Wednesday, June 29, 2005


Canada's Economy in Motion

Welcome to gun-toting Canada, eh ? It is a very welcome news of these days that Canadian senators want to see the face at the Canadian border look more like the U.S. counterpart: armed and focused on people instead of goods. In a June report entitled "Borderline Insecure" the Canadian Senate Committee on National Security and Defense recommends that Canada "change the entire culture at border crossings". Under pressure from U.S. politicians and the White House Administration, furthermore, the Committee recommends that Canada adopt a border image very much like the American.
The Committee has spent the last three years looking at security on the immense US/Canada border and has found it lacking on the Canadian side. "With good border security" proclaims the Committee in the report "we can protect our own country as well as be a good neighbor to a country that is vitally important to Canadians, politically and economically". But here is the really good economic news for which the Committee, in my views, must be praised. The report contains 26 recommendations necessary to ensure Canada's economic future, national security and smooth political relations with Washington. One of the top three is to significantly raise the personal exemption limit to allow cross-border shoppers to bring back more into Canada without paying duty. The Committee sustains that there should be "far less emphasis" on the collection of duties and taxes at border checkpoints since this takes valuable time away from inspectors to focus on their security responsibilities.
The Senate Committee recommendation is to restructure personal exemption limits to match American limits at first, and then raise them. "Large corporations have clearly benefited from free trade. Retailers and consumers in general should be provided with increasing opportunities to share the benefits" it states. Today American consumers can bring home US $200 in goods every trip across the border and can return to the U.S. with U.S. $800 after a trip lasting longer than 24 hours. For Canadians, on the other hand, there is no personal exemption under 24 hours and it's only CAD $50 for trips between 24 to 48 hours long, going up to CAD $750 after a week absence from Canada. The report recommends that the exemption limits be raised to the same level as the U.S. by 2007 and that the Canadian Border Services work with U.S. Customs and Border Protection to raise the limit to the equivalent of U.S. $2,000 per person per trip on both sides by 2010 ! Personally I think this is such a great news destined - if approved - to spur Canada's economy so much that the Committee deserves a warm round of applause.
On a different matter, the report further concludes that Canadian border inspectors also lack the tools needed to confront security threats when they find them. The Committee suggests that our inspectors should be armed, just like their American counterparts. "While the inspectors routinely encounter persons in possession of firearms, they themselves are armed only with batons and pepper spray" the report states, claiming moreover that in many sectors of the border backup from local police or the RCMP is "either slow or non-existent". Finally, to counter international terrorism (and appease Washington), the report recommends following the U.S. footsteps by meeting up with American requirements for everyone to carry identification that is "machine readable, tamperproof, biometrically enhanced and known to have been issued on the basis of reliable documentation" by 2007.
Luigi Frascati

