften the impact of that statement by noting that there were features of the situation in Cyprus that were unique to that country. Most notably, the Cypriot banks have very little in the way of marketable debt, so there was no scope for inviting institutional creditors to step up and take the hit And, of course, as we've already noted, a lot of the bigger depositors are, conveniently enough, citizens of a non-EU country.
Even so, if the message that Mijnheer Dijsselbloem is trying to get across is that in future, governments will look to all creditors of a bank to bail it out, then the consequences within the EU and even beyond are unpredictable. Depositors are, of course, creditors of their banks, but that's not how they see themselves, and it's not how they've been treated in previous Eurozone bank bailouts. Indeed, in every bailout prior to this one, avoiding losses for bank depositors has been a cardinal rule. The principle that large depositors need to pay attention to the solvency of the institutions they stick their money into is a good one, but it's grossly unfair to impose it suddenly like this, when you've run out of other ideas.
Whatever happens next, Cyprus's days as amoney laundering offshore financial centre are surely over, which the EU and ECB will feel is no bad thing. Who else is at risk? Well, banks in any of the countries that have already been bailed out or may be facing future bailouts will certainly be on the lookout for any signs of depositor flight. And then there are countries that, like Cyprus, have bloated banking systems that are out of all proportion to their economies. Such as, oh, I don't know....the UK?
The key element of the plan is the revival of the haircut for depositors that was the core of the previous deal, the one that Cyprus's Parliament turned down last week. Smaller depositors (those with less than the insured limit) will now be spared, but those with larger sums face a much more severe scalping, possibly as high as 30%. For reasons that are not entirely clear, this new deal doesn't have to go before Parliament. Maybe that has something to do with the fact that most of the losses will be borne by foreigners with deposits in Cypriot banks. Most of these depositors are Russians, and the EU, egged on by the European media, seems happy to assume that they are all crooks, and thus deserve everything they get.
That assumption is not exactly contradicted by the reaction of the Russian government to this latest deal. Prime Minister Medvedev has said something to the effect that "what has previously been stolen is being stolen again". President Putin, who spoke out strongly against the earlier deal, appears to have agreed that Russia will renegotiate the terms of its existing loans to Cyprus in order to help the country out.
All good news then.....or is it? Stock markets initially reacted positively, but later sold off after the Dutch Finance Minister indicated that what was imposed on Cyprus might be a template for other countries. He later attempted to soften the impact of that statement by noting that there were features of the situation in Cyprus that were unique to that country. Most notably, the Cypriot banks have very little in the way of marketable debt, so there was no scope for inviting institutional creditors to step up and take the hit And, of course, as we've already noted, a lot of the bigger depositors are, conveniently enough, citizens of a non-EU country.
Even so, if the message that Mijnheer Dijsselbloem is trying to get across is that in future, governments will look to all creditors of a bank to bail it out, then the consequences within the EU and even beyond are unpredictable. Depositors are, of course, creditors of their banks, but that's not how they see themselves, and it's not how they've been treated in previous Eurozone bank bailouts. Indeed, in every bailout prior to this one, avoiding losses for bank depositors has been a cardinal rule. The principle that large depositors need to pay attention to the solvency of the institutions they stick their money into is a good one, but it's grossly unfair to impose it suddenly like this, when you've run out of other ideas.
Whatever happens next, Cyprus's days as a
Thursday 21 March 2013
Same old, same old
Quite a large number of countries are having austerity thrust upon them right now, either by the markets or by the EU. But there are only two countries that have chosen austerity of their own accord: the UK and Canada. By coincidence, both countries tabled their annual budgets this week, and in each case, despite an alarming lack of evidence that the austerity is doing any good whatsoever, the finance ministers signalled more of the same for the coming year -- and beyond.
First to speak was George Osborne in London. You can find the BBC's summary of his fiscal plans here. Yet again, Osborne has been forced to downgrade his outlook for the economy: GDP growth is expected to reach only 0.6% this year, just half of what was forecast a few months ago. The stagnant economy is making it very hard to cut the deficit; the Government is now signalling that it will take a fresh axe to spending after the next election (due by May 2015 at the latest), with social programmes at the top of the hit list.
There wasn't much new in the budget, but there were further signs of the Government's populist tilt, as it looks to head off the growing challenge from UKIP. A planned fuel tax increase was cancelled yet again, and instead of a 3p hike in the duty on beer, it's to be cut by 1p. Hardly a big deal when a pint costs more than three pounds, but it's interesting that Osborne has chosen to favour beer swiggers over wine and spirits sippers, who get no equivalent break. There's also a "Help to buy" scheme to boost first-time homebuyers, with the Government in effect underwriting mortgage debt. Details are "still to be worked out", which suggests this may have been a last minute addition to the speech. And despite the poor fiscal outlook, Osborne is raising the basic personal exemption for income tax to 10,000 pounds in 2014, which will help keep his LibDem coalition partners happy.
