In what has to be one of the most nonsensical and counterintuitive statements since Lawrence Summers, former economic advisor to U.S. President Obama and former President of Harvard University, declared that though the financial crisis was caused by too much confidence and debt run-up, the cure involves more of the same imprudent spending habits, Carney offers this muddled statement:
The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage—the situation that got us into this mess in the first place.
Read it twice for the full effect. You see, the problem isn’t a deficiency of available credit; central banks around the world have made sure of that. It’s the demand for credit that remains an albatross on a robust spending boom. Yet, and this is the best part, regulations that ensure that credit expansion, a driving force in fractional reserve banking, doesn’t finance more reckless debt amassing can’t be expunged as it would lead to another deleveraging bust.
Carney wants his cake and to eat it too. While he warns of lack of credit demand, he also worries that an increase will lead to another boom and bust. This double talk- wanting success while worrying about too much success- is typical central banker speech.
Carney is not alone in this sentiment. Public officials all over the world, namely in the U.S. and Europe, are desperate for a return to the boom years. The drug of easy credit and debt monetization had them addicted to the good times.
Like any good central planner, Carney speculates on how to best unwind the private debt load in order to run it up again. He paints himself as a deep thinking central planner struggling to find the exact formula where the BoC can use its printing press and discover the perfect equilibrium for credit expansion without blowing up another bubble.
Over the same period, Canadian households increased their borrowing significantly. Canadians have now collectively run a net financial deficit for more than a decade, in effect, demanding funds from the rest of the economy, rather than providing them, as had been the case since the Leafs last won the Cup.It cannot entirely be business as usual. Our strong position gives us a window of opportunity to make the adjustments needed to continue to prosper in a deleveraging world. But opportunities are only valuable if seized.First and foremost, that means reducing our economy’s reliance on debt-fuelled household expenditures.
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 isn’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. Even Carney alludes to such as he states one of the hallmarks of the Austrian Business Cycle theory where the discoordination brought on by credit expansion leads to malinvestment in specific capital ventures and consumer goods:
Moreover, much of the proceeds of these capital inflows seem to be largely, on net, going to fund Canadian household expenditures, rather than to build productive capacity in the real economy. If we can take one lesson from the crisis, it is the reminder that channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.
When the day of reckoning arrives, the market correction will undermine an already flimsy recovery. Not only will private balance sheets containing mortgages and real estate take a hit due to reduced prices but also the Canadian Mortgage and Housing Corporation will be ravaged as it guarantees about 90% of the whole housing market. As Chris Horlacher points out, the CMHC’s leverage stands at almost an astounding 100:1. A burst of the housing bubble will likely require a massive bailout via the Canadian government to keep the CMHC functional which in turn will require further debt monetization. The probability of this chance event coming to past is further emphasized by Carney’s earlier comments on the inseparable nature of the private sector from governmental dominance.