What I Like About Scrooge

In praise of misers.

By Steven E. Landsburg

Here's what I like about Ebenezer Scrooge: His meager lodgings were dark because darkness is cheap, and barely heated because coal is not free. His dinner was gruel, which he prepared himself. Scrooge paid no man to wait on him.

Scrooge has been called ungenerous. I say that's a bum rap. What could be more generous than keeping your lamps unlit and your plate unfilled, leaving more fuel for others to burn and more food for others to eat? Who is a more benevolent neighbor than the man who employs no servants, freeing them to wait on someone else?

Oh, it might be slightly more complicated than that. Maybe when Scrooge demands less coal for his fire, less coal ends up being mined. But that's fine, too. Instead of digging coal for Scrooge, some would-be miner is now free to perform some other service for himself or someone else.

Dickens tells us that the Lord Mayor, in the stronghold of the mighty Mansion House, gave orders to his 50 cooks and butlers to keep Christmas as a Lord Mayor's household should—presumably for a houseful of guests who lavishly praised his generosity. The bricks, mortar, and labor that built the Mansion House might otherwise have built housing for hundreds; Scrooge, by living in three sparse rooms, deprived no man of a home. By employing no cooks or butlers, he ensured that cooks and butlers were available to some other household where guests reveled in ignorance of their debt to Ebenezer Scrooge.

In this whole world, there is nobody more generous than the miser—the man who could deplete the world's resources but chooses not to. The only difference between miserliness and philanthropy is that the philanthropist serves a favored few while the miser spreads his largess far and wide.

If you build a house and refuse to buy a house, the rest of the world is one house richer. If you earn a dollar and refuse to spend a dollar, the rest of the world is one dollar richer—because you produced a dollar's worth of goods and didn't consume them.

Who exactly gets those goods? That depends on how you save. Put a dollar in the bank and you'll bid down the interest rate by just enough so someone somewhere can afford an extra dollar's worth of vacation or home improvement. Put a dollar in your mattress and (by effectively reducing the money supply) you'll drive down prices by just enough so someone somewhere can have an extra dollar's worth of coffee with his dinner. Scrooge, no doubt a canny investor, lent his money at interest. His less conventional namesake Scrooge McDuck filled a vault with dollar bills to roll around in. No matter. Ebenezer Scrooge lowered interest rates. Scrooge McDuck lowered prices. Each Scrooge enriched his neighbors as much as any Lord Mayor who invited the town in for a Christmas meal.

Saving is philanthropy, and—because this is both the Christmas season and the season of tax reform—it's worth mentioning that the tax system should recognize as much. If there's a tax deduction for charitable giving, there should be a tax deduction for saving. What you earn and don't spend is your contribution to the world, and it's equally a contribution whether you give it away or squirrel it away.

Of course, there's always the threat that some meddling ghosts will come along and convince you to deplete your savings, at which point it makes sense (insofar as the taxation of income ever makes sense) to start taxing you. Which is exactly what individual retirement accounts are all about: They shield your earnings from taxation for as long as you save (that is, for as long as you let others enjoy the fruits of your labor), but no longer.

Great artists are sometimes unaware of the deepest meanings in their own creations. Though Dickens might not have recognized it, the primary moral of A Christmas Carol is that there should be no limit on IRA contributions. This is quite independent of all the other reasons why the tax system should encourage saving (e.g., the salutary effects on economic growth).

If Christmas is the season of selflessness, then surely one of the great symbols of Christmas should be Ebenezer Scrooge—the old Scrooge, not the reformed one. It's taxes, not misers, that need reforming.

Another Scrooge Analysis.

Survey of Buyers and Sellers

The Real Estate Board of Greater Vancouver has just released a report of a survey it commissioned of 2006 home buyers and home sellers in the Greater Vancouver region. 1,000 people were polled, and there are some interesting results.