A day after Osborne, Canadian Fin Min Jim Flaherty delivered his budget in Ottawa. The CBC's nifty "interactive" summary can be found here. In common with Osborne, Flaherty has had to revise his growth outlook lower and his deficit numbers higher from the forecasts he presented at the end of 2012. Flaherty and his boss, Prime Minister Stephen Harper, are in a vise of their own making, having pledged to eliminate the deficit by the time of the next election, which is due, as in the UK, by 2015. Canada's fiscal situation is far better than the UK's, particularly in terms of the debt/GDP ratio, but this pledge leaves Flaherty no room for manoeuvre. As a result the budget was truly a non-event, without even the populist sweeteners Osborne managed to find. There's a pledge to crack down on tax avoidance, a few bits and pieces about training and infrastructure, and that's about it.
While Osborne and Flaherty, both right-wingers, vowed to persist with fiscal austerity, there are some interesting differences in how the two countries got into a fiscal pickle in the first place. The Daily Telegraph had an interesting graphic on its website, now unfortunately removed, that showed Labour and the Tories have both steadily racked up deficits whenever they have been in power in the UK over the past three decades, with only a couple of short periods of very small surplus. You can argue -- Osborne certainly does -- that this approach was more misguided during Gordon Brown's years as Chancellor, because the economy was growing smartly and didn't need an extra boost from the Government. But the fact is that neither of the main parties can escape responsibility.
In Canada it's a lot different. Jim Flaherty (along with PM Harper) may, out of necessity or choice, be a deficit hawk now, but it's worth remembering that he inherited a healthy surplus from the Liberals when the Tories were first elected in 2006. That surplus was frittered away on Bush 43-style tax cuts, a policy which backfired badly when the financial crisis hit.
That should be no surprise, though: the Tories have form when it comes to fiscal policy. Back in the days of the Mulroney government, two decades and more ago, the Government introduced a long term deficit cutting plan every year, yet the deficit continued to grow. It took the Jean Chretien Liberal government, with Paul Martin as Finance Minister, to get the deficit under control, with powerful assists from the fast-growing US economy of the 1990s and a weak exchange rate. The clear lesson to be learned from that era is that GDP growth is the key to deficit reduction, but that's a message that's lost on Jim Flaherty, and on George Osborne.
First to speak was George Osborne in London. You can find the BBC's summary of his fiscal plans here. Yet again, Osborne has been forced to downgrade his outlook for the economy: GDP growth is expected to reach only 0.6% this year, just half of what was forecast a few months ago. The stagnant economy is making it very hard to cut the deficit; the Government is now signalling that it will take a fresh axe to spending after the next election (due by May 2015 at the latest), with social programmes at the top of the hit list.
There wasn't much new in the budget, but there were further signs of the Government's populist tilt, as it looks to head off the growing challenge from UKIP. A planned fuel tax increase was cancelled yet again, and instead of a 3p hike in the duty on beer, it's to be cut by 1p. Hardly a big deal when a pint costs more than three pounds, but it's interesting that Osborne has chosen to favour beer swiggers over wine and spirits sippers, who get no equivalent break. There's also a "Help to buy" scheme to boost first-time homebuyers, with the Government in effect underwriting mortgage debt. Details are "still to be worked out", which suggests this may have been a last minute addition to the speech. And despite the poor fiscal outlook, Osborne is raising the basic personal exemption for income tax to 10,000 pounds in 2014, which will help keep his LibDem coalition partners happy.
A day after Osborne, Canadian Fin Min Jim Flaherty delivered his budget in Ottawa. The CBC's nifty "interactive" summary can be found here. In common with Osborne, Flaherty has had to revise his growth outlook lower and his deficit numbers higher from the forecasts he presented at the end of 2012. Flaherty and his boss, Prime Minister Stephen Harper, are in a vise of their own making, having pledged to eliminate the deficit by the time of the next election, which is due, as in the UK, by 2015. Canada's fiscal situation is far better than the UK's, particularly in terms of the debt/GDP ratio, but this pledge leaves Flaherty no room for manoeuvre. As a result the budget was truly a non-event, without even the populist sweeteners Osborne managed to find. There's a pledge to crack down on tax avoidance, a few bits and pieces about training and infrastructure, and that's about it.
While Osborne and Flaherty, both right-wingers, vowed to persist with fiscal austerity, there are some interesting differences in how the two countries got into a fiscal pickle in the first place. The Daily Telegraph had an interesting graphic on its website, now unfortunately removed, that showed Labour and the Tories have both steadily racked up deficits whenever they have been in power in the UK over the past three decades, with only a couple of short periods of very small surplus. You can argue -- Osborne certainly does -- that this approach was more misguided during Gordon Brown's years as Chancellor, because the economy was growing smartly and didn't need an extra boost from the Government. But the fact is that neither of the main parties can escape responsibility.
In Canada it's a lot different. Jim Flaherty (along with PM Harper) may, out of necessity or choice, be a deficit hawk now, but it's worth remembering that he inherited a healthy surplus from the Liberals when the Tories were first elected in 2006. That surplus was frittered away on Bush 43-style tax cuts, a policy which backfired badly when the financial crisis hit.
That should be no surprise, though: the Tories have form when it comes to fiscal policy. Back in the days of the Mulroney government, two decades and more ago, the Government introduced a long term deficit cutting plan every year, yet the deficit continued to grow. It took the Jean Chretien Liberal government, with Paul Martin as Finance Minister, to get the deficit under control, with powerful assists from the fast-growing US economy of the 1990s and a weak exchange rate. The clear lesson to be learned from that era is that GDP growth is the key to deficit reduction, but that's a message that's lost on Jim Flaherty, and on George Osborne.
