Entities Are Aligned In Perpetuating The Speculative Mania Regardless Of Political Stripe – “The only decisive action taken by politicians has been to add more layers of finance to the teetering system of debt and precarity. Elites in Vancouver continue to prolong the system and extract super-profits.”

‘Imagine. A financial institution that lets everybody profit. Now that’s an idea I can live with.’ – Vancity Billboard, Vancouver, July 2012

“A brief recount of recent history is necessary for understanding why and how the local government under Vision Vancouver can be expected to aim towards re-mortgaging the housing crisis, deferring the current crisis of value underlying overinflated housing assets citywide. When the market crashed in 2008, many saw an opportunity for the city to meet its promised housing goals, including its promise to take actual concrete measures to end homelessness. After years of land speculation and high prices created by unprecedented consumer debt, properties finally started showing signs of affordability, with housing activists calling on the municipal government to buy newly-priced lots throughout the city.
In effect the opposite occurred, with sections of the property elite buying up land from the province in private deals, like at Little Mountain in 2009, or selling land back to the government at inflated pre-crash levels, like the land trading of Robert Wilson, who bought dozens of buildings and sold them back to the public. Fundamentally, Wilson and Holborn’s extraction of public funds and assets represents the spirit of the broader post-2008 period.”

“Looking back on the past half-decade, what stands out is that since the onset of the financial crisis of 2008, no effort has been made in policy and elite circles to re-evaluate the fundamental contradictions of state-backed housing privatization, despite the rampant inequalities produced by Vancouver’s real-estate market, and despite the volatility of that system. The market, towering over an exploitative rent-extraction economy, has only been the recipient of ever-new supports from the neoliberal state. The only decisive action taken by politicians has been made to add more layers of finance to the teetering system of debt and precarity. The recent experience in Vancouver has shown that while elites continue to prolong the system and extract super-profits, radical change can only come from below. Only a movement led by renters will be capable of taking action to halt the circuits of the exploitative real-estate economy and replace it with something new.”

– excerpts from ‘Re-financing the housing bubble: Strategies of the neoliberal state’, Nathan Crompton, rabble.ca, 20 Jul 2012 [hat-tips to ‘joe_blown_away_by_high_housing_costs’ and Jeff Murdock]

“My biggest complaint with the article is placing onus on Vision Vancouver for perpetuating the bubble when it’s the nature of the City’s finances, not the political stripe of council, that’s the problem. Ultimately cities derive revenue from permits and other real-estate-related activities and, if that is not present, either need to increase revenues in other areas or cut back. …
So at the local level, because of how the tax base is matched to the expenses, regardless of who’s in power, there will be pressure to kowtow to the real estate industry to keep revenues flush. And it’s not some “neoliberal” trend in my view, it’s what the populace votes for…”

– from a comment by jesse, VREAA, 20 Jul 2012

Our thoughts:
As a speculative mania develops and takes hold, more and more individuals and institutions in a society become aligned in their interest to perpetuate the bubble. This occurs on all levels, from the citizen to the federal. Home-owners, RE investors, landlords, contractors, developers, realtors, universities, credit unions, banks, municipal government, provincial government, central banks, federal government…
The entities are co-opted, not by some plan, but rather because all interests become aligned in a dependence on ever increasing prices, and the debt financing necessary to keep that going, and the temporary artificial easy ‘wealth’ that results. Ever expanding borrowed funds being spent into the economy certainly seems better than having to generate genuine wealth from true productivity; and it seems good to the naive, while it lasts.
It is crucial to realize that the majority of individuals and institutions become aligned in this interest, regardless of political stripe.
In the mature stage of a speculative mania, the vast majority of citizens and institutions are heavily dependent on the bubble continuing, and almost all those in positions of political power will have been thoroughly co-opted. This is a market effect. This is also why bubbles are never, ever legislated away. The majority always votes to shore up the mania, to perpetuate the bubble; any dissenting voices will be voted down; any protesters ejected.
Government intervention, from the civic to the federal, can extend the life of bubbles, but cannot dismantle them safely. This is not an ideological, or a pessimistic observation, but one made based on mathematic law and knowledge of market dynamics. Like a chain-letter or a Ponzi scheme or a raging forest fire, the engine runs out of fuel, eventually.

Of course, there will be all sorts of flavours and differences in the finer points of this process, so it is arguably of value to discuss how exactly local government is choosing to perpetuate the bubble. In this regard Nathan Crompton’s article is of interest. We respectfully submit, however, that the large overarching picture is far, far more important, and that differences in local approaches will pale into insignificance in the face of the broad implications of a collapsing speculative bubble. After the dust settles, the exact details of local policy will again become important.

– vreaa

18 responses to “Entities Are Aligned In Perpetuating The Speculative Mania Regardless Of Political Stripe – “The only decisive action taken by politicians has been to add more layers of finance to the teetering system of debt and precarity. Elites in Vancouver continue to prolong the system and extract super-profits.”

  1. …”all sorts of flavours and differences in the finer points of this process”… – VREAA

    That’s why History and PoliticalScience are so much fun!*

    *Disclaimer: In hindsight for scholars. In RealTime, it’s not ‘always’ such great fun for the participants.

