Real Estate, Canada, and the Economy oh my!

Real Estate, Canada, and the Economy oh my!
By Alex Merced



In this article what I’d like to discuss is the problems with the logic put forth as the justification for all the government intervention in the economy primarily in real estate. So first let’s discuss the reason why the government thinks it’s prudent to prop up housing prices.



Small Business is the driver of job growth, most small businesses expand based on loans backed by assets such as houses, so by propping up house prices it helps businesses borrow and expand to create jobs.

As usual, mainstream economists and politicians babble out half truths based on bizarre assumptions. Yes, it’s true small business drive economic growth (analogy: who’s going to grow more, an adult or child, similar logic), and yes it’s true small business usually need personal guarantees and collateral to get loans as they establish credit for their company.

So now that we see on what we agree, let’s talk about the weird assumptions. First off, housing aren’t the only assets that can be used as collateral, this emphasis on housing has caused some business owners to not have a diverse portfolio of assets with which to secure a loan for their business. If their wasn’t so much incentives to invest in housing some of their investment capital would go into other assets such as securities, commodities and other things that can be borrowed against and hedges the business owner in case of a dip any particular asset class.

Also, it’s weird to assume banks won’t realize that if prices are propped up and that they'll just be completely ignorant to the fact the prices are unsustainable and the collateral obviously insufficient for the kind of loans people took out before prices collapsed. If anything, having this knowledge and not being able to determine it’s true market value due to intervention would make banks even more hesitant and worried to make the loan fearing the eventual depreciation of the assets.

If prices were allowed to fall, eventually other prices in the economy would drop and the lower amount of money you can borrow against real estate at current prices would still have a similar purchasing power over time.



INTERESTING FACT: Canada allows for short term mortgages with recourse, and doesn’t have many of the incentives to invest in housing as the US yet has higher home ownership rates than the US.

While it’d be hard to say definitely why, I would theorize that due to all the investment incentives artificially placed on the US market drove speculators to have an unhealthy advantage in buying lots of property. So while many investors accumulated large swaths of the American real estate supply, this had pushed up the price so much deterring the ability for other non-speculators to participate. Once again, Canada shows how it surpasses the US with less intervention. Another similar scenario is in the early 1900 when both countries had no central bank and the US had frequent bank panics yet Canada did not, the major different being the US imposed severe branching restrictions on its banks while Canada did not. So while many focus on Canada’s universal healthcare to claim it as a “socialist” country, it’s much more free market than the US in terms of banking and real estate and has had more sustainable and stable economy for it.

Big Government (or any Government) Will Never Lead to Prosperity

Big Government (or any Government) Will Never Lead to Prosperity
by Alex Merced

What we constantly get told in some form or other, is that you need government for things to work... but in all reality things work in spite of government. It's like when your a kid and you want something, all the rules in the world won't stop you from trying.

For Example, two countries that are catching up very quickly if not surpassing the US and Europe in economic power are China and India, arguably their governments are bigger and more coercive in scope of control. You can take the economist approach and see that spending as a share of GDP is vastly less than the US, but what I want to take a look as is the rules they govern with, not so much the spending.

China: By having it's non-democratic central government, the current leadership in China has LIBERALIZED a lot of it's economic policy and up until recently has focused on having a savings economy. While it's intervention in the supply of savings has and will cause problems, it couldn't of done it without somewhere to invest those savings in which the US more than glad to play the role which arguably leads to more problems for the US as the Spending economy. Another aspect to take a look at is Hong Kong, once the best bastians of Free Marketeering on the globe which played it's role in sparking the economic growth in the region if not being the Seed that grew into it.

India: This country is known for some of the largest amount of red tape and barriers to entry of any country, with buildings filled with stacks of pending applications for all sorts of things. Yet no one can honestly make the argument that the excessive beuracracy has led to it's quickening growth. So while the same type of Liberalization we see in China isn't in india, a system of corruption and bribery has developed to supercede the beuracracy and foster a freer market... essentially a black market for merely "permission" to enter and participate in commerce.

People will never be diverted from purposeful action no matter what the rules, every rule in the US either eventually is found to have loophole or has some built into it initially. What keeps people honest is their respect for boundries which comes from their own self developed ethical framework. So if we care about what people do in their social and business lives we may affect more change by discussing principles to live life by than about which rules we should establish that people will ignore if their principles allow.

How to repair a bankrupt country

How to repair a bankrupt country
By Alex Merced

Well continuing with the balance sheet analogy of my previous post, how does a bankrupt company survive bankruptcy and what is bankruptcy. In order for a company to survive it must have enough assets to pay of it's creditors which are part of it's liabilities, if it can't do this (which means there's no more equity) then the company must go into bankruptcy. In bankruptcy the company will attempt to do a few things:

1. Try to restructure the terms of it's liabilities
2. Try to exchange liabilities in exchange for Equity
3. If possible to see if people will forgive debt (wouldn't bet on this)

So basically for a country as the economy shrinks to the point where there is little to no private sector and just a public sector this is an economy in bankruptcy. So how would we use the bankruptcy approaches above to fix this problem?

1. Restructure the costs of the Public Sector by lower wages, laying off excess public workers, and lowering the amount budgeted to parts of the private sector.
2. Turn some public programs into privately run services or programs which allow entrepreneurs to find ways to provide the same service in a profitable and cost efficient way, without the moral hazard that running at a perpetual loss a public program can cause.
3. Or completely end programs and services who's costs can't be reduced and can't be privatized.

All three of these actions will result in more resources for a larger private sector means for a resilient and vibrant economy as I described in the previous post. In a country like the US that is quickly growing into this bankruptcy scenario it's time to start advocating drastic measures like this before it's too late.