Tuesday 19 March 2013
Cyprus's deep pockets bailout
CNN's Richard Quest breathlessly told the world last night everyone he'd contacted about the bank depositor "haircut" that is the centrepiece of the EU's bailout of Cyprus thought it was a really bad idea. One can only assume that Quest hadn't spoken to any German taxpayers, or to most of the parties ranged against Chancellor Merkel, because they no doubt think, at least for the moment, that this is an absolutely great idea*.
Quest's interviewees are right, though. This is a really nasty and dumb idea, and one that could have some very unpleasant consequences for the entire EU if it ever actually happens (which is looking doubtful at the time of writing). Let's look at some of the issues.
(1) Forcing a 6.75% haircut on lower net worth depositors in Cypriot banks, those with funds of less than 100,000 Euros, flatly contradicts the deposit insurance that these depositors were supposedly entitled to under EU rules. If this precedent is allowed to stand, it won't take any time at all before depositors in other countries that may need a bailout start to take their money out of the banks as a precaution. More generally, after an action such as this, what value does any kind of commitment by the EU have?
(2) Although the old idea of enosis may have been discredited, the relationship between Greece and Cyprus (and Turkey) is not a healthy one. The difficulties that have forced Cyprus to seek a bailout have to a great extent been created by the enthusiasm with which the island's banks loaned money into Greece, money which is now, of course, unlikely ever to be repaid. It's a replay, on a smaller scale, of the problems that sank the Icelandic banks a few years ago: taking on large-scale business that you have no reason to get involved in and don't fully understand. The citizens of the pariah Turkish Republic of Northern Cyprus must be enjoying all of this enormously.
(3) There's a further similarity with Iceland. A lot of the money that was deposited into Icelandic banks, and which allowed them to go on their ill-fated lending spree, seems to have come from Russia. Wealthy Russians have been putting money into Cyprus's banks for some time, and most of them will face the 9.9% "haircut" reserved for those with deposits in excess of 100.000 Euros. There seems little doubt that the presence of these investors was actually a positive inducement for the EU to impose the levy -- they wouldn't have done this if the deep pockets had been from elsewhere in the EU. This is simply immoral, and it's also where the whole idea starts to look not just foolish, but downright dangerous.
Not surprisingly, the Russians are furious, and Vladimir Putin has already railed against the plan. There's Russian money all over the EU, not just in the banks, but in the property market, especially in London and in more traditional havens like Monaco. If the Russians decide, or if Putin tells them, that the EU is no longer a safe haven for their money, the impact could be very severe.
In addition, of course, Russia is a key supplier of natural gas to Europe. Gazprom supplies more than 25% of Europe's gas needs. CNBC is already speculating that cutting off gas supplies is the most obvious way for Russia to retaliate for the losses that will be inflicted on its depositors. If that were to happen, German voters would without doubt quickly reassess their support for the bailout deal.
As it happens, I'm currently reading William Shirer's Rise and Fall of the Third Reich. The last time Germany sprang a nasty surprise on Russia, Operation Barbarossa in 1941, it didn't end well. This ham-fisted levy won't, either.
*Someone else who thought so, at least initially, was Matt Yglesias at Slate. While admitting it was "hideously" unfair, he argued that making large depositors consider the safety of the banks they use, rather than relying on deposit insurance, was a good principle. He's right, but it's not one you can impose retrospectively in the way that the Cyprus bailout deal does.
Quest's interviewees are right, though. This is a really nasty and dumb idea, and one that could have some very unpleasant consequences for the entire EU if it ever actually happens (which is looking doubtful at the time of writing). Let's look at some of the issues.
(1) Forcing a 6.75% haircut on lower net worth depositors in Cypriot banks, those with funds of less than 100,000 Euros, flatly contradicts the deposit insurance that these depositors were supposedly entitled to under EU rules. If this precedent is allowed to stand, it won't take any time at all before depositors in other countries that may need a bailout start to take their money out of the banks as a precaution. More generally, after an action such as this, what value does any kind of commitment by the EU have?
(2) Although the old idea of enosis may have been discredited, the relationship between Greece and Cyprus (and Turkey) is not a healthy one. The difficulties that have forced Cyprus to seek a bailout have to a great extent been created by the enthusiasm with which the island's banks loaned money into Greece, money which is now, of course, unlikely ever to be repaid. It's a replay, on a smaller scale, of the problems that sank the Icelandic banks a few years ago: taking on large-scale business that you have no reason to get involved in and don't fully understand. The citizens of the pariah Turkish Republic of Northern Cyprus must be enjoying all of this enormously.
(3) There's a further similarity with Iceland. A lot of the money that was deposited into Icelandic banks, and which allowed them to go on their ill-fated lending spree, seems to have come from Russia. Wealthy Russians have been putting money into Cyprus's banks for some time, and most of them will face the 9.9% "haircut" reserved for those with deposits in excess of 100.000 Euros. There seems little doubt that the presence of these investors was actually a positive inducement for the EU to impose the levy -- they wouldn't have done this if the deep pockets had been from elsewhere in the EU. This is simply immoral, and it's also where the whole idea starts to look not just foolish, but downright dangerous.
