Borrower-Friendly Mortgages and Mortgage Interest Deductibility:Two Key Differences

Harry Koza, from the Altantic Institute for Market Studies, does everyone a great service by summarizing the two major differences between US and Canadian borrowing/financial system.

Mr. Krugman states that Canada’s advantage has been in being stricter about limiting bank leverage, and that’s true. But he then blames Reagan-era deregulation for the “dangerously interesting” US banking system and suggests that the wild American banking mustangs must thus be broken to the regulatory bit.

The thing is, in his Keynesian enthusiasm, he is neglecting the most important qualities of the Canadian financial system, the things that really made the difference and account for the fact that we didn’t have a US-style housing collapse and have to bail out our entire banking system. The stuff he cites in his column is all correct, as far as it goes, but it’s just the feathers, not the chicken.

The first major difference between the US and Canada that Mr. Krugman neglects is that we do not have the perverse government-spawned incentive of mortgage interest deductibility.

[...]

The second big difference in Canada that Mr. Krugman neglects to consider is that our mortgage law is far more lender-friendly than that in the US, where it is far more borrower- friendly. We don’t have no-recourse loans where you can just mail in the keys on your underwater mortgage and walk away. And, more importantly, our lenders can much more easily act on their collateral.

Bernanke’s strategy: Print And Pray

The continued ad hoc inflationary American monetary policy is becoming more and more pathetic:

However, he said only time would tell how successful the exercise was.

‘We hope that in two or three years we will be able to reflect on the banking system’s return to health with a sharply diminished reliance on government capital,’ Bernanke said.

Ben Bernanke may as well say: “Shucks, guys. We really have no idea what we are doing so we are just going to keep on printing money until…. well, until things turn around, I guess.”

Bailout bank demolishes California homes

The city of Victorville was fining the bank because the homes were unfinished. The fines were increasing daily. So, to minimize its costs, the bank — also a recipient of the bailouts, no less — demolished the brand new unoccupied homes. Feast your eyes:
Bailout bank demolishes homes
Victorville model homes demolished by bank

Somewhere in California is a poor family struggling to make ends meet so that they do not lose their home.

I remember making fun of the Soviets for playing football with loaves of bread. The American socialization of the banking system is more despicable.

1934 Chicago Tribune Political Cartoon – How Things Stay the Same

[Via The Big Picture]

Bailing Out Poorly Run Companies is Pouring Money Down the Drain

Disturbing fact of the day from the latest issue of Claremont Review of Books:

The bailouts did not create the financial meltdown, but it is a good bet that they have contributed to the depths of our current problems and the stock market sell-off. We have robbed healthy companies of funds to pour money down the rat hole of failing industries like General Motors. For the cost of all federal bailouts, we could have suspended the corporate income tax for a year, which would have been a powerful stimulant to growth.[Emphasis mine]

Obama’s Socialist Tendancies: Converting Preferred Stock to Common Stock

Dick Morris, a former adviser to Sen. Trent Lott (R-Miss.) and President Bill Clinton has some strong words concerning President Obama’s proposed plan to convert the stock the government owns in US financial industry from preferred stock, which it now holds, to common stock.

But to avoid the issue of a potential for government control of the banks, everybody agreed that the stock the feds would take back in return for their money would be preferred stock, not common stock. “Preferred” means that these stockholders get the first crack at dividends, but only common stockholders can actually vote on company management or policy. Now, by changing this fundamental element of the TARP plan, Obama will give Washington a voting majority among the common stockholders of these banks and other financial institutions. The almost 500 companies receiving TARP money will be, in effect, run by Washington.

And whoever controls the banks controls the credit and, therefore, the economy. That’s called socialism.

“Print money!” – reads just like communist nationalization

Will Hutton from The Observer says that the Bank Of England should print money, create price inflation, nationalize banks and create “good” banks:

Yet to get to such a hopeful point, the cash injected into the system in the months ahead has to be lent, spent and not hoarded. Here the government has to make three more major moves. It has to create some “good” banks fast which will close the gap left by the flight of foreign banks; it should create a National Infrastructure Bank, a Housing Bank and Knowledge Bank, all of which can raise cheap finance by Bank of England purchases of their debt. Then it has to create some demand for loans.

