Canadians Sitting on Cash Mountain

[OddSox]

I read it the exact same way as you: PR from the bank industry.

When I read "Canadians have large amounts of underutilized cash and are missing out on significant investment income", what I read is "please, folks, buy some of our mutual funds and investment services."

Is anybody here actually happy with the way their investments have performed over the past several years? They were doing a pretty mediocre job with my assets before The Big Crash of last year, and I'm scared to look at my holdings ever since. And they're disappointed that people aren't investing more money with them?

People aren't investing money because investing money has produced such dismal results and people have been burned badly several times in the past decade.

Unjustified risk aversion? In light of recent events I don't think peoples' mistrust of bankers, banks, investments, and stocks is "unjustified" at all.

There are tons of ways to invest your money without dealing in a bank's mutual funds or investment services. You can set up your own online trading account, or you can invest in ETFs which don't have management fees, or you can actually invest in a business and possibly create employment while earning profits. (although there seems to be a lot of people who think 'profit' is a bad word)

Just because some bank says 'please buy our services' doesn't mean you have to. You have options if you look for them.

[Jerry J. Fortin]

So, it is obvious that you don't understand what you posted in that first post .....

Maybe try changing the subject with someone else.

At least we know that Canada is hitting the bubble phase for real estate when nonsense like the above is being spilled.

I understand what I first posted, it was in response to a post by Riverwind. My position has not changed and it is based on reality not some boot licking yes person's concept of what is best for me. By the way MSJ, I think you may find that the Canadian version of a real estate bubble has not yet happened, nor is it likely to happen. Prices don't always go up here, they tend to trend upward but there is usually a little hiccup along the way. So the most common definition of a bubble doesn't seem to apply here.

[ba1614]

We can also take the money spent and give to everyone in an across the board tax cut.

Did you ever take the time to investigate why US banks started relying on mortgage brokers and securitization in the first place? Government pressure to promote home ownership was one of the catalysts. Do you known that banks in the US are actually penalized if they don't make enough loans to minorities in the US - credit worthiness is not enough to justify loan rates that do not match the demographics in a neighborhood. To much government social engineering was one of the causes of the crises and it should not be forgotten.

Higher housing prices hurt people who are not in the market because it takes them longer to save the necessary downpayments.

And a family that works hard and pays off their mortgage gets nothing. Please explain to me why you want take more tax money from the savers who buy homes less than what they theoretically can afford and give to the spendthrifts who overextend themselves.

Cut taxes for everyone. Fairer and accomplishes the same result.

Excellent post Riverwind

[msj]

I understand what I first posted, it was in response to a post by Riverwind. My position has not changed and it is based on reality not some boot licking yes person's concept of what is best for me. By the way MSJ, I think you may find that the Canadian version of a real estate bubble has not yet happened, nor is it likely to happen. Prices don't always go up here, they tend to trend upward but there is usually a little hiccup along the way. So the most common definition of a bubble doesn't seem to apply here.

1) Just because you are unable to see the contradiction within you own post does not change the fact that it is there.

2) The Canada bubble is well under way.

Sure, it is not too bad in some parts - but in Vancouver the average price is approaching 8 times the average income (over 10 times for single homes). In Toronto it's about 5.5 (which is frothy, just less so than crazy Vancouver).

Paying 50% to 60% of your income just on mortgage payments not only looks rather American, but it makes our banking system suspect, too. After all, they aren't supposed to lend out under such circumstances.

[msj]

Did you ever take the time to investigate why US banks started relying on mortgage brokers and securitization in the first place? Government pressure to promote home ownership was one of the catalysts. Do you known that banks in the US are actually penalized if they don't make enough loans to minorities in the US - credit worthiness is not enough to justify loan rates that do not match the demographics in a neighborhood. To much government social engineering was one of the causes of the crises and it should not be forgotten.

Pretty good post except for this myth about banks being forced to loan money to people who are not creditworthy.

Before making such unfounded opinions I recommend that you read the Community Reinvestment Act.

Why?

Because it promotes bank lending to creditworthy individuals that happen to be minorities. Oh, and check your prejudices at the door.

