Well…..one of them is right!
But which one? Who is looking out for Canadians, and who is looking out for shareholders?
Alright, so maybe I’m off base to suggest that the big banks are looking out for their profit margins and their shareholders.
It could just as easily be argued, “The big banks are looking out for Canadian consumers! They’re offering low rates, which is what consumers want!”
I couldn’t exactly disagree with that.
But this battle between Jim Flaherty and the lending institutions is just heating up, in my opinion.
Everything we’ve seen in the past two weeks is just the start of a monumental shift in not only the mortgage and debt markets, but perhaps in the role of government in a free market.
For those that haven’t been following the story (or simply looking at the front page of the Globe & Mail every day for the last week), finance minister, Jim Flaherty, has started something of a war with the lending institutions over their ultra-low mortgage rates.
Two weeks ago, BMO began offering a 2.89%, 5-year, fixed-rate mortgage, and Mr. Flaherty publicly scolded the lender.
Last week, Manulife Bank made a move to match the 2.89% rates offered by BMO, and that’s when Mr. Flaherty intervened.
Some accounts have Mr. Flaherty intervening personally, and some have his office doing so, but regardless, Mr. Flaherty intervened, Manulife Bank withdrew their rate cut, and now Mr. Flaherty’s role is being questioned.
The finance minister has made changes to mortgage industry several times since 2008. He brought the maximum amortization down from 40 years to 25, ensured that borrowers have 20% downpayments on second properties, decreased the amount that borrowers can take out against their home, and a host of other changes that were all designed to rein in mortgage debt.
But now it seems Mr. Flaherty is taking his debt-war to a whole other level, as he is beginning to regulate the mortgage market itself.
This is where critics (and there are many!) are taking issue.
The basic question becomes:is it in Mr. Flaherty’s job description to tell lenders how to lend?
The answer to that question depends on your political views, economic theory, and perhaps where you have your mortgage as well!
Jack Mintz, from the University of Calgary, wrote an article in the Globe & Mail last week called “Mortgage Rates Are Not The Finance Minister’s Business,” and said this:
“The crux of the issue is simple. The Bank of Canada has held interest rates to low levels for almost five years due to the slack in the economy. Consumer core inflation rates are well contained for now, and plodding growth does not suggest that we’re in for a bout of inflation any time soon. But housing prices have been rising, especially in the heated markets of both Vancouver and Toronto. Both the Governor of the Bank of Canada and the Finance Minister are concerned about Canadians taking on too much household debt, which has risen to 165 per cent of household income.”
Mr. Mintz raises an interesting topic: why, if Mr. Flaherty is so concerned about consumer debt, has he kept the overnight rate at 1.00% for the past 30 months?
Mr. Flaherty, critics argue, wants the best of both worlds.
He wants to reign in debt, but he doesn’t want to raise the overnight rate from 1%.
Instead, he wants to tell banks and other lending institutions what to do.
This is where free-market proponents take issue.
The Minister of State for Small Business, Maxime Bernier, said in a Globe & Mail article last week:
“Me, personally, I would not dictate to business what prices to decide. It’s the market. It’s supply and demand that decides the prices. It is the case for interest rates, it is the case for other products too.”
Some are arguing that Mr. Flaherty has unfairly targeted Manulife Bank, since he’s only gone after ONE lending institution with such force.
Did Mr. Flaherty go after BMO with as much gusto? It’s debatable.
And what if tomorrow, TD Bank, Scotia, and CIBC all cut their 5-year mortgage rates to 2.89%? Would Mr. Flaherty ‘reprimand’ them as well?
Should Mr. Flaherty be able to do so?
Those in the mortgage industry don’t think so, and most proponents of open-market dynamics think Mr. Flaherty has overstepped.
Jack Mintz further opined:
“It’s targeted price control that’s particularly problematic with Mr. Flaherty’s intervention. As the market is responding to excess supply, the government is pressing some financial institutions to keep interest rates high. It’s not clear that this response is productive. If we’re going to control interest rates in this way, why not use monetary policy to tighten up credit, which applies to the whole market?”
I see both sides to the coin, but let’s not forget that the government does intervene in many, many aspects of the so-called “open market.”
What do you think minimum wage laws are? I’m sure companies would be lined up to pay workers $2.00 per hour instead of the $10-ish dollars that most provinces have instituted as a fair wage, but alas, the government has stepped into the free market.
I’m also sure that most corner stores would LOVE to sell beer and wine in Ontario, but once again, the government has regulated that trade – and much to their benefit if I do say so myself! In fact, I bet 99% of consumers in Ontario would prefer to open the liquor and beer industry to competition, and be able to walk out to the 7-11 and get a six-pack of Labatt Blue, or a cheap bottle of Yellow Tail Shiraz, but the government seems to think it’s in our collective best interest to have to travel to location of their choosing, during business hours that they set, to purchase product that they decide on.
So I think the argument that the government should stay out of the mortgage market because they shouldn’t “intervene” in the free-market doesn’t really hold weight.
I understand the question about why Mr. Flaherty hasn’t increased the overnight lending rate, but in the end, I have to “trust” him over the big banks, who would sell their own mother down the river to get just a slightly bigger piece of the mortgage pie.
And if we take a look at Mr. Flaherty’s 2013 budget and associated plans, we see that perhaps he has bigger up his sleeve.
The federal government is now exploring ways increase competition in the financial sector by breaking down barriers to entry for new lenders. Mr. Flaherty is promoting competition with the Big 5 Banks, which many people think is a long time coming.
So Mr. Flaherty is looking to increase competition for consumers, and he’s looking to help consumers take on less debt. It sounds like he’s on our side, right?
My only question is this: won’t more lenders, and more competition for consumers, eventually lead to lenders slashing mortgage rates?
It seems like so many of these moves (and proposed moves) are contradictory.
The only conclusion we can draw, not to sound cheeky, is that there is no conclusion to this story and there won’t be any time soon.
I think this is just the start of a year, or maybe two, of Mr. Flaherty keeping a high public profile as he searches desperately for ways to reign in consumer debt, and protect consumers from the biggest threat out there: themselves.
Time will tell how this plays out, but in the meantime, take advantage of those low-low rates! 🙂