Maybe Hutton has a secret potion that can cure A.I.D.S., fight world poverty and stop the war too!

Abolish legal tender laws, Wall Street Journal

Wow. Some clear-headed thinking is starting to infiltrate into the main stream press:

So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust.

—SNIP—

Given that the driving force of free-market capitalism is competition, it stands to reason that the best way to improve money is through currency competition. Individuals should be able to choose whether they wish to carry out their personal economic transactions using the paper currency offered by the government, or to conduct their affairs using voluntary private contracts linked to payment in gold or silver.

There may be hope yet.

Greenspan makes a plea for crony capitalism

Greenspan, “who for decades was regarded as the high priest of laisser-faire capitalism,” now makes an about-face and throws a buoy out to corporate welfare:

The former Fed chairman said temporary government ownership would ”allow the government to transfer toxic assets to a bad bank without the problem of how to price them.”

But he cautioned that holders of senior debt – bonds that would be paid off before other claims – might have to be protected even in the event of nationalisation.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”

I do not think that cronyism can get less subtle. Some guy thinks that Greenspan “seems to be changing his views incrementally.”

Of course, Greenspan is never going to assume any blame for inflating the money supply. Here is how he deflects things:

Responding to questions after the speech, Greenspan blamed insufficient regulatory oversight in part for failing to recognize the degree of risk that was accumulating in the banking system.

‘Behind the Curve’

“The regulatory structures, especially internationally, were way behind the curve,” he said.

He is just singing the same old socialist song: any problem is a result of a lack of regulatory oversight blah blah blah. That is what the socialists want to hear. We need more government.

Well, Mr. former-Chairman of the Fed, did those regulatory structures just creep up on us all of a sudden? I think not. Even if a lack of regulatory oversight is the source of the problem, it is still your fault. You should not have been so loose with the money supply. The source of the problem is the printing of money which fuels malinvestment.

This is an astounding economic experiment to witness. Unfortunately, we have to endure it. This must really confuse the socialists. On the one hand, they are getting their state control in the financial market but on the other hand, it is the rich crony elite who are benefiting and not the proletariat. God help us! Are the Americans just making economic policy up as they go along? Throwing money around willy nilly until the only strategy left is to nationalizing the banks! Cui bono?

EndTheRecession.org misses the boat

At EndTheRecession.org, very astute observations of the structural flaws of modern central banking are made but the author offers silly solutions:

So what should we do now?
We need to prevent the banks from creating money every time they create a loan. We need to change the rules of banking to prevent the end the system under which, the more debt we get into, the more money the banks have available for lending!

Basically, his solution is to change the regulations in the money markets preventing lenders from lending in excess of their reserves. I am not sure people want that. They might want that but with regulations, we would never know. All we know now is that with a central bank providing loose credit and a history of inflating the money supply, consumers take loans. Can we trust bureaucrats to know what is good for us? I would not expect them to help worth a damn.

Whether we like it or not, we can not separate the creation of money from the creation of loans. That is part of the inherent nature of money and consumers demand that to a degree. Likewise, we can not separate entrepreneurship and capital growth from risk.

If you take away government guarantees from the money markets, there still might be customers willing to deposit their money in the banks that lend in excess of their reserves — possibly in exchange for higher interest rates or lower transaction fees or both. The future is never certain. Some people may want to take risks more than others. Those people should be free to do so at their own expense. The true problem with modern central banking is that the risks taken by lenders is often borne by tax-payers in the form of bail-outs, insurance and price inflation.

I think a wiser and more responsible solution is to stop central banking altogether, leave markets alone and let them fend for themselves. If governments stop insuring commercial loans and the central banks stop printing money entirely — even if it is only 5% of the over-all supply — the banks will be more diligent in how they lend money. Simply put, they will not have any other choice. Any mistakes that the banks make will be borne by their customers as it should and not by the lowly tax-payer.

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