Not surprisingly, the Russians are furious, and Vladimir Putin has already railed against the plan. There's Russian money all over the EU, not just in the banks, but in the property market, especially in London and in more traditional havens like Monaco. If the Russians decide, or if Putin tells them, that the EU is no longer a safe haven for their money, the impact could be very severe.
In addition, of course, Russia is a key supplier of natural gas to Europe. Gazprom supplies more than 25% of Europe's gas needs. CNBC is already speculating that cutting off gas supplies is the most obvious way for Russia to retaliate for the losses that will be inflicted on its depositors. If that were to happen, German voters would without doubt quickly reassess their support for the bailout deal.
As it happens, I'm currently reading William Shirer's Rise and Fall of the Third Reich. The last time Germany sprang a nasty surprise on Russia, Operation Barbarossa in 1941, it didn't end well. This ham-fisted levy won't, either.
*Someone else who thought so, at least initially, was Matt Yglesias at Slate. While admitting it was "hideously" unfair, he argued that making large depositors consider the safety of the banks they use, rather than relying on deposit insurance, was a good principle. He's right, but it's not one you can impose retrospectively in the way that the Cyprus bailout deal does.
Saturday 16 March 2013
Botching the case for banking reform
Coming up for half a decade on from the worst of the financial crisis, efforts at strengthening the regulation of banks are still moving at a snail's pace, not least because the bankers are fighting the regulators at every turn. The Toronto Star's David Olive has a column in today's paper that tries to argue that the entire basis of most regulatory reform proposals is fundamentally misguided. Most of Olive's arguments are lifted wholesale from this much more tightly-reasoned piece by Matt Yglesias on Slate, which is in turn based on a recent book, The bankers' new clothes, by Anat Admati and Martin Hellwig*.
Rather than busting up excessively large banks or separating "utility" banking from more speculative activities, Admati and Hellwig (and hence Yglesias and Olive) believe that the real solution involves forcing banks to maintain much more capital as a cushion against losses. They suggest a capital ratio of 20-30%, which is about twice as much as even the best-capitalised banks currently maintain, and much higher than the target capital ratios that the Basel III guidelines aim to achieve by the end of the current decade.
I haven't read Admati and Hellwig's book, but I strongly suspect that David Olive's take on their ideas does not do them justice. Olive seems to believe that it would be very simple to get bank shareholders to pony up more cash, even while curbing dividend payouts (he appears to think that retained earnings are free money) and curbing the banks' riskier (but also more profitable) activities.
It seems highly unlikely that this would be true. Nobody has to own bank shares; skewing the risk/reward ratio so markedly against the equity holders would make it difficult and expensive to attract the extra capital that the banks would be required to hold. Olive doesn't seem to see this at all; Yglesias does, and acknowledges that it would "give a different shape to the real economy" by making borrowing more expensive for some (consumers, small businesses) but cheaper for others (governments, corporates). Yglesias may well be right about this, but the dislocation involved in getting from here to there, so to speak, may well be enough to deter regulators from adopting Admati and Hellwig's ideas.
I found myself a bit puzzled when reading David Olive's take on all this, because Canada avoided the worst of the financial crisis, and its banking system is seen as one of the safest in the world. I became even more puzzled when I started to look at some of the numbers Olive tosses about regarding banks' current capitalisation, numbers which seem to be the product of his own "research".
Olive says that banks maintain "microscopic" capital ratios of only 3%, and that rather than retaining earnings, they blow them out to shareholders, mainly in order to boost the share price, on which (he asserts) management's compensation is based. They then make up for the lack of capital by borrowing too much.
I just took a look at the 2012 annual report and Q1 quarterly statement for my old alma mater, TD Bank Group. Admittedly TD is an exceptionally well-run bank, but it's not atypical within the Canadian financial system -- and its numbers bear no resemblance whatever to those Olive is throwing around. Capital ratios? TD's Tier 1 ratio is 10.9% and its total capital ratio is 14.2%, far above the 3% that Olive seems to have grabbed out of thin air. Retained earnings? Well, of the C$ 6.4 billion in "income attributable to shareholders" earned by TD in 2012, only $2.6 billion was paid out in dividends. The rest, $3.8 billion or 60% of the total, was added to capital as retained earnings. Too much debt? TD's equity at book value stood at $47.5 billion at the end of fiscal 2012, against $11.3 billion in subordinated notes and debentures -- and that debt total, by the way, has been falling steadily in recent years.
There's a strong case to be made for tighter regulation of banks, but it's not helped by columnists inventing numbers in a crazed effort to show how bad the current situation is. That just makes it easier for the banks to push back. I'd be very surprised if David Olive doesn't find a stack of messages on his Blackberry from the CFOs of the big Canadian banks, looking to set him straight on a few things.
* I'm not accusing anyone of plagiarism -- credit is given where credit is due by both Olive and Yglesias.