Among the highlights:
• Just over half of respondents (54%) both bought and sold a property in 2006. 44% only bought and 2% only sold a property.
• Approximately one-third of buyers are first-time home owners.
• First-time home buyers are more inclined to be young (under 45 years of age), with children, and from Asian countries in comparison to repeat buyers.
• Approximately six-in-ten of buyers and sellers are female.
• The majority (over seven-in-ten) of buyers and sellers are married or living common-law.
• Buyers tend to be younger than sellers with just over half of buyers being less than 45 years of age whereas just over half of sellers are 35 to 54 years of age.
• The average household size of both groups is 2.7.
• Approximately one-in-ten work from home and an equal size group do so at least part of the time.
• A total of 7% of home buyers bought a new home. Among these, approximately six-in-ten purchased the home pre-completion.
• Just over one-quarter of homes were bought or sold in the City of Vancouver.
• The Tri-Cities, Richmond and Burnaby each accounted for approximately 10-16% of transactions.
• Approximately 20% of buyers and sellers, most between 45 to 64 years of age, own more than one home.
• An average of just over 50% of the purchase price was financed, this proportion being relatively consistent across the Greater Vancouver region.
• Proximity to such amenities as shops, grocery stores and medical facilities is the most common factor considered in selecting neighbourhoods, particularly among condo, townhouse or duplex buyers.
• Furthermore, approximately one-third of buyers report to have paid more for their home to be closer or within walking distance to such amenities as public transit, shops and schools.
• In terms of factors considered in the selection of their home, apart from price, the style of home, followed by the size (with the majority desiring a larger home) are the most common considerations. The location and condition of the home are other important considerations.
• A total of 94% of both buyers and sellers used a Realtor.
• MLS listings on the Internet were most commonly used to market homes for sale, followed at some distance by Realtor client lists, open-houses and print ads.
• The Internet, followed by a Realtor are the most useful sources of information about homes for sale. In fact, almost nine-in-ten rate the Internet as ‘very’ or ‘somewhat’ useful.
• Email at 61% is the most commonly preferred method of receiving information by buyers who used a Realtor. Telephone calls and in person are the next most preferred ways.

Bubble Psychology

I have seen this chart or variations of it posted about the internet and I thought it was fitting for a rainy Friday. Talk about what you want. Post links to interesting financial and real estate stories.

Cash Injection - Hello Inflation

By HEATHER SCOFFIELD Globe and Mail Update December 12, 2007 at 12:29 PM EST

OTTAWA — The world's major central banks, including the Bank of Canada, are launching a rare coordinated action to calm global credit markets and smooth out transactions over the end of the year.

The Bank of Canada, the U.S. Federal Reserve, the European Central Bank, the Bank of England and Switzerland's central bank made a joint announcement Wednesday, saying they were taking coordinated measures “designed to address elevated pressures in short-term funding markets.”

Investors applauded what was yet another step to deal with a severe credit crunch stemming from the tightening of bank lending standards. The Dow Jones industrial average was up by more than 100 points in midday trading, after rising more than 270 points in early trading, while the S&P/TSX composite index gained more than 120 points.

“At the very least these measures should tide the markets over the potentially awkward New Year period, and hopefully well into 2008 as well,” Capital Economics said in a research note. “They do not address the underlying imbalances threatening the world economy – notably the impact the U.S. housing slump will still have via conventional economic channels – but they should at least reduce the risk that the credit crunch tips economies into recession.”

For its part, the Bank of Canada will inject liquidity into short-term money markets, something it has resisted doing over the past few months despite widening spreads in short-term debt markets.

To date, the Canadian central bank has only concentrated on injecting liquidity into the overnight market to defend its target interest rate, which stands at 4.25 per cent. But spreads on credit for terms longer than overnight have been high and widening recently.

The central bank will enter into purchase and resale agreements with banks Thursday to the tune of $2 billion, followed by a minimum of $1 billion next Tuesday.

The Bank of Canada will also expand its list of collateral, something financial institutions have been begging the central bank to do for months.

Acceptable collateral for the term liquidity includes Government of Canada bonds and bonds guaranteed by the government, such as Canada Mortgage Bonds and securities backed by provincial governments, and bankers' acceptances and bearer deposit notes.

The Bank of Canada also said it would begin in March to accept some kinds of asset-backed commercial paper, or ABCP, as collateral for borrowing from its standing liquidity function, a pool from which banks can borrow at the bank rate, on an overnight basis, to help deal with temporary liquidity problems in their settlements.

To be accepted as collateral, the ABCP can not be the type that froze Canadian markets in August. Rather, it must be backstopped under global rules, not looser Canadian rules, the central bank said.

The fact that the Canadian central bank is taking measures it has resisted to date — making plans to accept ABCP as collateral, getting involved in term lending, and being more lenient in the collateral it accepts – suggests grave and urgent concern on the part of the central bank.

And the fact that it is coordinating credit-oriented action with other central banks suggests problems are deep and widespread, heading to a climax as the year draws to a close and demand for liquid cash spikes.

The liquidity measures are aimed at flooding money markets with extra readily-available cash at a price lower than the market is demanding now. The measures are meant to drag spreads back to more normal levels, and instill confidence in the markets.

While each central bank's measures may seem modest taken on their own, they are impressive if taken together and should be effective, said Mark Chandler, fixed income strategist at RBC Capital Markets.

“It's coordinated with monetary policy and it's coordinated with central banks, and it shows that they're listening,” he said.

