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How Central Banking Works

“Back in 2009, our hot housing market acted as a life preserver in a sea of economic uncertainty. Now it feels more like a cinder block tied around our necks.”

— Chris Sorensen, “The Great Canadian Real Estate Crash of 2013”, Macleans

Canada’s housing market is in the opening phase of a historic collapse. According to the Canadian Real Estate Association (CREA) sales of existing homes dropped 17.4 percent year-over-year in December, while sales in Vancouver plunged an eyewatering 31 percent in the same period. While prices have held firm so far, it’s only a matter of time before droopy demand leads to an excruciating correction. Sometime in the next 12 months, prices will follow sales down the plughole wiping out a sizable chunk of the equity people were counting on to feather their retirement nesteggs. Despite the media’s braying about a “soft landing”, the sharp decline in sales suggests that Canada will face a catastrophe very similar to the one in the US, the only difference being that Canada will not suffer a financial crisis at the same time. (Mortgages are not securitized in Canada) Now check out this article in Macleans magazine:

“A housing correction—or, possibly, a crash—is no longer coming. It’s here. And you don’t have to own a tiny $500,000 condo in downtown Toronto or a $1.3-million bungalow in Vancouver to get hurt. With few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect. Construction jobs will be lost.

Homeowners will end up underwater. Consumers may stop spending. “I’m getting very nervous,” says David Madani, an economist at Capital Economics, who has been predicting a drop in housing prices of up to 25 per cent in Canada. “I know I’m a bear, but the housing market itself has the potential to put us in a recession, let alone what’s happening in Europe and the U.S.”….

The sudden cooling in Canada’s housing sector seemingly struck without warning. …. And not just in Toronto and Vancouver. In Victoria, existing home sales were down by 22 per cent in November from a year earlier. In Montreal, sales were down 19 per cent last month. Ottawa’s sales were down nine per cent and Edmonton’s were down six per cent. With all those houses lingering on the market, prices dipped in 10 of 11 big cities across the country between October and November, according to the Teranet-National Bank index. It was the first such drop since 2009.” (“Great Canadian Real Estate Crash of 2013”, Chris Sorensen, Macleans)

The entire article is worth reading, although it’s hard to swallow the whole “no one could have seen this coming” baloney. I mean, how many times have we seen this sort of thing before? Let’s see, there’s the US, the UK, Ireland, Spain, Japan, Australia, and now Canada. That’s a pretty impressive list of coincidences, isn’t it? And isn’t it funny how the exact same policies were put in place (low interest rates and lax lending standards), that produced the exact same results?

It’s almost like the folks at the central banks and government wanted to blow up the system from the very start. How else can you explain the fact that we’ve seen a rash of these monster bubbles across the industrial world which have ravaged their respective economies and led inevitably to the implementation of harsh austerity measures? Coincidence?

Not bloody likely. Easy-money bubblemaking is just part of a bigger plan to crush labor, eviscerate the safety net, and restructure the economy. There’s nothing random about it. Check out this clip from Dr. Housing Bubble:

“I was trying to find a time in history where the world experienced correlated housing bubbles and could not find a time similar to the one we are living in when it comes to real estate. The reason for this is central banking policy around the world is very similar…..

Part of it has to do with easy banking policies mimicking one another. If you think that all of this came at no cost just look at the balance sheet of big central banks….

Central banks have boosted their balance sheets from $2 trillion in 2008 to being on path to reaching $6 trillion this year. The Fed alone is inching closer to $3 trillion especially if they continue with QE3 and their mortgage backed security purchasing plan. It is very clear that the Fed became the bad bank to induce this housing boom and went as far as to take off MBS from the hands of these banks.” (“Global Housing Bubbles in Perspective”, Dr. Housing Bubble)

So they’re all doing the very same thing at the very same time, right? And they don’t care how much money they print, because the money never goes beyond their buddies at the banks and the brokerages. So there’s no threat of inflation. It all stays in the family.

And how do you like that part about “correlated housing bubbles”? Now there’s an understatement. The fact is, the world’s biggest central banks (The Fed, the ECB, the BOJ, the BOC and the BOE) are a de facto cartel. That’s why they all read from the same script and implement the same policies. It’s because they’re a monopoly. Ask yourself this: How could Canadian housing prices double in just a few years, if the bigwigs in the Harper administration and at the Bank of Canada (BOC) weren’t using the exact same blueprint that Bush and Greenspan used?