Rather than busting up excessively large banks or separating "utility" banking from more speculative activities, Admati and Hellwig (and hence Yglesias and Olive) believe that the real solution involves forcing banks to maintain much more capital as a cushion against losses. They suggest a capital ratio of 20-30%, which is about twice as much as even the best-capitalised banks currently maintain, and much higher than the target capital ratios that the Basel III guidelines aim to achieve by the end of the current decade.
I haven't read Admati and Hellwig's book, but I strongly suspect that David Olive's take on their ideas does not do them justice. Olive seems to believe that it would be very simple to get bank shareholders to pony up more cash, even while curbing dividend payouts (he appears to think that retained earnings are free money) and curbing the banks' riskier (but also more profitable) activities.
It seems highly unlikely that this would be true. Nobody has to own bank shares; skewing the risk/reward ratio so markedly against the equity holders would make it difficult and expensive to attract the extra capital that the banks would be required to hold. Olive doesn't seem to see this at all; Yglesias does, and acknowledges that it would "give a different shape to the real economy" by making borrowing more expensive for some (consumers, small businesses) but cheaper for others (governments, corporates). Yglesias may well be right about this, but the dislocation involved in getting from here to there, so to speak, may well be enough to deter regulators from adopting Admati and Hellwig's ideas.
I found myself a bit puzzled when reading David Olive's take on all this, because Canada avoided the worst of the financial crisis, and its banking system is seen as one of the safest in the world. I became even more puzzled when I started to look at some of the numbers Olive tosses about regarding banks' current capitalisation, numbers which seem to be the product of his own "research".
Olive says that banks maintain "microscopic" capital ratios of only 3%, and that rather than retaining earnings, they blow them out to shareholders, mainly in order to boost the share price, on which (he asserts) management's compensation is based. They then make up for the lack of capital by borrowing too much.
I just took a look at the 2012 annual report and Q1 quarterly statement for my old alma mater, TD Bank Group. Admittedly TD is an exceptionally well-run bank, but it's not atypical within the Canadian financial system -- and its numbers bear no resemblance whatever to those Olive is throwing around. Capital ratios? TD's Tier 1 ratio is 10.9% and its total capital ratio is 14.2%, far above the 3% that Olive seems to have grabbed out of thin air. Retained earnings? Well, of the C$ 6.4 billion in "income attributable to shareholders" earned by TD in 2012, only $2.6 billion was paid out in dividends. The rest, $3.8 billion or 60% of the total, was added to capital as retained earnings. Too much debt? TD's equity at book value stood at $47.5 billion at the end of fiscal 2012, against $11.3 billion in subordinated notes and debentures -- and that debt total, by the way, has been falling steadily in recent years.
There's a strong case to be made for tighter regulation of banks, but it's not helped by columnists inventing numbers in a crazed effort to show how bad the current situation is. That just makes it easier for the banks to push back. I'd be very surprised if David Olive doesn't find a stack of messages on his Blackberry from the CFOs of the big Canadian banks, looking to set him straight on a few things.
* I'm not accusing anyone of plagiarism -- credit is given where credit is due by both Olive and Yglesias.
Friday 15 March 2013
David Cameron disses the Pope
Egged on by who else but The Daily Mail, British PM David Cameron has renewed his tilt towards populism by taking issue with Pope Francis's views on the Falklands/Malvinas. While he was still Archbishop of Buenos Aires, His Holiness opined that the UK had "usurped" the islands. Cameron says that the Pope is wrong about this. Hey Dave, don't you know the Pope is infallible?*
Cameron cracked a laboured white smoke joke while referring to the recent referendum in which the islanders were asked whether they wished to remain a UK protectorate. In the kind of result not usually seen outside North Korea, 99.8% responded in the affirmative. Take that, Francis!
I've written about the Falklands/Malvinas before. Argentina's claim is based solely on geography, as its peoples have never inhabited the islands on a continuous basis. Even the name is French rather than Spanish in origin: it was imparted by fishermen from St Malo. The UK's claim is based on continuous occupation, but that occupation, whether Cameron likes it or not, initially took place in the era of colonialism. Now the UK attitude echoes that of Ronald Reagan when he talked about the Panama Canal: "It's ours. we stole it fair and square."
Here's the thing about that referendum result. If you take a bunch of your citizens, plunk them in a faraway place, turn that place into an armed camp and pump in prodigious amounts of taxpayers' money, how else would you expect them to vote? Before Argentina attempted to invade the islands back in 1981, the Thatcher government had actually been considering ways of accommodating Buenos Aires's demands. The invasion served to harden British attitudes, and they have shown no sign of softening even slightly in the past three decades. With UK politics starting to move into pre-election mode, it's going to take a lot more than a pronouncement from the Pope to change that.
* I'm joking. Catholic doctrine is that the Pope is only infallible when speaking ex cathedra on doctrinal matters. His opinions on the weather or on politics are no better or worse than anyone else's. Since the doctrine of infallibility was promulgated in the mid-19th century, the cumulative number of infallible pronouncements made by all subsequent Pontiffs is....one.
Cameron cracked a laboured white smoke joke while referring to the recent referendum in which the islanders were asked whether they wished to remain a UK protectorate. In the kind of result not usually seen outside North Korea, 99.8% responded in the affirmative. Take that, Francis!
