Tag Archives: Borrower

Is the Euro aggravating the European debt crisis?

ECM sent me this story from the liberal German newspaper “Der Spiegel”.

Here’s the thesis of the article:

In the past 14 months, politicians in the euro-zone nations have adopted one bailout package after the next, convening for hectic summit meetings, wrangling over lazy compromises and building up risks of gigantic dimensions.

For just as long, they have been avoiding an important conclusion, namely that things cannot continue this way. The old euro no longer exists in its intended form, and the European Monetary Union isn’t working. We need a Plan B.

Instead, those in responsible positions are getting bogged down in crisis management, as they seek to placate the public and sugarcoat the problems. They say that there is only a government debt crisis in a few euro countries but no euro crisis, citing as evidence the fact that the value of the European common currency has remained relatively stable against other currencies like the dollar.

But if it wasn’t for the euro, Greece’s debt crisis would be an isolated problem — one that was tough for the country, but easy for Europe to bear. It is only because Greece is part of the euro zone that Athens’ debts are a problem for all of its partners — and pose a threat to the common currency.

If the rest of Europe abandons Greece, the crisis could spin out of control, spreading from one weak euro-zone country to the next. Investors would have no guarantees that Europe would not withdraw its support from Portugal or Ireland, if push came to shove, and they would sell their government bonds. The prices of these bonds would fall and risk premiums would go up. Then these countries would only be able to drum up fresh capital by paying high interest rates, which would only augment their existing budget problems. It’s possible that they would no longer be able to raise any money at all, in which case they would become insolvent.

Well, the article talks about how economically productive counties like Germany are on the hook for the bailouts to underperforming countries like Greece and Portugal. That will happen unless Greece reverts to the drachma and stops dragging down the Euro. But the strong European countries are not the only source of bailout funds – there’s also the International Monetary Fund. And guess who funds them?

Consider this article by John Bolton in the New York Post.

Excerpt:

Most Americans had barely heard of the International Monetary Fund before the arrest of its managing director, Dominique Strauss-Kahn, for sexually assaulting a hotel housekeeper. Yet the race to replace him offers a chance to rethink everything about what the real American interest is in the IMF — including whether its continued existence is beneficial.

The top contenders for Strauss-Kahn’s job are French Finance Minister Christine Lagarde and Bank of Mexico Governor Agustin Carstens. Europeans have headed the IMF since its founding, as Americans have led the World Bank — prerogatives that Third World countries increasingly resent as vestiges of colonialism. Carstens’ candidacy is the most visible manifestation of this rising discontent.

[…]Europe is eager to keep the top IMF job not simply because of geographical chauvinism but because continued IMF assistance is critical to European Union efforts to bail out the fractured economic and fiscal system in Greece and several other EU countries. Lurking behind the bailout crisis is the EU’s growing panic over the viability of its currency, the euro. Having a sympathetic ear at the IMF’s pinnacle seems absolutely critical to protect Europe’s parochial interests.

What of America’s interests? We should have long ago resisted throwing our scarce resources, through the IMF or otherwise, into the sinkhole of defending the euro. The currency was always conceived to be as much a political statement as an economic policy: Its European proponents believed the euro would enhance Europe’s strength as an alternative and perhaps rival to America.

If the United States and a few other developed countries like Japan decide to break with Europe over this vote, the IMF’s voting system, based on world-wide economic strength, makes defeating Lagarde a real possibility.

Today’s IMF does little or nothing for US national interests, especially when we face enormous domestic economic challenges. Why should Washington not support Carstens, break the EU hold on the IMF and stop IMF support for the euro?

We can barely afford us, and yet we have to bailout these profligate European nations? Give me a break.

Canada’s finance minister proposes changes to mortgage lending laws

From the National Post.

Excerpt:

On Tuesday, the Department of Finance announced three changes to the standards governing government-backed mortgages, that come into force April 19. Here are a summary of the changes.

QUALIFYING FOR A FIVE-YEAR RATE

The adjustments to the mortgage framework will require mortgage insurers to ensure that new borrowers qualify for a five-year fixed rate mortgage when calculating the gross debt service and total debt service ratios. The measure is intended to protect Canadians by providing them with additional flexibility to support mortgage payments at higher interest rates in the future.

LIMIT THE MAXIMUM REFINANCING

Borrowers seeking financial flexibility can currently refinance their mortgage and increase the amount they are borrowing on the security of their home up to a limit of 95% of the value of the property. The adjustment will lower the maximum amount of the mortgage loan in a refinancing of a government-backed high-ratio mortgage loan to 90% of the value of the property, consistent with the principle that home ownership is a tool for savings.

DISCOURAGING SPECULATION

This measure will require a minimum down payment of 20% for government-backed mortgage insurance on non-owner-occupied properties purchased for speculation. At present, borrowers may purchase a residential property with a 5% down payment. The change will require a 20% down payment for small non-owner-occupied residential rental properties. Borrowers purchasing owner-occupied residential properties which also include some rental units (such as a duplex) will still be able to access government-backed mortgage insurance with a 5% down payment.

But the CEI reports that the Democrat mortgage bailouts encourage fiscal irresponsibility.

Excerpt:

Economists and real estate experts are saying that a $75 billion mortgage bailout program designed by the Obama administration has backfired and harmed the housing market…

[…]Earlier, the government pushed through billions more in other mortgage bailouts, to bail out even reckless high-income borrowers, and forced financial institutions the government took over in the name of fiscal responsibility, like Freddie Mac, to run up billions in losses bailing out irresponsible borrowers.

Banks will now be pressured to make even more risky loans. The House has approved Obama’s proposal to create the so-called Consumer Financial Protection Agency. Government pressure on banks to make loans in economically-depressed neighborhoods was a key reason for the mortgage meltdown and the financial crisis. Yet Obama’s disturbing proposal would empower the new agency to enforce the Community Reinvestment Act without regard for banks’ financial safety and soundness.  The Community Reinvestment Act was a key contributor to the financial crisis.

The mortgage crisis was also caused by the reckless government-sponsored mortgage giants Fannie Mae and Freddie Mac, and by federal affordable-housing mandates. But Obama’s proposed financial rules overhaul does absolutely nothing about Fannie Mae and Freddie Mac, admits Obama’s Treasury Secretary, tax cheat Timothy Geithner, even though he admits that “Fannie and Freddie were a core part of what went wrong in our system.”

Worse, the Obama Administration lifted the $400 billion limit on bailouts for Fannie and Freddie, so that they could continue to buy up junky mortgages at taxpayer expense, and showered their executives with $42 million in compensation.

Obama’s financial-regulation plan is “largely the product of extensive conversations” with two lawmakers responsible for the corrupt status quo, Chris Dodd and Barney Frank, and it expands the reach of regulations that have been used by left-wing groups to extort pay-offs from banks.

This is why we should have elected an economist like Stephen Harper.