Thursday, December 9, 2010

When the BOC talks we should listen

I have never read such an anxious piece from them as their latest review. Even in the midst of the crisis they were not sounding such dire alarm bells.

Here's a few clips:

'The Bank judges that the risk of this environment jeopardizing financial stability in Canada in the near term is moderate; however, careful monitoring of risk-taking is essential so that any buildup of financial imbalances can be identified early '

'In Canada, with the growth rate of debt outpacing that of disposable income in recent years, the proportion of households with stretched financial positions that leave them vulnerable to an adverse shock has grown significantly. The risk is that a shock to economic conditions could be transmitted to the broader financial system through a deterioration in the credit quality of loans to households, which would prompt a tightening of credit conditions that could trigger a mutually reinforcing deterioration of real activity and financial stability. '

'The Bank judges that, overall, the risk of a system-wide disturbance arising from financial stress in the household sector is elevated and has edged higher since June. This vulnerability is unlikely to decline quickly, given projections of subdued growth in income '

'However, the vulnerability of the household sector has deepened, with the rate of growth of household debt continuing to exceed that of income.'

'The main domestic source of risk arises from the increasingly stretched financial position of Canadian households, which leaves them more vulnerable to adverse events '

'In Canada, the deteriorating financial position of the household sector requires vigilance. When taking on debt, households bear ultimate responsibility for ensuring that they will be able to service it in the future. It is also essential that financial institutions actively evaluate the risk sur- rounding households’ ability to service their debt over time. Authorities are co-operating closely and will continue to monitor the financial situation of the household sector.'

My comments:

So the are saying the same thing in several different ways, in a very short document. Consumers and households you are over-debted..damn over-debted. Your debt growth has no relation to your income growth (or lack of) and your ability to pay it!

Wouldn't have anything to do with your ZERO interest rate policy would it now??

Where is this huge debt coming from?= OVER-PRICED HOUSING.

Most of it is housing-related debt and equity withdrawal (you know all those radio ads for people wanting to lend you money on the last cent of equity you have in your house)

So what are they going to do about it??

Nada. Nothing. Zilch. We will just wring our hands and hope consumers do the right thing even though no-one but economists read our reports and actions are louder than words, but we ain't going to do a thing. Just worry about.



  1. Well, he could do what Greedspan did and encourage more of it. "Blow yo brains out stupid mutha! Banksta got yo money!"

  2. Here Carney, I fixed it for you:

    Clockwise from top:
    - What can't be paid, won't be paid. Loans don't help.
    - We restarted the frauds and didn't fix anything.
    - All countries doubled-down on their unsustainable policies.
    - All pension funds are going bankrupt. Speculators now believe (correctly?) that they are God's children who will not be allowed to take a loss.
    - After five years and a reboot, ordinary people have given up all hope that this madness will end and have surrendered their rationality to the bubble.

    In short, we have decided to ride the bomb:


  3. This is an ass-covering document, so when it hits the fan they can say -told you so.

    The problem is they are the ones supposed to set monetary policy. It's like a parent giving his kid wads of cash, knowing he is spending it on drugs and still dishing it out, while wagging his finger at the kid.

  4. In a way Carney is doing Canadians a huge favour.

    Carney has spent the last year sounding the alarm.

    Meanwhile you've got our local real estate community eagerly hooking up with wealthy Asians flush with cash from Bernanke's/China's massive stimulus policies who want to buy our overpriced real estate.

    Carney has created the perfect escape route for Canadians. i.e. cash out on your once-in-a-lifetime property equity and leave the (temporarily) wealthy Asians holding the bag.

    Despite the warnings, some Canadians aren't catching the subtle hints. Like Carney says, "(wise up because) households bear ultimate responsibility for ensuring that they will be able to service that debt in the future."

    You can lead a horse to water...

  5. Well Whisperer- i think it is more like leading a thirsty old nag to a freash water stream and then saying..'why are you drinking so much, don't you know you will bloat up, you fool!'

    The problem is when the household's default on their debt, it will be the CMHC (you and I) and the banks (you and I via bail-outs) who will take the hit.

    Talking is NO good. It is just like that that weenie Greenspan talking about 'irrational exuberance' in 1996! and then bailing out Wall Street at every turn.

    Don't talk - do!

  6. It's not the defaults that cause banks to pull their umbrellas off the market, it's their capital reserve ratios. If house prices start tanking they need to rein in their loan portfolio to get their balance sheets in order.

    Canada's banking system sure is something.