I've written about the Falklands/Malvinas before. Argentina's claim is based solely on geography, as its peoples have never inhabited the islands on a continuous basis. Even the name is French rather than Spanish in origin: it was imparted by fishermen from St Malo. The UK's claim is based on continuous occupation, but that occupation, whether Cameron likes it or not, initially took place in the era of colonialism. Now the UK attitude echoes that of Ronald Reagan when he talked about the Panama Canal: "It's ours. we stole it fair and square."
Here's the thing about that referendum result. If you take a bunch of your citizens, plunk them in a faraway place, turn that place into an armed camp and pump in prodigious amounts of taxpayers' money, how else would you expect them to vote? Before Argentina attempted to invade the islands back in 1981, the Thatcher government had actually been considering ways of accommodating Buenos Aires's demands. The invasion served to harden British attitudes, and they have shown no sign of softening even slightly in the past three decades. With UK politics starting to move into pre-election mode, it's going to take a lot more than a pronouncement from the Pope to change that.
* I'm joking. Catholic doctrine is that the Pope is only infallible when speaking ex cathedra on doctrinal matters. His opinions on the weather or on politics are no better or worse than anyone else's. Since the doctrine of infallibility was promulgated in the mid-19th century, the cumulative number of infallible pronouncements made by all subsequent Pontiffs is....one.
Wednesday 13 March 2013
Vatican's got talent
As a so-called "cradle Catholic" I've been bemused by the wall-to-wall media coverage of the current Papal Conclave. Hasn't the Church supposedly spiralled down into irrelevance in recent decades? Many of the TV channels have a little pop-up screen in the corner of their programmes, with a camera focussed on the Sistine Chapel chimney; amazingly, at least one channel (CNN) is keeping this pop-up in place even during ad breaks. The CBC's venerable Peter Mansbridge, enjoying a jolly in the Eternal City while covering the event, told his audience that he has never in his long career seen so many cameras and reporters gathered in one place.
At first I though that the interest was all down to the unusual circumstances of Pope Benedict's resignation. There has been speculation that he quit as a result of some sort of looming scandal, involving either sex or money (very Downton Abbey!), so people may be hoping to hear all the gory details once a new Pontiff is in place.
From my reading of the media, though, I now think there's a simpler and more trite explanation: the Conclave, for most people, is no more than the latest reality show. That seems a bit unbecoming for so solemn an event, but as reality shows go, the Conclave has at least two real pluses: (1) it actually is real; and (2) there's no sign of either Simon Cowell or Nicki Minaj.
Footnote, March 14: the Canadian papabile, Marc Ouellet, didn't get the job, but the ever-parochial Toronto Star has still managed to find a local angle: a Toronto businessman called Francis Pope! Who is, of course, listed in the phone book as "Pope, Francis".
At first I though that the interest was all down to the unusual circumstances of Pope Benedict's resignation. There has been speculation that he quit as a result of some sort of looming scandal, involving either sex or money (very Downton Abbey!), so people may be hoping to hear all the gory details once a new Pontiff is in place.
From my reading of the media, though, I now think there's a simpler and more trite explanation: the Conclave, for most people, is no more than the latest reality show. That seems a bit unbecoming for so solemn an event, but as reality shows go, the Conclave has at least two real pluses: (1) it actually is real; and (2) there's no sign of either Simon Cowell or Nicki Minaj.
Footnote, March 14: the Canadian papabile, Marc Ouellet, didn't get the job, but the ever-parochial Toronto Star has still managed to find a local angle: a Toronto businessman called Francis Pope! Who is, of course, listed in the phone book as "Pope, Francis".
Monday 11 March 2013
Employment mysteries
For much of 2011 and 2012, there was a surprising disconnect between UK economic growth data and developments in the labour market. Although GDP was stagnant or even falling slightly, the economy was creating jobs quarter after quarter, with a good proportion of the new positions arising in the private sector. There was a lot of criticism at the time of the ONS's estimation methods, and suggestions that the GDP data would eventually be revised higher.
This is indeed what has happened: it now transpires that the UK never really experienced a double-dip recession, though this hasn't deterred parts of the media from continuing to talk of a potential triple dip. The growth data are particularly interesting in light of last week's estimate from the Office of Budget Responsibility, the government's "independent" forecasting body, that the Coalition's clumsy and ineffective attempt to impose fiscal austerity since 2010 has cut almost 1.5 percentage points from GDP.
Remarkably, something similar now seems to be happening here in Canada. Job creation was reasonably robust for most of 2012, yet when GDP data for the final quarter of the year were released late last month, they showed an annual growth rate of only 0.6%. Always quick to react to a single data reading, the nation's economists promptly downgraded their employment forecasts, only to be blindsided by the official employment data for February, which showed a 51,000 increase in the number employed. Employment has risen by 1.9% in the past year.
As was the case earlier in the UK, most of the new jobs in the latest Canadian data were full time, and more than half were in the private sector. Economists are fond of describing employment as a lagging indicator: for a variety of reasons*, changes in employment tend to come some months after changes in growth. That being the case, a strong increase in employment coming just a few months after a sharp slowdown in growth is surprising. As in the UK, there must be a strong likelihood that the Canadian GDP growth numbers will be revised higher in due course.