  2. Ralph Cramdown

    There’s a few unfortunate facts that don’t align with these theses:

    1) Renting is cheaper than owning, by a lot. Many landlords are subsidizing renters. Rent extraction it ain’t. If anything, renters are exploiting the landowners too dumb even to follow the otherwise useless Don Campbell’s dictum “make sure it cash flows from day one.”

    2) Flaherty cut insurable amortizations from 40 to 35 to 30 to 25 years, increased DP requirements from nil to 5%, and did a bit of other fiddling, all of which is unequivocally tightening and not good for the bubble. Yes, he’s the doofus who loosened these regs in the first place, but that doesn’t change the fact that the reversals represent significant tightening. Hardly a response typical of one co-opted by the system.

    • Agree with both, though I would add that the “liberalization” of credit markets has not just been under CPC dictate, it has been a slow but consistent move over decades. The knee in the graph of credit growth began before Harper had a minority.

      Transferring credit off balance sheet, through schemes such as mortgage insurance or transferring taxes to homebuyers from homeowners at the civic level, is politically expedient because it lowers taxes and keeps service levels unchanged in present, which is why it so easily infiltrates the system. Similarly, blame for the inevitable fallout is equally as political and unfortunately equally lacking in accountability over what’s, in my view, actually going on.

    • Ralph ->
      Regarding 1): You and I and most readers here know that landlords are subsidizing renters. Most are subsidising in terms of opportunity cost (so they don’t literally ‘see’ the monthly subsidy), but some are actually taking money out of their pockets to pay the difference between rent and mortgage+ costs. So, yes, they are subsidizing renters. But most landlords don’t see it that way: the vast majority of them believe that renters are funding the landlord’s one-way-bet in an ever-appreciating asset. Witness the posts we see here and at other sites where bulls jeer renters for “paying the landlord’s mortgage”. As long as the bubble is inflating, landlords are very definitely a group that is largely ‘co-opted’ by the mania.

      Regarding 2): True, Flaherty has tightened. Perhaps simply because he had to? He’s in one of the driver’s seats, the craft is moving very fast and accelerating, he chose to tap the brakes. I think we were at a point in the cycle where inaction or further loosening would have had early, very negative consequences. I’m not sure that he had any option to do anything else.
      Also, remember that bubbles end, and all entities don’t leave at exactly the same time. So, as the ship is crashing, some abandon earlier than others.

      • Ralph Cramdown

        I agree that most recent amateur landlords are clueless. On the other hand, the occasional real estate agent comes out and says the problem with the price/rent disparity is that rents are too low. Wait, that’s clueless, too.

        I don’t think Flaherty had to tighten. He could’ve let ‘er blow and said “hoocoodanode?” To the extent that every player in the industry will blame him if/when the bubble pops (Phil Soper’s “timing is unfortunate” comment being an early example) I think he displayed more bravery than politicians are typically known for.

        I HATE the “tap the brakes” metaphor that everyone’s been using. It implies a market in control, and boffins skillfully keeping it that way. I lean towards “inherently unstable” and “doing the best they can, sometimes.”

      • Ralph -> To liken what Flaherty did to “tapping on the brakes” by no means implies a market in control. As we have said before, tapping the brakes at 180mph, on black ice, can have catastrophic consequences.

      • Sometimes it works….

        And… sometimes… it don’t.

    • As I often like to point out, Ralph, the housing bubble phenomenon has been a global event. That it was orchestrated simultaneously by governments andd finance ministers everywhere is an event in itself but no one person is wholly accountable. Much of the trouble goes back to the days of Greenspan actually and the US really led the rest of the world in setting policy that was copied elsewhere (for better or for worse). It all seemed like a good idea post 9-11 but in fact everyone had just run out of imaginitive ideas to get the growth numbers they desired. Problem is, once an idea like that is out of the bag (economic reflation via cheap rates and accomodative policy) then everyone pretty much has to jump on board or get left behind and economic costs can be pretty severe for those not participating. What we need is leadership ideas that address imbalances and inequities as they come up with more stable sustainable solutions. Easier said than done obviously. Especially now as so many countries have their backs to the walls heading into a slow growth environment. Recognizing that decisions rendered by the lead nations of the G20 affect all parts of the machine is crucial though. We are simply too interconnected to go it alone without destabilizing everyone else. The Third World and developing nations in particular have been hard hit as we witness daily on the news. I think a lot of positive progress has been made actually and the regular meetings of the worlds major countries (including Canada) have played a role in bringing about some much needed stability. Lets not forget that it was not so long ago we were quite literally on a cliffs edge peering into the abyss of financial calamity. Whatever the naysayers might rant about online we do know a few things did NOT happen, We did not hyperinflate. We did not sink into a global depression. There has not been a tit for tat trade war amongst participants nor has there been round of vicious competitive currency devaluations. We did not suffer severe inflation in this time either nor did the banking system fail. Hey, things were not good but most people still have their jobs and the world continues to function much as it used too. Not bad for crisis management if you ask me. I think some of these guys did a stand up job considering what we were all up against.

