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Thursday, September 30, 2010
Mark Carney needs to shut the hell up and raise rates
Bank of Canada governor, Mark Carney is at it again. This time, with even stronger rhetoric than before.
He is warning consumers to stop taking on more consumer debt.
Instead, Carney should look himself in the mirror and tell himself to tighten the spigot on the Niagara Falls of cheap money, that is the policy he's continuing.
Continuing to allow near-zero interest rates to persist, is akin to giving away unlimited free food, indefinitely, and telling people to stop getting fat. People can't even manage to not get fat when the food costs them money. Let alone when it's free.
Human beings are notoriously short-term thinkers. In fact, very few people are generally any good at making good, long-term decisions unless necessity pins them down with a knee to the neck.
When rate policy and government stimulus is used to "kick-start" the economy, what's really happening is that the market is being encouraged to borrow and spend. Government runs deficits, and the central banks debase the currency to provide more credit to businesses and consumers.
The fact that people like Mark Carney, who worship at the alter of inflationary monetary policy, are surprised that loose money policy leads to high consumer debt is astounding. It doesn't require much theory or study to understand that human beings, while rational actors, do not reason on a macro or long-term basis. Any economic policy that expects them to do so -- like current policy -- in the face of heavy incentives towards extremely short-term, indulgent behaviour is doomed.
The reason, and the only reason, that the Western world is buried under a mountain of debt is for the exact policies which Mark Carney and his foreign counterparts continue to pursue.
While economists throw around their graphs, equations and theories on exactly how much to inflate a currency, and when to stop, the aggregate fiscal position of the entire Western world has been in free fall for over 30 years. Save for a brief reprieve to a return to surplus cashflow for some governments, for a brief period of time -- and hardly for sufficient in time or quantity to account for previous and future shortfalls. The parabolic graph of aggregate Debt-vs-GDP for the past 30 years speaks for itself.
As the world was brought to it's knees in late 2008 in a wave of bad debt, the solution to the problem by Carney and his ilk has simply been: more debt, in greater quantities, at higher velocities.
What's that they say about the definition of insanity?
The deterioration of the balance sheets of consumers in that time period speaks for itself. Consumer bankruptcies in great numbers are on the horizon. You know that Mr. Carney, and you think waving your finger while sitting on top of your digital printing press is going to save you from your real legacy?
Posted by Mike Brock on September 30, 2010 | Permalink
Comments
Excellent post, Mike, but I have to disagree on one point.
"...human beings....do not reason on a macro or long-term basis. Any economic policy that expects them to -- like current policy -- is doomed."
I think that current monetary policy is anything but rational or focused on the long term. In fact, it's quite short-sighted in its approach.
Irrationally low interest rates signal consumers to borrow and spend now, and not worry about paying it back. Low interest rates also have the effect of penalizing saving, which is an activity that is necessarily focused on the longer term.
Carney's claim that he's only admonishing people to be sensible is belied by the fact that the institution he runs is doing everything in its power to achieve the opposite. It's like advocates of rent control blaming real estate investors for the resultant housing shortage.
If a market-oriented banking system were instituted in this country, you would be amazed at how forward-thinking people would suddenly become, precisely because there would be no one around to pay for their failure to do so.
Posted by: Dennis | 2010-09-30 2:59:17 PM
I think that current monetary policy is anything but rational or focused on the long term. In fact, it's quite short-sighted in its approach.
That wasn't my point. My point was that individuals couldn't be expected to make choices based on long-term considerations in the face of low interest rates. Instead, they will likely load up the credit card and banks, will be ready and willing to keep raising their credit limits.
Hence, my example of the free food.
Posted by: Mike Brock | 2010-09-30 3:04:22 PM
I had a good laugh when Carney originally warned consumers about taking too much debt. Either he's stupid, or a hypocrite. I'm thinking more the latter.
But this comes back to my point. And I'm sure Carney must know this. The only way to increase net indebtedness is to lend money which is not backed by savings. Every dollar that Carney and his pals create out of thin air, lend to Royal Bank at 1.0%, which will in turn be lent out at 3.99% for a five year fixed mortgage for example (for a lovely 300 basis point margin), increases net debt in Canada. It also fattens the Royal Bank's profits at the expense of everyone else.
