If you want a good analogy on the various admonishments of Bank of Canada head Mark Carney, think of the bartender who tells the local drunk he should really reconsider getting sloshed every night but is still ready and willing to serve him up another.Â Today, The Globe and Mail highlighted some recent research done by the BoC which issues a warning on a potential housing bubble burst and decline in prices:
The Bank of Canada is warning again that growth in household debt supported by a decade-long increase in home prices means families and the economy as a whole are vulnerable to a correction in the housing market.
â€œRising house prices can facilitate the accumulation of debt,â€ the central bank said Thursday in a collection of its recent research on the subject. â€œHouseholds could therefore experience a significant shock if house prices were to reverse.â€
Governor Mark Carney and his policy team at the central bank have long flagged record levels of household debt as the No. 1 domestic risk to Canadaâ€™s economy and financial system. Still, while the report contains little new information and does not include any policy prescriptions, it comes at a time of escalating concern among policy makers about how overstretched many households have become.
In my recent article entitled “Mark Carney and the Art of Deflecting Blame,” I wrote on the blatant hypocrisy emanating from Carney’s mouth asserting that the increase in private debt is not a rational reaction to his own central bank’s monetary policies:
Though Canada saw tremendous growth with public spending reforms adopted in the mid-1990s, the cyclical pattern of private overindebtedness has begun to rear its ugly head. This isnâ€™t unexpected as the BoC, like central banks all over the world, took interest rates to anorexic levels following the financial crisis of late 2008. As I have noted, this orthodox reaction has set the stage for what looks like a housing bubble that will inevitably pop.
While Carney spends a great deal of time laying out the predicaments the global economy is facing, he spends zero time acknowledging the role central banks have in perpetuating these difficulties. The continual and desperate manipulation of interest rates to spur growth is ignored. Carney is a master of pointing the finger at profligate governments and individuals without addressing the core issue at hand. Without a central bank ready and willing to use the printing press to engineer credit expansion, a sustained period of leveraging cannot occur without interest rates spiking. Price signals serve as not only a means to direct investment to those sectors which demand it but also to put a limit on an overextension resources devoted to unsustainable lines of production. The increase in cheap debt canâ€™t continue without further inflationary pressure manifesting itself over the whole economy.
As The Globe and Mail article points out, Carney’s move to keep interest rate at 1% beginning in 2010 has in turn coincided with a jump in debt accumulation with almost 50% of the total borrowing amount using home values as collateral.Â In what amounts to a laughable degree of double talk, Carney comes off as rest assured of the stability of the housing market yet worried about its growth in prices:
The central bank said Canadaâ€™s housing market has not yet shown signs of â€œthe excesses seen in other countries,â€ such as the United States and the United Kingdom in the years before the global financial crisis, which in no small part was triggered by the bursting of real-estate bubbles. However, other comments in the report reinforce the notion that the central bank â€“ which is not expected to be able to counter a runup in debt through higher interest rates any time soon â€“ is more and more worried about this issue.
Carney and co. want their cake and to eat it too.Â Whenever the inevitable bust comes, they can point back to these reports and claim they gave adequate warning.Â Meanwhile, the BoC holds interest rates low to support its banking sector and fuel the boom.Â When interest rates eventually rise, the result will be the same:
These economists too must admit and do admit that the upswing is invariably conditioned by credit expansion, that it could not come into being and continue without credit expansion, and it turns into depression when the further progress of credit expansion stops. -pg 78 Human Action
This author always finds it peculiar that while mainstream economists are well aware of the damage wrought by rising interest rates after a period of ultra cheap credit, they are still dismissive of the Austrian Business Cycle Theory as if it doesn’t adequately explain this phenomena.Â Like the collapsing of the housing bubble in the U.S., the prospects of more people coming to the Austrian school once the same happens in Canada are good.Â Even the grayest of clouds can always have a silver lining.
Just don’t expect central bankers or do-gooder politicians to ever learn their lesson.