      • it’s over, awesome!

      • Ralph Cramdown

        Farmer, I agree with a fair bit of your analysis, excepting that the housing bubble was a planned event. Carney has been begging individuals to spend less on housing, and companies to spend more on investments and productivity for a long, long time now. I think he’s sincere. Central banks only really have the one big knob of interest rate adjustments at their disposal, and I think most of them have made the right call. Contrary to the beliefs of some, inflation isn’t out of control (MIT’s billion prices project is tracking the US government’s supposedly fudged numbers).

        No sane economist wishes his country would invest more in granite and stainless and less in exporting industrial capacity, but fiscal policymakers in developed countries have been loth to rein in incentives to improve and McMansionize housing stock — to wit, the MI deduction in the US, government guaranteed mortgages and favourable capital gains treatment in many places. This likely for two reasons: The belief that a construction job is better than no job, and the unwillingness to tamper with current regulations favourable to homeowners, who vote disproportionately and who have much wealth tied up in their abodes.

        Vreaa, I agree that you qualified your “tapping the brakes” analogy with “on black ice,” but the term was used more broadly in the media, with no qualifiers, painting Flaherty as someone who was making minor adjustments to a reasonably well run machine. Of course, RE agents and mortgage brokers didn’t characterize it that way for the most part, but they wouldn’t, would they?

      • Thanks Ralph. I agree with you too about the tapping of the brakes. The comment as used by the media really gives the impression that these changes were just small corrective adjustments. Truth is, between Mr Flaherty and OSFI the brakes were slammed on in an emergency stop as the realization sunk in that Toronto itself was heading for bubble territory if nothing was done. On that note I do not think anyone “planned” a bubble. More likely is that it is acceptable for there to be casualties in some cities but that the goals of growth targets being met was net beneficial for the whole country. So some losses are acceptable. Its is part of every gamble you make. In this case, Vancouver may be seen as the countries sacrificial lamb.

      • “In this case, Vancouver may be seen as the countries sacrificial lamb.”

        I think it’s more that Vancouver was ignored on its way up and can be ignored on its way down. The provincial and municipal governments, on the other hand, will be doing all they can to revive the bloodline.

      • Ralph Cramdown

        I wouldn’t get in a snit about Vancouver being sacrificial or especially ignored. Most of Toronto proper’s ridings (“the 416”) have voted reliably Liberal for a long time until recently.This translated into being ignored by the Liberals and the Conservatives, provincially and federally. Easy money has taken its toll here, fuelled by a not inconsiderable fraction of HGTV’s content being filmed here. Presale condo prices per square foot have been at or above resale prices for years now, and are heavily marketed toward “investors” with mainly one bedroom and studio units. For two years, the market for SFH has been so hot that realtors have lost all clue how to price, with failed bidding wars followed by a price increase after a week on the market being common. Flaherty is a former Ontario finance minister, and our provincial legislature is in the middle of the city, so it isn’t like senior levels of government didn’t notice. Price/rent and price/income have been outrageous here for years, only looking somewhat sane compared to Vancouver. If anyone’s done anything to try and keep a lid on growth, used urban planning to get intelligent growth, or even built the infrastructure to efficiently support the growth we’re getting, I haven’t seen it. Given the labour and materials that goes into simultaneously building and selling 100+ highrise condo projects, the crash here will be profound.

      • Ralph, Farmer -> Fair comment about common usage of ‘tapping the brakes’.

  3. Most of the millions piled up in paper profits had melted away, many of the millions sunk in developments had been sunk for good and all, the vast inverted pyramid of credit had toppled to earth, and the lesson of the economic falsity of a scheme of land values based upon grandiose plans, preposterous expectations, and hot air had been taught in a long agony of deflation.


    Vancouver or Miami? 2014 or 1930?

  4. Speaking of “elites, super-profits and systemic prolongation [NoteToEd: that last sounds a tad suggestive]”… Here are your SundayFunnies, DearReaders… [It’sTheJuxtaposition]…

    [UK Telegraph] – Super-yachts dock in London as business heads to Olympics

    …”They are some of the most magnificent and expensive vessels in the world and this weekend they started arriving in London as the world’s global CEOs brought a touch of glitz and glamour to the capital in time for the Olympics.”…


    [UK Telegraph] – Duke of Cambridge pledges to save outdoor spaces*

    “The Duke of Cambridge has warned of the dangers of children being “cooped up indoors” all day instead of enjoying an outdoor lifestyle.”
    [*A 2010 inquiry found that 6,000 playing fields were lost in the UK between 1992 and 2009.]


    [NoteToEd: Nem’s Leader would probably have included a subversive allusion to the Chancellor of the Exchequer’s contribution to the Duke’s charitable objectives along the lines of, “Osbourne declares victory as austerity regime proven to afford more British children an outdoor lifestyle”…]

  5. On a lighter/concluding note… And of particular interest to fans of SocialistRealism [BR, you know you love this stuff]…

    [NoteToEd: Any similarity to subsequent Nike™ OlympicBranding is ‘purely coincidental’]

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