The US government stepped in to bail out the banks to the tune of hundreds of billions of dollars. Then, to stimulate a struggling economy the US Central Bank reduced interest rates to very near zero. The banks took their bailout money and took advantage of low interest rates. In the process, they managed to squeeze another point or two into the deposit/lending spread, enabling a miraculous recovery.
America’s second largest bank, J P Morgan (JPM:NY), managed to repay their full $25 Billion TARP loan in June of 2009, a scant eight months after receiving the funds. Heck, at that rate it was more like a revolving line. $25 Billion here, $25 Billion there, who cares? For the quarter ended September 30, 2009 J P Morgan reported profits of $3.59 Billion. Quite a turnaround in one year!
Naturally, the Canadian economy suffered along with the US. The overall slowdown along with the near collapse of the automotive sector forced the Canadian government to step in with stimulus money. The Bank of Canada went along for the ride and reduced interest rates to near zero.
Like the US banks, Canadian banks did very well during the recovery period. Similarly, Canadian companies benefited from historical low interest rates and continued to turn in decent numbers throughout the downturn. Young Canadians snapped up real estate and no longer asked, "how much house can I afford?" Rather, the new question is "how much mortgage can I afford?" At these rates, they can afford BIG mortgages. This undoubtedly contributed to the escalation of real estate values...during a so-called recession!
Good for the banks, good for business, good for young people buying homes. So who’s getting shafted by near zero interest rates? The Boomers! (that’s me) and elderly Canadians (that’s not me…yet). Canadians who worked hard and saved all their lives are now offered .5% in a Bonus Savings Account or 3% for a 5 year GIC.
The Bank of Canada provided the ultimate insult with the annual issue of Canada Savings Bonds. Remember the ads? The falling leaves…the flying geese. Yup, The Bank of Canada spent mucho dinero advertising CSBs, and they were paying…are you ready for it? .40%! Yup, four tenths of one percent for our hard earned money. I’m all over that. NOT!
My own retirement a number of years ago was based on deposit rates in the 8-10% range.
Hi Ho, Hi Ho, it’s off to work I go!
4 comments:
Wow. You assumed 8-10% DEPOSIT rates? That would put mortgage rates in the low to mid teens. It didn't cross your mind that maybe that situation wouldn't be sustainable?
Your comment emphasizes how dramatically things change with time. Back in 1994, deposit rates in the 8 – 10% range were the norm and had been for some time. These levels seemed low to those of us who had come through the eighties. The Bank of Canada rate peaked at 21.03% in August of 1981 and was in double digits for most of the eighties and early nineties.
Yes, mortgage rates were in the low to mid teens and had been for many years. Young people bought starter homes in a real estate market that was steady and predictable. The term ‘real estate bubble’ wasn’t coined until the present decade. Radically different times to be sure.
TPCI
OK.. first of all, your 8-10% return expectation was extremely optimistic.
Second of all, let me remind you that it is the boomers who are the largest owners of real estate. It is in their interest for their largest single asset to experience price appreciation as a result of cmhc rule changes. It is to their advantage that young people were so willing to sign up 35 years of their lives in two-working-parent households to pay down a mortgage with considerable interest rate risk. This in itself was a major intergenerational transfer of wealth IN FAVOR of boomers.
Can't disagree with your comments about real estate.
We must remember that these same bommers, are also the largest holders of retail investments, who are seeking safe, secure investments with reasonable returns.
It's great to live in a Million Dollar home. Wouldn't be great if a Million Dollars in the bank would generate decent income to help out with the operating costs of the home?
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