And then, when you are finished with that, go read about all the non-bank lending companies that started going bust before the banks ("Countrywide Homes" anyone?) that were not subject to the CRA and, yet, still went for broke.

They (banks and non-bank lenders) lent to minorities and non-minorities whether they met the "3 C's of credit" rules or not (being, character, capacity, and capital).

[jdobbin]

2) The Canada bubble is well under way.

Some people think the same thing about the stock market at the moment. Once again it is closing in at 10000 on the Dow. In Canada, it is hard to say whether our market is overpriced but we are definitely influenced by the U.S. and if they plunge, so will our market.

Lots of nervousness abounds wondering if the fundamentals don't support such a recovery in the stocks.

Edited September 29, 2009 by jdobbin

[msj]

Some people think the same thing about the stock market at the moment. Once again it is closing in at 10000 on the Dow. In Canada, it is hard to say whether our market is overpriced but we are definitely influenced by the U.S. and if they plunge, so will our market.

Lots of nervousness abounds wondering if the fundamentals don't support such a recovery in the stocks.

I agree.

And their market will be going down again after an obnoxious run up.

Canada is fortunate that "peak" commodities is here.

So far, knock on wood, commodities have not declined down to their previous lows as they have in past recessions.

If it truly is "different this time" then it will help Canada weather a terrible recovery.

[jdobbin]

I agree.

And their market will be going down again after an obnoxious run up.

We know how Canadians felt after the last stock market plunge.

Canada is fortunate that "peak" commodities is here.

So far, knock on wood, commodities have not declined down to their previous lows as they have in past recessions.

If it truly is "different this time" then it will help Canada weather a terrible recovery.

Some think a recovery will send resources up higher but it will be 2010 before we see anything steady. In the meanwhile, some Canadians are praying for a North American-wide very cold winter.

[OddSox]

We know how Canadians felt after the last stock market plunge.

Some think a recovery will send resources up higher but it will be 2010 before we see anything steady. In the meanwhile, some Canadians are praying for a North American-wide very cold winter.

2010 isn't that far away. The market may dip again but I suspect the worst is over - or else it's just beginning.

[jdobbin]

2010 isn't that far away. The market may dip again but I suspect the worst is over - or else it's just beginning.

Recovery is not forecast to be rocket sled to the moon growth. And we should be wary if it is.

[Riverwind]

Before making such unfounded opinions I recommend that you read the Community Reinvestment Act.

The entire topic has lots of differing opinions. On one had you have the where activists groups like ACORN would make a lot of noise if a banks lending policies did not match what they considered to be 'fair'. In any case, I did not say that actual loans made under these programs were the ones going bad. I said that the fact that banks felt they were being pressured to meet quotas were one of the reasons why US banks started packaging mortgages into bundles and selling them off. This created a market that was later exploited by unethical brokers and investment houses.

Here is a link that tries to be more balanced in assessing the CRA http://www.city-journal.org/html/10_1_the_...ion_dollar.html

It acknowleges that the CRA is not the 'root of all evil' as claimed by some. OTOH, it also created a banking culture were banks would delegate their loan making responsibilities to social activist groups. It should come as no surprise that banks saw securitization as a good way to reduce the risk associated with these loans - a step that a crucial in creating the environment that caused the current crisis.

Edited September 30, 2009 by Riverwind

[Sir Bandelot]

Nothing will change, until the consumers open their purses. And I believe thats not going to happen very soon. The system is in a viscous negative cycle, with people buying less they are getting penalized more by their creditors, by the losses of investment in mutual funds and pension plans caused by the greedy investors clawing back every last cent they can, which only results in further retreat fir the consumer, which further hurts the investor, and so on.

[Riverwind]

This entire story line stinks of marketing by the investment industy.

Prudent financial planning requires that one maintain at least 6 months expenses in cash or near cash to deal with the unexpected. Many people have not being doing that and relied on credit for a buffer when they needed but the credit crunch, downturn and job losses have made many re-evaluate. I suspect a lot of this cash is being saved for that reason and not because people are simply 'scared of stocks'.

