Too big to fail?
The right diagnosis, treatment for “Patient Canada?”
I’m not a big believer in great government conspiracies - for a number of reasons. First, because governments can’t control something as 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 macroeconomy. 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 interesting 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.
Bank of Canada Governor Stephen Poloz.