The really interesting question, of course, is why these discrepancies between growth and jobs are happening. Someone with a lot more analytical firepower than I will have to work on that one, but I strongly suspect that the techniques used by the official statistical agencies to estimate output are failing to keep up with the increasing involvement of the internet in all aspects of the modern economy.
* Companies don't fire people at the first sign of a downturn in business, in case the downturn proves temporary and they have to hire them back at higher wages later. Similarly, when demand starts to grow, companies initially try to get more output from their existing employees, and only add staff when they think the upturn is reasonably permanent.
This is indeed what has happened: it now transpires that the UK never really experienced a double-dip recession, though this hasn't deterred parts of the media from continuing to talk of a potential triple dip. The growth data are particularly interesting in light of last week's estimate from the Office of Budget Responsibility, the government's "independent" forecasting body, that the Coalition's clumsy and ineffective attempt to impose fiscal austerity since 2010 has cut almost 1.5 percentage points from GDP.
Remarkably, something similar now seems to be happening here in Canada. Job creation was reasonably robust for most of 2012, yet when GDP data for the final quarter of the year were released late last month, they showed an annual growth rate of only 0.6%. Always quick to react to a single data reading, the nation's economists promptly downgraded their employment forecasts, only to be blindsided by the official employment data for February, which showed a 51,000 increase in the number employed. Employment has risen by 1.9% in the past year.
As was the case earlier in the UK, most of the new jobs in the latest Canadian data were full time, and more than half were in the private sector. Economists are fond of describing employment as a lagging indicator: for a variety of reasons*, changes in employment tend to come some months after changes in growth. That being the case, a strong increase in employment coming just a few months after a sharp slowdown in growth is surprising. As in the UK, there must be a strong likelihood that the Canadian GDP growth numbers will be revised higher in due course.
The really interesting question, of course, is why these discrepancies between growth and jobs are happening. Someone with a lot more analytical firepower than I will have to work on that one, but I strongly suspect that the techniques used by the official statistical agencies to estimate output are failing to keep up with the increasing involvement of the internet in all aspects of the modern economy.
* Companies don't fire people at the first sign of a downturn in business, in case the downturn proves temporary and they have to hire them back at higher wages later. Similarly, when demand starts to grow, companies initially try to get more output from their existing employees, and only add staff when they think the upturn is reasonably permanent.
Friday 8 March 2013
Spending our children's inheritance
The baby boom generation, of which your blogger is a member, shows no signs of amending its profligate ways. A study last month by TD Economics (disclosure: I worked there about 30 years ago) revealed that while younger Canadians were reining in their debts in response to dire warnings from policymakers and others, the older generation was continuing to get further into hock. Although the average level of debt among seniors is lower than for the population as a whole, the entirely predictable is starting to happen: bankruptcies among seniors are on the rise, according to official data.
What a wonderful generation we are! For years, we've been demanding generous social programmes that we have no intention of paying for, leading governments to pile up debts that future generations will have to pay back. And now it seems that increasing numbers of us are stiffing our creditors, rather than making any effort to live within our means.
Years ago, I remember hearing, I think from the Chief of one of Canada's First Nations, something to the effect that "the role of government is to represent the future to the present". Fat chance of that while the baby boomers are in charge.
What a wonderful generation we are! For years, we've been demanding generous social programmes that we have no intention of paying for, leading governments to pile up debts that future generations will have to pay back. And now it seems that increasing numbers of us are stiffing our creditors, rather than making any effort to live within our means.
Years ago, I remember hearing, I think from the Chief of one of Canada's First Nations, something to the effect that "the role of government is to represent the future to the present". Fat chance of that while the baby boomers are in charge.
Tuesday 5 March 2013
Practice what you preach
The Toronto Star is a remarkable newspaper. For one thing, it's tremendously parochial -- no story is likely to receive front page coverage unless the paper can dig out a Toronto angle, however tenuous. And it's unapologetically left/liberal, constantly editorialising against unbridled capitalism, deficit reduction, the hollowing out of the Canadian economy as a result of globalisation, the erosion of workers' rights and so on. A friend of mine used to call it "Pravda", which sometimes doesn't seem like too much of an exaggeration.
So you'd think that yesterday's announcement of the loss of 55 skilled jobs in Toronto, as a result of a corporate decision to outsource, would be just the kind of story that the Star would pounce on and splash on the front page. The Star's main rival, the Globe and Mail, certainly thought so, giving the story prominence on its website.
Thing is, though, the corporation doing this dastardly deed was none other than the Star itself, which is contracting out a lot of its compositing functions in order to save money. The Star only found room to print the story in a small column at the bottom of the back page of its business section -- and in today's paper, that whole section, which is normally free-standing, was tucked in after the hockey scores, at the back of the sports section. How strange.
So you'd think that yesterday's announcement of the loss of 55 skilled jobs in Toronto, as a result of a corporate decision to outsource, would be just the kind of story that the Star would pounce on and splash on the front page. The Star's main rival, the Globe and Mail, certainly thought so, giving the story prominence on its website.
Thing is, though, the corporation doing this dastardly deed was none other than the Star itself, which is contracting out a lot of its compositing functions in order to save money. The Star only found room to print the story in a small column at the bottom of the back page of its business section -- and in today's paper, that whole section, which is normally free-standing, was tucked in after the hockey scores, at the back of the sports section. How strange.