Wednesday, June 22, 2005


The History of Interest throughout Time

In this day and age of mortgage and lending interest rates as well as returns on investment and yields, I thought it would be interesting for my readers to take a look at how the very concept of interest - both active and passive interest - has developed throughout the centuries to the point of where we acknowledge and understand it today. Looking back at how things were once seen is always gratifying, to the extent that it provides us with a measure of how times have changed.
The 'phenomenon on interest' as it was once called first became the object of question only in the form of Loan Interest for a full two thousand years. What especially caught the attention - and the ires - of our ancestors was the fact that Loan Interest has its source and spring not in labour but, as it were, in some bounteous mother-wealth. In societies of the past where work and productivity stood at the very essence of existence, making a profit by - quite literally - not producing anything for the common good must have looked almost sacriligeous. The acquisition of wealth without labour, moreover, ran diametrically opposite to many early religious tenets, both pagan as well as christian.
The history of the interest phenomenon, therefore, begins with a very long period in which loan interest, or usury, alone is the subject of investigation. This period begins deep in ancient times and reaches down to the eighteenth century. It is occupied with the contention of two opposing doctrines: the elder of the two is hostile to interest; the later defends it. In the early stages of economic development there regularly appears a lively dislike to the taking of interest. Credit has still little place in production. Almost all loans are loans for consumption and are, as a rule, loans to people in distress. The creditor is usually rich, the debtor poor; and the former appears in the hateful light of a man who squeezes something from the little of the poor in the shape of interest to add to his own superfluous wealth. It is no wonder, therefore, that both the ancient world and the Christian Middle Ages were exceedingly unfavourable to usury. The ancient world, in spite of some few economical flights, had never developed very much of a credit system and the Middle Ages, after the decay of the Roman culture, found themselves - in industry as in so many other things - thrown back to the circumstances of primitive times. As a result, in both eras several laws were enacted forbidding the taking of interest, or the paying of it.
Perhaps the Greek philosopher and thinker Aristotle in his book "Politics" is the most vociferous opponent of interest. Here is what he wrote : "Of the two sorts of money-making one, as I have just said, is a part of household management, the other is retail trade: the former necessary and honourable, the latter a kind of exchange which is justly censured; for it is unnatural, and a mode by which men gain from one another. The most hated sort, and with the greatest reason, is usury, which makes a gain out of money itself, and not from the natural use of it. For money was intended to be used in exchange, but not to increase at interest. And this term Usury which means the birth of money from money, is applied to the breeding of money, because the off-spring resembles the parent. Wherefore of all modes of making money this is the most unnatural". Quite a statement! You may want to bring it up to the attention of you banker next time you stop by to make your mortgage payment.
Aristotle's thinking may be summed up this way: money is by nature incapable of bearing fruit. As such, the lender's gain cannot come from the peculiar power of money. And, consequently, it can only come from a defrauding of the borrower. Interest is therefore a gain got by abuse and injustice (another point you may want to discuss with your banker).
Things began to change somewhat under the Roman Empire, when economic exchange and trading of goods reached such complexity that gratuitous credit began not to make sense any longer. And yet even the Romans - perhaps in obtemperance to the theological credo of the time - put severe legal constraints to the amount of interest that could be charged. And to canonize these limits (which varied on a case-by-case basis), they were the first to publish a list of interest rates. This list grew more and more complicated with time, since the Senate thought that interest rates should be less for friendly countries and more for the unfriendly, thereby instauring the first international economic agreements among countries of the Mediterrenean Basin (though these economic 'agreements' where unilateral, i.e. imposed by Rome on to everyone else).
Things began progressively worse, however, following the break up of the Roman Empire and the advent of Christianity. In fact in the sacred writings of the New Testament were found certain passages which, as usually interpreted, seemed to contain a direct divine prohibition of the taking of interest. This was particularly true of the famous passage in Luke: "Lend, hoping for nothing in return" (third point you should talk to with your banker). The powerful support which the spirit of the time, already hostile to interest, thus found in the express utterance of divine authority, gave it the power once more to draw legislation to its side. The Christian Church lent its arm. Step by step it managed to introduce the prohibition into legislation. First the taking of interest was forbidden by the Church, and allowed to the clergy only. Then it was forbidden to everyone, but still the prohibition only came from the Church. At last even the temporal legislation succumbed to the Church's influence and gave its severe statutes the sanction of Roman law.
The status quo remained cast into stone for the following fifteen centuries, until the advent of the Industrial Revolution. Here the monarchies of the time, most notably the Crown of England, decided to back private entrepreneurs with their own money. They chose to do so to gain a political and strategic edge over other monarchies and other states. And so as to encourage their own citizens not only to manually work, but also to think, they cheerfully invested large sums in the development of their inventions - some archaic but others of very practical application. In doing so, however, the monarchies wanted to reap also an economic profit and thus the modern concept of interest - both simple and compunded - was finally born.
Luigi Frascati

Saturday, June 18, 2005


Due Diligence in a Real Estate Transaction

As time goes by and real estate markets become hotter and hotter the temptation is there for prospective Purchasers to cut corners while involved into a legally binding accepted offer. This may not be the most prudent venue to follow, as illustrated by this very recent Court case.
The Buyer made an offer to purchase a condo in Yaletown (Vancouver, BC) which contained several subject-to clauses, one of which being subject to financing. The condition precedent stipulated that the Buyer would be applying for a loan in the amount of CAD $150,000. When the lender sent in an appraiser, the appraiser informed the Purchaser that he was in fact over-paying for the suite and that the appraisal amount would be less than the purchase price. The Buyer proceeded with the application for mortgage financing but for a loan in the amount of CAD $250,000, not the CAD $150,000 proscribed in the contract. The Buyer, under no circumstances, could possibly qualify for any such amount. Additionally, there was a delay in applying for the mortgage and the Buyer did not ask for an extension of the subject. Ultimately the Buyer did not remove the financing clause and failed to purchase the unit. The matter ended up in Court.
The Judge found the Buyer guilty of contractual negligence, that is failing to carry out his side of the contract with reasonable care, and awarded CAD $68,000 to the Seller for losses suffered.
Here is the point. The question at law, as described by the Judge, is whether the Buyer satisfied his contractual obligation to undertake his best effort to obtain financing, i.e.: due diligence. If, in fact, the Buyer had used his best effort to obtain financing but was unsuccessful, the Court opinated, the Buyer could then in fact excuse himself from completing the sale by relying on the non-removal of the financing condition. However in his reasoning the Judge found that by applying for an unobtainable mortgage the Buyer did not fullfil his contractual due diligence, since the Buyer 'knew or ought to have known' that he could not possibly obtain a CAD $250,000 loan. The Court further concluded that the phrase "This clause is for the sole benefit of the Buyer" commonly inserted in real estate contracts in British Columbia did not release the Buyer from the requirement that he use his best efforts to 'diligently fullfil' his side of contractual obligations.
I see often more during the course of my practice that many Buyers - especially the young - think that the subject to financing clause (or any other subject clause for that matter) is a free ticket to walk away from a contract. Not so ! And this recent case re-affirms the fact that it is not so. A contract signifies the common intention of the parties to be legally bound by their respective obligations, with each party relying on the promises and statements made by the other party. Implied in this is the assumption that each party will deal with reasonable care in the carrying out of his side of the bargain.
So, therefore, if you are a Buyer who thinks he can walk away from a Contract of Purchase and Sale merely by not removing a condition precedent, take my multi-annual professional advise and do yourself a favor: do not put in the offer.
Luigi Frascati

