A transcript of an email exchange between two guys who sit eight feet apart in our Ottawa bureau.
Paul Wells: John, I see it’s going badly between Angela Merkel and François Hollande. He’s Mr. Growth, she’s Ms. Austerity. Each has repeatedly endorsed the other’s political opponents. And this roundup in Le Figaro shows that both at a human level and a policy level, Europe’s most important relationship is in trouble.
Hollande’s determination to follow through on some of his more exuberant election promises is amazing to the Germans, who don’t just want spending restraint, they want the kind of structural labour-market reforms they went through in a decade ago. So when Hollande lowered France’s retirement age to 60 for some workers, “we were floored,” a senior German official tells Le Figaro. “We don’t understand Hollande’s determination to join the PIGS (the crisis-racked southern club of Portugal, Italy, Greece and Spain).” I’m also enjoying the German headlines. Süddeutsche Zeitung: “François, Nightmare of Business.” Financial Times Deutschland: “Mr. President, Break Your Promises!”
So the Germans may be irritated with Canada, but they’re furious at France. What do you make of it all?
John Geddes: As a hopelessly parochial Canadian, my initial reaction is that I’m glad the Germans don’t have time to dwell on their quite understandable irritation with us. At a deeper level, the Merkel-Hollande, austerity-vs.-growth tension makes me think of debate that’s played out here in recent times.
We learned that you need both. I’ve argued before that the key to Canadian deficit-eliminating success in the 1995-1999 period was tax-generating growth; but the Liberal formula included real restraint, too. It would be more rhetorically satisfying to argue for one over the other, but you need both when a serious debt crunch looms.
The problem is that concocting a policy blend that includes short-term pain with medium-term gain is going to be far harder in Europe circa 2012 than it was in Canada circa 1995. As Royal Dutch Shell CEO Peter Voser, no less, told Maclean’s recently, there’ s no quick solution to be had.
And, by the way, on Hollande’s lowering of the retirement age, isn’t it fascinating the Finance Minister Jim Flaherty managed to nudge up the eligibility age for Old Age Security to 67 from 65, albeit not until 2023, has gone over pretty smoothly. You can do things in this country without filling the streets with protestors. Well, sometimes.
Paul Wells: Indeed it should be possible to reconcile growth with the kind of structural reform that can keep these countries fiscally sustainable. The Europeans are getting no end of advice on this front. Robert Zoellick and Stephen Harper are saying a lot of the same things, and the leader they sound the most like is Merkel. But she won’t get far without a France-sized ally, and as long as Hollande is busy replaying the worst of early François Mitterrand, they’ve got trouble.
But enough about Europe. Why is Jim Flaherty suddenly containing the ardours of the Toronto condo market? Since we work at Maclean’s, I’ve always felt a little proprietary about housing-bubble speculation and I hope Flaherty hasn’t managed to ruin our fun.
John Geddes: It’s hard to remember now that back in 2006 Flaherty was all for blowing bubbles, or at least for making it easier to get mortgages for very long terms. But after
introducing 40-year mortgages [very sloppy of me to phrase it like that; I've added an update at the bottom for more detail] opening the Canadian market wider to private mortgage insurers, he’s spent the six years tightening, tightening, tightening.
This week, he reduced the maximum mortgage amortization to 25 years. And that’s after he said in April that he wanted to avoid tightening the rules for the fourth time (since he first loosened them), hoping for “the market itself to correct to the extent correction is necessary.”
Apparently the market didn’t do its job. (The market can be lazy that way.) Hence Flaherty’s move to discourage marginal house hunters won’t buy unless they can really spread those payments out. Yet this powerful fear of an overstimulated housing market—especially the Toronto and Vancouver housing markets—comes against the backdrop of an economy that shows no sign of revving up, and is considered vulnerable to the interminable threat of a “shock” from Europe.
Bank of Canada Governor Mark Carney recently issued this warning (and woe betide us if we fail to pay heed to this giant who strides among us): ”Given the reality of global finance, it’s not enough to have our house in order unless we seal ourselves off from the world,” he said. “And, of course, if we seal ourselves off from the world, we would end up much poorer.”
So the policy trick is to cool an overheated housing market without choking our economy just as it might be hit hard by a European setback. That’s no easy matter. It’s why the spring budget looked so delicately—some might say awkwardly—balanced between austerity and let’s-not-go-overboard-with-the-austerity-here.