Posted by: Charles | 2010-09-30 3:18:22 PM
Charles,
Well, mechanically the Bank of Canada doesn't lend money to anyone. Unlike the Federal Reserve system in the US which manages it's own discount window, there is no such mechanism in Canada.
Rather, the chartered banks themselves create new money in the overnight intrabank lending market. Which is why it's called a "target rate" in Canada, rather than a "discount rate".
Just for the purposes of education on the Canadian system. The end result is no different than that of the US. But it's worth understanding this point, nonetheless.
The Bank of Canada is not a reserve bank. It is a policy bank. The banks which are under it's regulatory control, the chartered banks, collectively perform the duties of the central bank in a functional sense. The Big 5 banks are their own lenders of last resort.
One could argue, and it has been argued, that short of outright collusion being present, that this sort of arrangement is marginally safer and more restrained than the US system, because it results in banks constantly looking over each other's shoulders.
There's at least some anecdotal evidence to support this theory, as none of the big five banks have ever been close to their reserve ratio limits, unlike US and European banks which in many cases were straddling their legal maximums. Canadian banks were not even within firing range of those limits -- which was interesting.
Actually, to put the capitalization levels of the big 5 into perspective... most of them could survive a default on almost all of their mortgage liabilities and still stay solvent. Which is quite impressive, really. At least in the context of a fractional reserve system.
On the other hand, the arrangement negates the the possibility of any broad-based competition in the consumer banking space, since the banks need to be sufficiently big enough in order to serve this chartered purpose.
Posted by: Mike Brock | 2010-09-30 3:22:03 PM
Shit. You're right. I'm too used to thinking in American terms. My bad.
Posted by: Charles | 2010-09-30 3:51:23 PM
Well actually, since something like 40% of their on balance sheet mortgages are insured by the CMHC ... I'm sure they'd have no problem staying solvent. I'm not so sure about us however ;)
Posted by: Charles | 2010-09-30 3:57:40 PM
Thanks for taking me back to my university days Mike. What we do forget when we've been out of school for too long ...
Posted by: Charles | 2010-09-30 4:42:38 PM
Good post Mike
I agree with it entirely
Posted by: StanleyR | 2010-09-30 5:06:45 PM
I largely agree, but shouldn't our central bank get some points for raising rates lately (not enough, I know) and not resorting to quantitative easing?
Posted by: Cytotoxic | 2010-09-30 6:07:43 PM
And yet Mr. Carney's fellow central banker, one Charles Bean, deputy governor of the Bank of England admonished senior savers earlier this week for their complaints about low interest rates eating into their income stream and advised them to get out and spend their capital. He also admitted that the Bank of England had deliberately lowered interest rates to multi-generational lows to force savers to spend to stimulate the economy.
Perhaps the world's central bankers should get together and discuss what they really want consumers to do to bail them out of the mess they have made and provide us with a consistent story.
Here is background information on Mr. Bean's comments earlier this week:
http://viableopposition.blogspot.com/2010/09/quit-griping-and-spend-your-savingsnow.html
Posted by: Steve Thompson | 2010-09-30 6:15:12 PM
Cytotoxic,
Given enough time and the right circumstances, our central bank would resort to quantitative easing in a heartbeat. They consider QE to be just another "tool" in their pouch which they are prepared to use regardless of the consequences.
One problem they will be forced to deal with in the near future is a runaway appreciation in the Canadian dollar, brought about by a collapse in the yankee greenback. I'm not sure that QE would be the precise tool they would use to deal with this, but I'm sure that they are prepared to follow the U.S. down the hyperinflation path by some means if only to maintain a certain ratio between our currencies.
Posted by: Dennis | 2010-09-30 7:53:50 PM
An increase in lending rate will immediately cause a drop in stock markets and govt bonds, hence a devaluation of pension funds and pension payments, and also a drop in business borrowing to create jobs.
Poorer pensioners and less jobs, with the stroke of a pen. In the middle of a recession. Great move!
Posted by: Manny | 2010-09-30 9:18:07 PM
Manny,
If pensioners have savings then higher interest rates would benefit them. Lower interest rates cause inflation and therefore devaluation of savings.