Saturday, June 04, 2005


Does Money buy Happiness? An Economic Intrigue

An enduring paradox in the history of humanity is that although the rich are significantly happier than the poor within any country at any moment, average happiness levels change very little as people’s incomes rise in tandem over time. The question of happiness is central to our lifestyles, religions and societies. It can be argued, in fact, that all that we do is ultimately for the conquest and increase of happiness. Happiness is also a central tenet of the science of economics: the measurement of changes of income levels vis-a-vis changes in levels of happiness have been interpreted to mean that happiness depends on relative rather than absolute income. However, another interpretation is true, that is gains in happiness that might have been expected to result from growth in absolute income have not materialized because of the ways in which people in affluent societies have generally spent their incomes.
Considerable evidence suggests that if we use an increase in our incomes, as many of us do, simply to buy bigger houses and more expensive cars, then we do not end up any happier than before. But if we use an increase in our incomes to buy more of certain inconspicuous goods–such as freedom from a long commute or a stressful job–then the evidence paints a very different picture. The less we spend on conspicuous consumption goods, the better we can afford to alleviate congestion; and the more time we can devote to family and friends, to exercise, sleep, travel, and other restorative activities. On the best available evidence, reallocating our time and money in these and similar ways would result in healthier, longer– and happier–lives.
A case in point is Japan, which was a very poor country in 1960. Between then and the late 1980s, its per capita income rose almost four-fold, placing it among the highest in the industrialized world. Yet the average happiness level reported by the Japanese was no higher in 1987 than in 1960.They had many more washing machines, cars, cameras, and other things than they used to, but they did not register significant gains on the happiness scale. The same pattern consistently shows up in other countries as well, and that’s a puzzle for economists. If getting more income doesn’t make people happier, why do they go to such lengths to get more income?
It turns out that if we measure the income-happiness relationship in another way, we get just what the economists suspected all along. When we plot average happiness versus average income for clusters of people in a given country at a given time, we see that rich people are in fact much happier than poor people. The evidence thus suggests that if income affects happiness, it is relative, not absolute, income that matters. Some social scientists who have pondered the significance of these patterns have concluded that, at least for people in the world’s richest countries, no useful purpose is served by further accumulations of wealth. On its face, this should be a surprising conclusion, since there are so many seemingly useful things that having additional wealth would enable us to do. There is indeed independent evidence that having more wealth would be a good thing, provided it were spent in certain ways. The key insight supported by this evidence is that even though we appear to adapt quickly to across-the-board increases in our stocks of most material goods, there are specific categories in which our capacity to adapt is more limited. Additional spending in these categories appears to have the greatest capacity to produce significant improvements in well-being.
The human capacity to adapt to dramatic changes in life circumstances is impressive. We adapt swiftly to losses as well as to gains. Ads for the Provincial Lottery show participants fantasizing about how their lives would change if they won. People who actually win the lottery typically report the anticipated rush of euphoria in the weeks after their good fortune. Follow-up studies done after several years, however, indicate that these people are often no happier –and indeed, are in some ways less happy–than before. In short, our extraordinary powers of adaptation appear to help explain why absolute living standards simply may not matter much once we escape the physical deprivations of abject poverty. This interpretation is consistent with the impressions of people who have lived or traveled extensively abroad, who report that the struggle to get ahead seems to play out with much the same psychological effects in rich societies as in those with more modest levels of wealth.
So, therefore, the economic answer to the question as to whether money buys happiness must be in the negative. The evidence described earlier suggests that the satisfaction provided by many conspicuous forms of consumption is more context sensitive than the satisfaction provided by many less conspicuous forms of consumption. If so, this would help explain why the absolute income and consumption increases of recent decades have failed to translate into corresponding increases in measured well-being.
Luigi Frascati

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