[Slim MacSquinty]

Tax deductible mortgages overheat the housing market and encourage irresponsible lending and borrowing practices and most definately contributed to the real estate bubble and financial collapse in the US. European credit ratios for banks are even looser than those in the US yet Europe did not suffer from a real estate bubble like the US.

As for the original point of the thread, sitting on idle money although it perhaps makes those who posses it feel more secure, it is unproductive money not being re-invested in the economy thereby not contributing to economic recovery. This of course is not good for the banks but also not good for many businesses or the rest of us.

[msj]

The entire topic has lots of differing opinions. On one had you have the where activists groups like ACORN would make a lot of noise if a banks lending policies did not match what they considered to be 'fair'. In any case, I did not say that actual loans made under these programs were the ones going bad. I said that the fact that banks felt they were being pressured to meet quotas were one of the reasons why US banks started packaging mortgages into bundles and selling them off. This created a market that was later exploited by unethical brokers and investment houses.

Here is a link that tries to be more balanced in assessing the CRA http://www.city-journal.org/html/10_1_the_...ion_dollar.html

It acknowleges that the CRA is not the 'root of all evil' as claimed by some. OTOH, it also created a banking culture were banks would delegate their loan making responsibilities to social activist groups. It should come as no surprise that banks saw securitization as a good way to reduce the risk associated with these loans - a step that a crucial in creating the environment that caused the current crisis.

1) You are getting it backwards: they thought it was a good idea to lend to people (whether minority or otherwise) while disregarding the 3 c's. Lenders (whether required to or not under the CRA) willingly lent money.

2) There is no proof that CDO's and their ilk were a direct or indirect result of banks trying to mitigate risk from the CRA.

3) If one were to take a look at the CRA one would realize that by relying on the 3 C's then there is no reason that they can't make money under the CRA and from those minorities.

But there's the rub: realizing that it is harder to make money when you are expected to consider the 3 C's of credit - well, it's just so much harder for those poor bankers, appraisers, and mortgage brokers who prefer the golden age of liar loans, infinite increases in asset prices, and passing the buck - none of which was brought about by the CRA.

[Riverwind]

2) There is no proof that CDO's and their ilk were a direct or indirect result of banks trying to mitigate risk from the CRA.

And there is no proof that a link does not exist. The crisis was caused by the culture of banking in the US. We were spared the crisis because Canadian banking culture is different. I don't think it reasonable to ignore how the CRA contributed to the toxic banking culture in the US because it allowed non-bankers to distribute mortgage money for social purposes. Edited September 30, 2009 by Riverwind

[msj]

And there is no proof that a link does not exist. The crisis was caused by the culture of banking in the US. We were spared the crisis because Canadian banking culture is different. I don't think it reasonable to ignore how the CRA contributed to the toxic banking culture in the US because it allowed non-bankers to distribute mortgage money for social purposes.

Well, you're the one who has made the link.

So prove it.

[Riverwind]

Well, you're the one who has made the link.

It should be painfully obvious. To argue there was no link is to argue that the CRA was a pointless legislation because the banks would have made those loans anyways.

Anyways, from the words of the Federal Reserve:

Short summary:

Banks were forced by regulation to make loans that they would not have made otherwise. They used mortgage securitization as a way to make these types of loans profitable. This in, turn, set the stage for the gross abuse of mortgage securitization that created the crisis. This does not exclude greed as an additional contributing factor. It just means that the CRA is ONE of the factors that created the crisis. I aslo feel the CRA is one of the reasons why politicians failed to regulated the market properly once the abuse started to happen in the early 2000.

http://www.federalreserve.gov/newsevents/s...ke20070330a.htm

For more than a decade after its enactment, the CRA was a rather low-profile banking regulation, one that set minimal compliance requirements for depository institutions and attracted limited supervisory attention from the bank regulatory agencies.8 By the late 1980s, however, the issues surrounding access to credit were attracting renewed interest.

...

Further attention to CRA was generated by the surge in bank merger and acquisition activities that followed the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. As public scrutiny of bank merger and acquisition activity escalated, advocacy groups increasingly used the public comment process to protest bank applications on CRA grounds. In instances of highly contested applications, the Federal Reserve Board and other agencies held public meetings to allow the public and the applicants to comment on the lending records of the banks in question. In response to these new pressures, banks began to devote more resources to their CRA programs. Many institutions established separate business units and subsidiary community development corporations to facilitate lending that would be given favorable consideration in CRA examinations. Local and regional public-private partnerships and multibank loan consortia also gained more prominence as banks developed strategies for expanding and managing CRA-related activities.

