A weekend topic starting with an editorial by Paul Krugman. “I’m in Spain right now, talking about zombie ideas — ideas that should have been killed by evidence, but just keep lurching along. And as it happens, the experience of Europe, and Spain in particular, provides some of the bullets we should be using to shoot these particular zombies in the head. So let’s start with the origins of the 2008 financial crisis, a topic that remains relevant if we want to avoid repeating past mistakes.”
“Although few saw 2008 coming, in retrospect it was a classic banking panic, the type of thing that happened frequently before the 1930s. First, lenders got caught up in a gigantic housing bubble; then, when the bubble burst, much of the financial system just froze up. What made this panic possible, after two generations of relative financial calm? The answer, clearly, was the erosion of effective financial regulation over the previous few decades.”
“At this point the evidence against the liberals-did-it story is overwhelming. The surge in bad loans came neither from government-sponsored agencies nor from regulated banks, but from unregulated mortgage originators. The fallout was so severe because investors believed, wrongly, that fancy financial instruments protected them from risk. And, crucially, the housing bubble was an international phenomenon: Spain had a bigger bubble than we did, followed by a worse slump. Did U.S. liberals force Spanish banks to make bad loans?”
“But zombie ideas can’t be killed by evidence. Perpetrators of the liberals-did-it lie are still out there, still getting space to spread their disinformation in mainstream media.”
From Yahoo Finance. “The Federal Reserve is lending financial markets an ear – albeit cautiously – about the potential impact of unconventional monetary policy tools that it may use in the next economic downturn. Fed officials acknowledged Friday that new policies deployed around the world, such as negative interest rates and yield curve control, are raising questions about possible distortions in financial conditions.”
“At the core of the debate: whether or not market expectations drive Fed policy or the other way around. Former Fed Chairman Ben Bernanke described the dilemma as a ‘hall of mirrors,’ in which policymakers read asset prices while simultaneously trying to guide markets on future moves. But uncertainty about what these new policies would do to financial markets sparked debate at the conference over how carefully policymakers should trend when using these tools.”
“A conference paper entitled ‘Monetary Policy for the Next Recession’ encouraged policymakers to be fearless in deploying those tools. The paper concluded that new monetary policy tools, ranging from negative interest rates to quantitative easing, did not appear to ease financial conditions overall. But the paper also noted that inflation risks also did not appear to materialize. ‘We view the limited success in easing financial conditions in the face of global headwinds as a justification for more activist policy, not less,’ the paper read.”
From the Globe and Mail in Canada. “The ‘fear of missing out’ that set the Greater Toronto Area’s real estate market ablaze in early 2017 appears to have flared up again in 2020. First-time buyers are competing vigorously for one-bedroom and two-bedroom units at prices up to $1-million. In Little Portugal, a one-bedroom unit received 32 offers. Real estate agent Al Daimee of Royal LePage Signature Realty has been shocked by the ‘really rapid action’ in the condo market so far in 2020. ‘It feels a lot like 2017.’”
“Just as it was in the first quarter of 2017, the market today is characterized by frenzied competition for properties and run-away prices.”
The Canadian Press. “So much for the adult supervision of our housing market. The federal government was onto a good thing when it introduced a stress test for home buyers a few years ago that demanded they be able to afford mortgage payments if interest rates spiked higher. The stress test was tough, but all in a good cause, in that it limited the risk of people buying more house than they could properly afford.”
“Starting April 6, the stress test will get easier for insured mortgages, which typically means the buyer has a down payment of less than 20 per cent. An already hot market in many cities is getting more stimulus through the easier stress test. Prices will rise, affordability will fall and more people will buy homes they can just barely afford. Wait until they add kids, cars and rooms full of furnishings.”
“The housing industry has hammered the stress test for being too harsh and for ruining the home-ownership aspirations of young first-time buyers. Just as this argument was weakening amid strong sales, the federal government has stepped in to make it easier to buy a home. The revamped stress test is better in some ways than what it replaces – more commonsensical and responsive to what’s actually happening to interest rates in the here and now. But the toughness of the current test is what’s needed as housing mania reawakens in many cities.”