Saturday 2 March 2013
Clouds over Canada
What with the endless problems in the Eurozone, the UK's ham-fisted attempts at austerity and the fiscal woes in the US, the state of Canada's economy hasn't been getting much attention in the international media in recent times. After all, good news is no news, right? Canada's banks made it through the financial crisis unscathed, and energy development in the western provinces is making up for slackness elsewhere, so what's to worry about?
Quite a bit, as it happens:
* All is not well in the energy patch. Rising shale oil production in the US is cutting into demand for Alberta oil sands crude, which is relatively heavy. As a result, producers are being forced to sell their product at hefty discounts to prevailing world prices. This has pushed the Province of Alberta, where the phrase "saving for a rainy day" seems never to have been heard, into a budget deficit.
* The Keystone XL pipeline, which would provide an improved outlet for oil sands product, remains in doubt, even though the most recent State Department assessment seems to suggest it would not add to pollution levels. Alternative schemes to move Alberta oil to Eastern Canada through existing pipelines are facing equally determined opposition from environmentalists.
* Although it's been weakening in recent weeks, the Canadian dollar has been at or above par with the US dollar for several years, which has put renewed pressure on the manufacturing sector. That sector was dramatically "hollowed out" years ago as a result of free trade and globalisation, and the strong exchange rate seems to be finishing the job. This is particularly significant for Ontario, the most populous province in the country, which is now bizarrely regarded as a "have not" jurisdiction!
*Despite low interest rates, the housing market in most parts of the country is going nowhere, although Vancouver remains an exception. One thing low rates have done is to encourage frenzied condominium building in Toronto, which has more skyscrapers under construction than any city in the world apart from Shanghai. It bears all the hallmarks of a disaster waiting to happen, especially when interest rates eventually start to rise.
*Lastly, the imminent departure of global central banking superstar Mark Carney from the Bank of Canada for the bigger job at the Bank of England adds a fresh layer of uncertainty at an inopportune moment. It looks as though an internal candidate, deputy governor Tiff Macklem, will get Carney's job, but a search firm is currently looking around for suitable outside candidates for the government to consider.
Given these headwinds, it's no surprise to learn that the Canadian economy grew at only a 0.6% annualised rate in the final quarter of 2012, with particular weakness evident in the month of December. It all adds up to a challenging backdrop for the Federal budget in a few weeks time. You might think that the government would want to avoid making the economy's problems any worse at such a juncture, but it seems you'd be wrong. Cheerful, potato-faced Federal Finance Minister Jim Flaherty says that because the slowdown in the economy has reduced revenues, he's going to have to look at further spending cuts in order to get the government's deficit reduction plans back on track. He can hardly have failed to notice how that approach has backfired badly in the UK, but then, nobody ever learns from other people's mistakes, do they?
Quite a bit, as it happens:
* All is not well in the energy patch. Rising shale oil production in the US is cutting into demand for Alberta oil sands crude, which is relatively heavy. As a result, producers are being forced to sell their product at hefty discounts to prevailing world prices. This has pushed the Province of Alberta, where the phrase "saving for a rainy day" seems never to have been heard, into a budget deficit.
* The Keystone XL pipeline, which would provide an improved outlet for oil sands product, remains in doubt, even though the most recent State Department assessment seems to suggest it would not add to pollution levels. Alternative schemes to move Alberta oil to Eastern Canada through existing pipelines are facing equally determined opposition from environmentalists.
* Although it's been weakening in recent weeks, the Canadian dollar has been at or above par with the US dollar for several years, which has put renewed pressure on the manufacturing sector. That sector was dramatically "hollowed out" years ago as a result of free trade and globalisation, and the strong exchange rate seems to be finishing the job. This is particularly significant for Ontario, the most populous province in the country, which is now bizarrely regarded as a "have not" jurisdiction!
*Despite low interest rates, the housing market in most parts of the country is going nowhere, although Vancouver remains an exception. One thing low rates have done is to encourage frenzied condominium building in Toronto, which has more skyscrapers under construction than any city in the world apart from Shanghai. It bears all the hallmarks of a disaster waiting to happen, especially when interest rates eventually start to rise.
*Lastly, the imminent departure of global central banking superstar Mark Carney from the Bank of Canada for the bigger job at the Bank of England adds a fresh layer of uncertainty at an inopportune moment. It looks as though an internal candidate, deputy governor Tiff Macklem, will get Carney's job, but a search firm is currently looking around for suitable outside candidates for the government to consider.
Given these headwinds, it's no surprise to learn that the Canadian economy grew at only a 0.6% annualised rate in the final quarter of 2012, with particular weakness evident in the month of December. It all adds up to a challenging backdrop for the Federal budget in a few weeks time. You might think that the government would want to avoid making the economy's problems any worse at such a juncture, but it seems you'd be wrong. Cheerful, potato-faced Federal Finance Minister Jim Flaherty says that because the slowdown in the economy has reduced revenues, he's going to have to look at further spending cuts in order to get the government's deficit reduction plans back on track. He can hardly have failed to notice how that approach has backfired badly in the UK, but then, nobody ever learns from other people's mistakes, do they?
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