Even as these developments were occurring, extensive change was taking place in the financial services sector. During the 1980s and 1990s, technological progress significantly improved data collection and information processing, which led to the development and widespread use of credit-scoring models and the availability of generic credit history scores. Deregulation also contributed to the changes in the marketplace. Notably, the lifting of prohibitions against interstate banking was followed by an increased pace of industry consolidation. Also, the preemption of usury laws on home loans created more scope for risk-based pricing of mortgages. Securitization of affordable housing loans expanded, as did the secondary market for those loans, in part reflecting a 1992 law that required the government-sponsored enterprises, Fannie Mae and Freddie Mac, to devote a percentage of their activities to meeting affordable housing goals (HUD, 2006). A generally strong economy and lower interest rates also helped improved access to credit by lower-income households.

Bankers were also gaining experience in underwriting and managing the risk of lending in lower-income communities. After years of experimentation, the managers of financial institutions found that these loan portfolios, if properly underwritten and managed, could be profitable. In fact, a Federal Reserve study found that, generally, CRA-related lending activity was at least somewhat profitable and usually did not involve disproportionately higher levels of default (Avery, Bostic, and Canner, 2000; see also Board of Governors, 1993). Moreover, community groups and nonprofit organizations began to take a more businesslike, market-oriented approach to local economic development, leading them to establish more-formalized and more-productive partnerships with banks. Community groups provided information to financial institutions on the needs of lower-income communities for credit and services, offered financial education and counseling services to community members, and referred "bankable" customers to partner banks. Specialized community development banks and financial institutions with the mission of providing financial services and credit to lower-income communities and families emerged and grew.

Edited September 30, 2009 by Riverwind

[msj]

And that's just it: many banks and non-banks made loans not subject to CRA to minorities or to whoever (liar loans).

Of course, it still comes down to the CRA legislation itself: it does not force banks to make poor lending decisions and if you would bother to look at the legislation you would see that it does not force banks to lend willy nilly to minorities without considering the 3 C's of lending.

Banks (and non-banks) chose to lend will nilly to anyone.

Banks and non-bank lenders did not need encouragement to lend to minorities during the 2001 - 2007 period because they were willing to lend to anyone who could state their income and sign their name (although not necessarily in that order).

But even then, there is this little thought experiment that one should consider (and consider the links at the bottom): CRA Thought Experiment

[eyeball]

Some think a recovery will send resources up higher but it will be 2010 before we see anything steady. In the meanwhile, some Canadians are praying for a North American-wide very cold winter.

Just in time for my 35 km marketing challenge. How far does your home heating fuel have to travel? My woodlot is about 35 kms from the last house on the coast - which is to say, its anything from a 100 to thousands of km closer than anything else people can use.

[OddSox]

Just in time for my 35 km marketing challenge. How far does your home heating fuel have to travel? My woodlot is about 35 kms from the last house on the coast - which is to say, its anything from a 100 to thousands of km closer than anything else people can use.

Not sure what you're getting at - but just how sustainable is that woodlot going to be when push comes to shove? Besides, isn't wood one of those 'dirty' fuels?

[jdobbin]

Just in time for my 35 km marketing challenge. How far does your home heating fuel have to travel? My woodlot is about 35 kms from the last house on the coast - which is to say, its anything from a 100 to thousands of km closer than anything else people can use.

I just throw neighbourhood cats on the fire. The stripey ones burn longest.

[Jerry J. Fortin]

Clean fuels, as in renewable resources are not exactly what you can expect the current energy corporations to pursue, this is one of those things where the government could do so real good.

[Sir Bandelot]

Where exactly is this 'cash mountain'? Do they have a nice ski resort there?

I've got 5 people in my house, so they must be holding my $150,000 in safe keeping for me.

[Jerry J. Fortin]

Its an industry(financial) spin to indicate that consumers are responsible for the economy.