Two from Domain News in Australia. “First-home buyers are pressing ahead with their dreams of home ownership, rushing to buy in inner and middle-ring suburbs as rapid price growth threatens to push them further out of reach. The number of first-home buyers jumping into the market and how much they are prepared to borrow has soared in recent months, as Sydney prices continue to rebound. ‘There’s definitely a fear of missing out,’ said Tom Scarpignato of Belle Property Neutral Bay. ‘There are people who are feeling like they’ve missed the boat or are going to if they don’t purchase straight away. I don’t know where that’s come from.’”
“First-home buyer numbers in NSW are at their highest level since 2012, the latest lending figures from the Australian Bureau of Statistics show, while the average loan size in December was up more than 15 per cent year-on-year. Stamp duty exemptions and concessions for first-home buyers – for properties up to $650,000 and $850,0000 respectively – were also up more than 25 per cent, state government figures show.”
“Sydney first-home buyers have also been quick to take up the federal First Home Loan Deposit Scheme that was launched this year, which enables them to purchase with as little as a 5 per cent deposit.”
“Thousands of home buyers could be forced to sell their home as they find themselves under financial strain when the interest-only period of their mortgages comes to an end. Interest-only loans are usually offered for five years by Australian lenders, meaning those who borrowed in the 2015-16 calendar year will now have to pay the principal (the actual loan amount) plus interest when the change kicks in over the next year.”
“Around 730,000 interest-only loans will switch to principal-plus-interest this year across the country, an analysis of data by finance comparison service Finder has found. That equates to around $292 billion in mortgages. Finder’s Insights manager Graham Cooke said the average loan size was around $395,000 in 2015 and 2016, meaning at today’s interest rates of 4.8 per cent, home owners would face paying an extra $3600 a year – or $300 per month – on that amount.”
“‘Owner-occupiers or investors who borrowed more are in for a bigger surprise, with the increased cost for a $1 million loan clocking in at a huge $789 per month, or $9468 annually,’ Mr Cooke said.”
The New York Post. “The view while flying over Cambodia from the inland tourist mecca of Siem Reap to the coast is jarring: The national forests that once held Asian tigers, elephants, leopards, bears and other endangered species have been replaced by scarred, deforested industrial landscapes. And where was the beach paradise I was expecting when I landed? Cambodian coastal cities like Sihanoukville and Kampot may have made The New York Times’ ’52 Places to Go’ list, but for people who have actually made the trek, it’s a depressing destination strewn with garbage and overrun with construction.”
“‘It’s awful,’ Australian tourist Andrew Walker told me. He’d visited Sihanoukville a decade ago and was so taken with it he brought his girlfriend back for a holiday. ‘But it’s all gone now — just a bunch of casinos, whorehouses and hotels.’”
“Much of the demolition is coming via Chinese ‘investment.’ Since 1994, China has injected $17.5 billion into Cambodia — much of which has not trickled down to Cambodians — and locals say the business-friendly term is a euphemism for ‘China buying us,’ a local taxi driver told me. And it’s not just Cambodia. China’s ‘Belt and Road’ global development strategy spans Africa and Asia, and detractors say it lures poor countries into debt traps and contributes to environmental disasters while leaving locals high and dry.”
“I went to Kampot a little over a year ago to visit the Bokor Hill Station — a legendary ghost town in Preah Monivong National Park that was a French colonial luxury retreat in the first half of the 20th century. I was expecting a historic site in the middle of a lush jungle. Instead, I found much of the park had been bulldozed, and new cities rising from the razed forests. Landslides had occurred a week before, covering parts of the newly built road.”
“‘They are all for the Chinese,’ said my local guide Kary, whose full name is being withheld because he fears government retribution. In the past two years, the Cambodian government has dissolved opposition parties and cracked down harshly on any press that is not supportive of the country’s leader, Hun Sen, a former member of the Khmer Rouge who has been in power now for 31 years and insists on being called Lord Prime Minister and Supreme Military Commander. The situation is so bad that the European Union announced this week that it is pulling the country’s trade privileges due to human rights offenses.”
“Large swaths of once-pristine land now house hundreds of neo-classical condos — with Chinese signage and a Chinese guard outside the entrance. ‘If you are not Chinese, you are not allowed in,’ Kary said. As I took a video of the housing, a guard shooed us away. At the entrance to the Bokor Hill Station is a huge building, ‘the Bokor Development Master Plan Development Zone 1&2 Showroom,’ which displayed a huge dusty model of what the forest was to be turned into. The display showed six hills that were to be razed and covered in luxury housing in a country where the average salary is $1,300 a year.”