Note that Carney stresses the need not to view our problems in isolation, which brings us back to the dance of Merkel and Hollande. It would be silly to suggest Canada can do anything decisive to aid the EU. But shouldn’t we be doing something? The only something in play was the International Monetary Fund’s plan to bulk up its resources to help shore up EU economies, and Harper refused to contribute.
Maybe that’s justifiable: not our problem, fix it yourself. The other viewpoint (argued well here) is that anteing up to the IMF would have been a rather low-cost way to ensure our traditional Canadian place at the table. Why have the likes of Carney hanging around Basel, Switzerland, if our national policy doesn’t lend him as much clout and credibility as possible?
Paul Wells: For what it’s worth, I think there’s a strong case for keeping Canadian money (even loaned, even if from foreign-currency reserves and not from general revenues) out of a European solution, and it’s the case Bob Zoellick makes in the piece I linked to above. Europe needs reform; reform is hard; and constant lifelines don’t concentrate the minds of national European leaders who would prefer not to concentrate. The nativist “Don’t bail out rich European socialist” rhetoric the Conservatives are peddling doesn’t help, but just because they are oafish in selling their policy doesn’t mean it’s bankrupt policy.
I do wish Harper would simply explain his viewpoint to some actual Europeans. I continue to wonder why this prime minister, who was briefly so eager to get on U.S. television when the Fox-obsessed Kory Teneycke was his communications director, has not bothered to write an op-ed for the Financial Times or some German tabloid now that the fate of Europe is the biggest cloud on Canada’s horizon. But that’s the columnist in me talking, not the realist. The realist says it’s the weekend and we should enjoy it. Have a good one.
John Geddes: Finance Minister Jim Flaherty’s office rightly points out by email that he did not introduce 40-year mortgages, as I originally and incorrectly phrased it in my exchange with Paul. The 40-year amortization was introduced to the Canadian market by a private mortgage insurer in the fall of 2006. That was my mistake, for which I’m sorry; I’ve corrected it in the text above.
What Flaherty did do in his first budget, back in the spring of 2006, was double the amount available, to $200 billion from $100 billion, as a government guarantee for private companies that insure mortgage loans. That move was plainly intended to pave the way for a big expansion of private mortgage insurance in Canada, and unequivocally signalled the government’s aim of stimulating the housing market.
Flaherty’s undisguised hope at the time was that private insurers would make it easier for would-be home owners to buy. Here’s how his May 2, 2006 budget explained the purpose of encouraging more private insurers to join the Canadian residential real estate game: “These changes will result in greater choice and innovation in the market for mortgage insurance, benefiting consumers and promoting home ownership.”
By way of innovation, private insurers introduced 35-year- and 40-year amortizations in the spring of 2006, even before the budget was tabled. The federal Canada Mortgage and Housing Corp., in step with the government’s policy bent, also began backing 30-year and then 35-year amortizations that spring. In that email note to me today, Flaherty’s office says there was no reason at the time to worry about any of this. “In 2006,” the minister’s officials write, “risks relating to mortgage markets were not top of mind.”
Evidently such risks were not top of mind around Flaherty’s office. However, the danger inherent in those spring 2006 “innovations” in the Canadian mortgage insurance business certainly worried David Dodge, the Bank of Canada governor of the day, and arguably the most respected voice in Ottawa on economic issues.
Canadian Press broke the story of Dodge’s urgently worded, promptly written June 30, 2006, letter to the head of CMHC. ”I read with interest and dismay your press release of June 28 which indicated that CMHC would offer mortgage insurance for interest-only loans and for amortizations of up to 35 years,” Dodge wrote.”Particularly disturbing to me is the rationale you gave that ‘these innovative solutions will allow more Canadians to buy homes and to do so sooner.’”
Beyond Dodge’s remarkable blunt and prescient intervention, the recollection of Flaherty’s staff regarding the worry-free atmosphere regarding mortgage risks in 2006 seems to me a bit off. Just to cite just a couple of mainstream examples from the same month as Flaherty’s first budget, BMO economist Douglas Porter warned of worrisome “bubble-like activity” in Canadian real estate, and, down in the U.S., Fortune reported: “The great housing bubble has finally started to deflate.”