They couldn’t. Interest rates had to be slashed and standards had to be abandoned. That’s how bubbles are created. Now comes the painful part. Here’s more from Macleans:

“Ben Rabidoux, an analyst at M Hanson Advisers, estimates that 1.3 million people, or seven per cent of Canadian workers, are employed in the construction industry, with housing being the main driver. He argued in a recent report that a U.S.-sized housing slowdown could result in the loss of 370,000 jobs and push the unemployment rate well over nine per cent, compared to 7.2 per cent now. And that doesn’t include job losses in related industries…..

Rabidoux …estimates that as much as 27 per cent of GDP can be linked to Canada’s housing market, a disproportionately large number compared to other countries, including the U.S. at its peak. “Take it away and that alone puts us into a recession, given where we are,” Rabidoux says.” (“Great Canadian Real Estate Crash of 2013”, Chris Sorensen, Macleans)

Okay, so unemployment is going to soar and GDP is going to shrink. Add that to the fact that Obama is increasing taxes and cutting government spending, (which will slow activity in Canada.) and the chances that Canada will slip back into recession look pretty good. And, of course, the deeper the recession, the more people will face foreclosure, the weaker the demand for housing, the greater the downward pressure on prices, and the bigger the budget deficits. That will give Mr. Harper and his party of far-right loonies the opportunity to push for savage cuts to popular social programs while launching a full-blown attack on the labor unions. All according to plan.

Of course, it’s all just a coincidence, because to suggest otherwise would be positively conspiratorial, right?

But maybe there’s more to this “global bank cartel”thing than meets the eye? Did you catch the article in the Wall Street Journal last month about the Basel Love-in for central bankers that takes place every couple months? Here’s a clip that’s worth mulling over in the context of “correlated housing bubbles” and “unlimited liquidity support” (free money) for the financial markets:

From the WSJ:

“Every two months, more than a dozen bankers meet here on Sunday evenings to talk and dine on the 18th floor of a cylindrical building looking out on the Rhine. The dinner discussions on money and economics are more than academic. At the table are the chiefs of the world’s biggest central banks, representing countries that annually produce more than $51 trillion of gross domestic product, three-quarters of the world’s economic output.

Of late, these secret talks have focused on global economic troubles and the aggressive measures by central banks to manage their national economies. Since 2007, central banks have flooded the world financial system with more than $11 trillion. Faced with weak recoveries and Europe’s churning economic problems, the effort has accelerated. The biggest central banks plan to pump billions more into government bonds, mortgages and business loans.

….The central bankers are, in effect, conducting a high-stakes experiment…They form a tightknit fraternity (and) have forged their own path, independent of voters and politicians, bound by frequent conversations and relationships stretching back to university days.

The 18-member group, formally known as the Economic Consultative Committee, has only once issued a public statement: a two-line missive in September, promising to look for solutions in interbank lending markets, responding to allegations that some private banks had conspired to manipulate the Libor interest rate. …

This summer, the central banking clique kept in close touch as they readied for a new round of monetary activism. On June 8, Mr. Bernanke and Mr. King spoke by phone for a half-hour before policy meetings at their central banks, according to Mr. Bernanke’s phone records, obtained in a public records request. A few days later, Mr. Bernanke spoke by phone with Mark Carney, head of the Bank of Canada—and last month named as Mr. King’s successor. Shortly after, Mr. Bernanke called Stanley Fischer, head of the Bank of Israel, and a former MIT professor who was Mr. Bernanke’s dissertation adviser….

“A big secret of central bank cooperation,” Mr. King said, “is that you can just pick up a phone and have an agreement on something very quickly” in a crisis.”  (“Inside the Risky Bets of Central Banks”, Wall Street Journal)

It all sounds pretty cozy, doesn’t it?  The actions of the world’s biggest central banks are secretive, collaborative, undemocratic, and monopolistic. Some people would call it a “New World Order”. I’d call it a Boys Club. But whatever you call it, the banker’s fraternity is responsible for most of our present economic woes; the chronic asset-price bubbles, the widening inequality, the high unemployment, the gigantic budget deficits, and the sluggish growth.

If you want to know why Canada’s housing market is headed for the shitter, look no further than Bank of Canada chief Mark Carney, the man who kept interest rates locked at 1 percent for 4 years despite the fact that Canadians’ debt-to-income levels have gone through the roof (higher than Americans at the peak of the housing bubble) and despite the fact that housing prices have more than doubled in less than a decade.

Carney has kept the punch bowl brimming throughout his tenure at the BOC, which is why he’s been pegged to take over the top job at the Bank of England (BOE) next year. It’s because destroying Canada’s economy is an achievement that deserves to be rewarded. That’s how central banking works.

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

 

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MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

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