Markets balked yesterday when the U.S. Federal Reserve cut its key rate by just a quarter of a percentage point, feeling the Fed was not sufficiently recognizing the pain felt from the credit crunch.

The Fed's response makes more sense now, with the news that it is coordinating with central banks to inject liquidity, Mr. Chandler said.

The action comes alongside interest rate cuts by the Fed, the Bank of Canada and the Bank of England, he pointed out, and as a package should ease problems in debt markets.

Mr. Chandler said it is wise for central banks to work together, since the problem of widening spreads in credit markets is globalized – more expensive borrowing conditions in one country has sent borrowers scurrying to other countries in search of better rates. But the pressure of their demand made for more expensive borrowing in other countries too.

So a problem in England quickly became a problem in Canada and the United States.
“We've all been fighting for the same thing, which is a pool of liquidity,” Mr. Chandler said.
That pool is now larger and easier to access.

In a statement timed to occur before the start of trading, the Fed said it planned to offer $40 billion (U.S.) in emergency funds to banks next week through an auction process.

The Fed said that it was creating a temporary auction facility to make funds available to banks and was also setting up lines of credit with the European Central Bank and the Swiss Central Bank that could be used for additional resources.

The first two auctions of $20 billion each will be next week on Dec. 17 and Dec. 20.
Analysts said the use of auctions to try to get more money into the banking system was an acknowledgment that efforts to spur direct loans from the Fed to banks through the Fed's discount window had not worked as well as hoped because of banks' fears that investors could become worried if they started utilizing the Fed's discount window to any large extent.

The Fed said it was also setting up lines of credit with the European Central Bank and Swiss Central Bank that could be used for additional resources.

The Fed said the new auction process should “help promote the efficient dissemination of liquidity” when other lines of credit were “under stress.”

It said that the temporary swap arrangements being set up would provide up to $20 billion in reserves for the European Central Bank and up to $4 billion for the Swiss National Bank. The reserves would be available for up to six months.

Since the global credit crunch hit with force in August, central banks have been injecting massive amounts of money into the banking system in an effort to keep credit flowing.

However, those efforts have only been partially successful. Many businesses and consumers report rising trouble in obtaining loans as banks become more fearful about extending credit in the wake of a surge in bad loans stemming from the U.S. housing crisis.

But I thougth these problems were contained to the United States and only affected a few deadbeat borrowers called subprime!?!?!

Check out Calculated Risk on this topic.
Or Floyd Norris' comments at the NY Times.

How much will prices fall?

This question is the essential question for all those waiting to buy real estate due to the fact it is over-priced and offers no value over renting right now in the Vancouver area. For a value oriented individual, no premium should be paid to own versus rent.

For comparison purposes I have selected two typical 'first time buyer' residences in the Lower Mainland to determine what I consider to be a “fair market value” for these homes.

Methodology:
I am comparing the monthly cash outflow for buying versus renting, with renting representing the fair market value of the monthly cost of the housing in question. Sources for data are the Multiple Listing Service for local asking prices and Craigslist for local asking rents. I have tried my best to find units that are as similar as possible.

Mohican's fair market value is based on the fundamental price of the housing (rent) minus any extra owner incurred costs plus any principal paydown

Assumptions:
- 100% financing
- 6% fixed five year mortgage rate with 40 year amortization
- Inclusion of maintenance fees and property taxes

1) Our first candidate is MLS # V673124 in the Central Park area of Burnaby. It is a two bedroom, 1 bath condominium. Maintenance fees and property taxes are approximately $400 / month. I assume the purchase price to be the asking price at $309,000. In this scenario a buyer would have monthly cash expenses of $2,084 = ($1,684 + $400with only $158 of principal pay-down for a total net cost of $1,926 / month. For comparison I found a comparable unit for rent in the same neighborhood, with the same features for $1200 / month for a net savings to the renter of $726 / month. Based on these numbers the mohican fair market value of this condominium is $183,456. This represents a 41% decrease from the current day asking price.

2) Our next candidate is MLS# F2730243 is a 3 bedroom, 3 bathroom townhouse in the quickly growing Clayton area of Surrey. This townhouse has an asking price of $334,900 and maintenance fees and property taxes are approximately $350 per month. In this scenario a buyer would have monthly expenses of $2,175 = ($1,825 + $350) of which only $172 is principal paydown. This gives us a total net cost of $2,003 per month. I found a comparible unit for rent in the same complex for $1600 / month. This gives the renter a monthly net savings of $403. Based on these numbers the mohican fair market value of this townhouse is $266,012. This represents a 21% decrease from the current day asking price.

What do you think? What would you be willing to pay for these places? Do you think prices will fall by the amount stated and when?