Too big to fail?

With any sig­nif­i­cant move up­wards in in­ter­est rates, a whole lot of bank man­agers are go­ing to be in trou­ble

Cape Breton Post - - EDITORIAL - Rus­sell Wanger­sky Rus­sell Wanger­sky is TC Media’s At­lantic re­gional colum­nist.

I’m not a big be­liever in great gov­ern­ment con­spir­a­cies — for a num­ber of rea­sons. First, be­cause gov­ern­ments can’t con­trol some­thing a s sim­ple as a roads con­tract fid­dle with­out get­ting caught (“I know — let’s spend 88 per cent of Ac­tion Plan money in Con­ser­va­tive dis­tricts. No one will ever no­tice.”) and sec­ond, be­cause peo­ple talk. They talk to spouses, to friends, in bars. I heard at one point that Sen. Mike Duffy’s le­gal tra­vails be­gan with an over-loud con­ver­sa­tion heard in a Ot­tawa wa­ter­ing hole. Third, be­cause gov­ern­ment is­sues travel through so many hands.

I do think, how­ever, that some­times, crit­i­cal in­for­ma­tion is just not men­tioned, be­cause it’s eas­ier that way.

And that brings me to the Bank of Canada, and its de­ci­sion Thurs­day to lower in­ter­est rates yet again.

The an­nounce­ment had its usual bevy of up-and-down in­di­ca­tors: oil is weak, the re­cov­ery slow, ex­ports were off, in­fla­tion low — all were rea­sons for the Bank to pre­scribe a lighter in­jec­tion of in­ter­est rates than dur­ing the past few months.

(The Globe and Mail ac­tu­ally likened Bank of Canada Gover­nor Stephen Poloz to a suc­cess­ful doc­tor on Thurs­day, say­ing he’s got the di­ag­no­sis and treat­ment for “Pa­tient Canada” just right.) But I don’t think the Bank of Canada is us­ing its in­ter­est-rate set­ting abil­i­ties and tools to solely at­tempt to con­trol — or even stage-man­age — the macro-econ­omy. In fact, I think there’s an ever-larger ele­phant in the fi­nan­cial room, one that doesn’t get a lot of public dis­cus­sion when the rates are set. We talk about what the new lower in­ter­est rates might do — we don’t talk about the far more sin­is­ter ef­fects of an in­ter­est rate in­crease.

Sim­ply put, I think house­hold debt in Canada has grown so tremen­dously, stag­ger­ingly large that it’s com­ing close to con­trol­ling the Bank of Canada.

I re­mem­ber a St. John’s busi­ness­man who told me “If you owe your bank branch $10,000 and you can’t pay, you’re in trou­ble. If you owe your bank branch $10 mil­lion and you can’t pay, your bank man­ager is in trou­ble.”

With any sig­nif­i­cant move up­wards in in­ter­est rates, a whole lot of bank man­agers are go­ing to be in trou­ble. What was in­ter­est ing about the dis­cus­sion of Poloz’s de­ci­sion is that it fo­cused on what the in­ter­est rate de­cline might do to al­ready-ac­tive bor­row­ers. It might make more money for real­tors, with more house sales, for ex­am­ple.

What wasn’t dis­cussed was the corol­lary ef­fects of an in­ter­est rate rise: that many fam­i­lies, crit­i­cally overex­tended af­ter years of near-zero credit costs, would not only see their spend­ing abil­i­ties con­tract, but might ac­tu­ally tank out of ma­jor bor­row­ings — like mort­gages.

Thurs­day’s Bank of Canada rate an­nounce­ment was fol­lowed by a bunch of cau­tion­ary lan­guage: that Cana­dian banks don’t have much wig­gle room to make prof­its with such low in­ter­est rates, that peo­ple shouldn’t bor­row more, even that, as eco­nomic for­tunes im­prove in the fall and the fed­eral elec­tion passes, the Bank is likely to move rates up­wards.

Fam­ily debt in the econ­omy right now is sim­i­lar to a very, very heav­ily laden air­craft. We’re fly­ing, but the pi­lot has to keep goos­ing up the power to keep the thing in the air. That power — in this case, low in­ter­est rates — is keep­ing the air­craft up there.

But there’s only so much power. Even­tu­ally, aero­dy­nam­ics will win.

I think the silent con­spir­acy is that ev­ery­one on the fis­cal side is hop­ing against hope that oil prices re­vive, or that man­u­fac­tur­ing picks up un­ex­pect­edly, in time to pro­vide the eco­nomic fuel that lower and lower in­ter­est rates can only do for so long.

Re­mem­ber: ev­ery­body agreed that the em­peror’s new clothes looked great — un­til some­one pointed out he was naked.

I won­der some­times about the em­peror’s new eco­nom­ics.

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