That is the question implied by Jay Bryan of the Montreal Gazette today who praises Bank of Canada head Mark Carney for guiding the country through the Great Recession with just a printing press.
It’s really hard to manage a big, complicated machine like the Canadian economy when you only have the blunt tool of interest rates. Just ask Bank of Canada governor Mark Carney.Notice the great wisdom shared in that last paragraph? The way to offset a market correction brought on by an overabundance of personal debt accumulation financed by cheap, central bank money is….more debt accumulation and cheap money! If I didn’t know better, I would say economic non-extraordinaire Lawrence Summers ghost wrote this piece himself. Mr. Bryan goes on to extol the rebound Canada’s property market saw since the crash of 2008 and cites it as proof of Carney’s masterful central planning.
That’s true even though Carney is not only smart, but also lucky.
That combination of skill and luck at the top of our banking system is a very big part of the reason why Canada looks much healthier than the U.S. or Europe these days. But the luck is starting to run a bit thin.
When the financial crisis tanked economies all over the world a few years ago, interest rates were slashed everywhere because that’s how you support a faltering economy; by making money so cheap that consumers will borrow more, mostly for big-ticket stuff like housing.
None of this was true in Canada, whose stodgy, well-regulated banking system hadn’t permitted crazy mortgage lending to deadbeat borrowers, so cheap money worked just fine here. When interest rates were slashed, people hurried to borrow and banks were willing and able to accommodate them.Indeed, Canada’s housing industry has been enjoying a bull run in recent years despite the global financial calamities plaguing every other industrialized power. But like the two years preceding the financial crisis in the U.S., naysayers are beginning to doubt the robustness of another fiat-financed boom. From a Bloomberg report released just two days ago:
Very quickly, the late-2008 dip in home-buying and home values turned into a 2009 boom, and Canada’s real-estate market has remained strong ever since.
Canadian home sales last year increased 9.5 percent to C$166 billion, the Canadian Real Estate Association said yesterday, as home prices rose 7.2 percent. Toronto-Dominion Bank (TD) estimated in a Dec. 22 report the average Canadian home is overvalued by about 10 percent.And via a Huffington Post report just a few months ago:
The average resale price rose 0.9 percent in December from a year earlier to C$347,801, the smallest monthly increase since October 2010, the real estate group said.
Other reports last week showed strength in the housing market, with new home construction increasing 7.9 percent in December and residential building permits rising 6.9 percent in November.
Canadian home prices fell by 8.5 percent between August 2008 and April 2009, but have since increased by 22 percent, according to the Teranet Home Price Index (TNBHICP). By comparison, U.S. home prices fell by 33 percent between July 2006 and March 2011, and have since increased by 1.9 percent, according to the S&P/Case-Shiller Composite-20 Home Price Index (SPCS20).
“It looks like a bubble to me, so the collapse of that bubble, that’s dangerous to any economy,” said (Robert) Shiller, who is also an economics professor at Yale University.
One in five houses sold in the Vancouver real estate market this year went for more than $1 million, according to data from the Canadian Real Estate Association.
CREA’s data show the percentage of homes sold above the million-dollar mark has doubles since 2009. The same is true for Toronto, where more than 5 per cent of homes sold this year went for more than $1 million. That’s double the percentage in 2009.None of this is surprising for those who understand the correlation between asset bubbles and cheap credit; a keystone of the Austrian school. Carney’s only real success has been fighting a deflating bubble by inflating another. The one trick pony has many fooled just as Alan Greenspan had the U.S. putting him on a pedestal in his heyday. Carney, like all central bankers, has only resorted to what he knows best: papering over debts in hopes of avoiding the unavoidable market correction. Austrian minded investors such as Mike Shedlock are predicting that Canada’s housing bubble bust will even be worse than what the U.S. experienced.
While Canada has escaped the financial crisis relatively unscathed (as of now) compared to the U.S. and Europe, its robust economic growth prior to 2008 is a wonderful refutation of orthodox Keynesianism. In 1995, the country was experiencing incredibly slow economic growth and a staggering public debt. The debt-to-GDP ratio peaked at 68.4% and unemployment was around 8.5%. The finance minister at the time even admitted “we are in debt up to our eyeballs.” Instead of further deficit spending and currency debasement to reduce unemployment, Canada took the opposite approach by cutting spending, laying off public sector workers, and allowing its currency to appreciate relative to the dollar. From John Stossel:
Canada fired government workers, but unemployment didn’t increase. In fact, it fell from 12 percent to 6 percent. Canadian unemployment is still well below ours. And the Canadian dollar rose from just 72 American cents to $1.02 today.
Canada also raised some taxes. But the spending cuts were much bigger, six to one: agriculture was cut 22 percent; fisheries, 27 percent; natural resources, almost 50 percent.See the results for yourself:
Canada’s growth prior to the financial crisis can be attributed to a great reduction in government expenditures and hence, a relief on the private sector to keep much more of its income. Such a policy is blasphemy to Keynesians who regard deficit spending as the ultimate cure for any economic hiccups irrespective of historical evidence. It should also be pointed out that Canada’s foray into stimulus at the onset of the crisis was negligible in size compared to that of the U.S. or China and was much more of a political show than a genuine effort to squander more funds from the private market.
While Carney is lucky to be presiding over a seemingly successful tenure as the head of Bank of Canada, it won’t last forever. Canada’s housing bubble will pop and take his reputation down with it.
This time isn’t different. It will be yet another vindication for the Austrian school which holds that no amount of money printing or interest rate manipulation will ever pave the way for sustained growth. Cheap money is only a languishing band aid that eventually falls apart to once again reveal the cracks of a monetary system addicted to the drug which fuels its own destruction.