If pensioners savings are tied up in speculative instruments, then I don't know what so say: but continuing on this path is stealing from our children's future in unsustainable amounts and has us on course for yet another financial crisis. Except much bigger than next time and much sooner than most people think.
We do not need to encourage spending, debt and people running down their savings to encourage fake growth.
Posted by: Mike Brock | 2010-10-01 5:16:20 AM
Dennis,
That's an excellent point. Too many economists view a strong dollar as a bad thing (it isn't of course). I have a bad feeling they'll keep inflating for longer than we thing.
Posted by: Charles | 2010-10-01 5:39:19 AM
"we think".
Posted by: Charles | 2010-10-01 5:39:37 AM
Manny is thinking short term Mike, just like everyone else I know. Human beings don't generally think long term. We have an uphill battle on this one, that's for sure.
Posted by: Charles | 2010-10-01 5:44:42 AM
I opened up my Globe & Mail this morning to an article calling for doom and gloom for the future of the Canadian economy. Why? Wait for it ... Weakening housing demand.
The big bank economist they quote literally makes the case for rising house prices as a necessity to economic growth, saying that not having rising house prices is like taking $20 billion out of the economy. I can't make this shit up.
Yes, Charles... THAT'S what we are up against. A culture that things shoveling the majority of ones income into a depreciating asset, and relying on future price speculation against that asset to "fuel" economic growth.
And you've got "chief economists" working at all the big banks who essentially say this with a straight face.
Posted by: Mike Brock | 2010-10-01 6:08:24 AM
... You know, because investing in say, productive assets -- no, that's what developing countries do. Advanced countries import their labour and speculate on depreciating assets and financial instruments, while exporting our "high value services" to developing economies.
The philosopher's stone is real!
Posted by: Mike Brock | 2010-10-01 6:17:14 AM
"And you've got "chief economists" working at all the big banks who essentially say this with a straight face."
Just to really make you sick ... do you have an idea how much these people make?
Posted by: Charles | 2010-10-01 6:28:52 AM
It's a bit like those "sell-side" analysts at major brokerage houses. Last week, I had an analyst inform me that securitized lending (which only exists because of gov't) was worth the same as on b/s lending in terms of valuation. When we left the meeting, one of my collegues turned to me, rolled his eyes, and said: "what an idiot".
Posted by: Charles | 2010-10-01 6:32:07 AM
@Dennis: we shouldn't assume all Central Banks are evil and incompetent to the same degree, just to at least some degree. Canada had much tighter monetary policy than America before the crash and that's how we avoided so much boom bust, along with some other policies like not forcing banks to make bad loans. This is even truer of Brazil's central bank.
@Mike Brock: where did that dumbass work? Please don't say BMO....
Posted by: Cytotoxic | 2010-10-01 5:44:31 PM
I opened up my Globe & Mail this morning to an article calling for doom and gloom for the future of the Canadian economy. Why? Wait for it ... Weakening housing demand.
The big bank economist they quote literally makes the case for rising house prices as a necessity to economic growth, saying that not having rising house prices is like taking $20 billion out of the economy. I can't make this shit up.
Yes, Charles... THAT'S what we are up against. A culture that things shoveling the majority of ones income into a depreciating asset, and relying on future price speculation against that asset to "fuel" economic growth.
And you've got "chief economists" working at all the big banks who essentially say this with a straight face.
Posted by: Mike Brock | 2010-10-01 6:08:24 AM
I agree. My take on this is that higher housing prices just majorly increases debt load. It just means people have bigger mortgages (bad). If housing demand drops I see this as positive in this today's era.
Housing demand can be a negative thing but with the personal debt load Canadians have now it is a good thing NOW. Weakening demand is good.
"saying that not having rising house prices is like taking $20 billion out of the economy" I see not rising prices as billions in less personal debt.
Posted by: StanleyR | 2010-10-01 5:54:27 PM
I mean
LOWER Housing demand can be a negative thing but with the personal debt load Canadians have now it is a good thing NOW. Weakening demand is good.
Posted by: StanleyR | 2010-10-01 5:56:23 PM
"where did that dumbass work? Please don't say BMO...."
Heh. I really shouldn't tell you that so I'll leave it this. One of the big five ;)
Posted by: Charles | 2010-10-04 6:38:28 AM
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