Wednesday, May 2, 2012

David Dodge in Denial

Usually past Bank of Canada Governors keep their lips closed and sit on their criticisms when they leave office.

Not David Dodge it seems. In a speech in Calgary he wanted to have his say. Basically it boils down to the fact that housing is not in a bubble except in pockets like Vancouver and Toronto, and that is driven by off-shore money, not low interest rates and so interest rates should not be used to try and control housing.

While I agree that there is a significant effect from the HAM Tsunami on the markets, my answer to David Dodge is the graph produced by the Bank of Canada itself (below). If low interest rates are not the problem then why the huge run-up in our consumer debt, considering that only 20% of the population of Canada live in the two most bubbly cities


  1. Agreed. :) He should have kept it short and simple, "all things being relative".

    To recap Dodge on the need for homeowner equity:
    "Let’s be very clear: a home purchaser is able to borrow at very low interest rates because you and I as taxpayers essentially guarantee that, when it’s a high ratio mortgage… and so it’s not at all unreasonable, again for us as taxpayers, to say, “Look mister borrower, you’ve gotta have an equity stake in this as well… so that if things go really bad, it’s not all on the Canadian taxpayer, part of it is on you.”

  2. Your question why there is so high household debt is very good. The answer to it is that the large part of this debt is carried by the highly indebted households.

    "Households heavily dependent on borrowing now hold 73 per cent of all household debt in Canada." (quoted from How Dangerous is High Household Debt for the Economy)

    Those, who owe money have more incentive to borrow more money. This produces high levels of debt in the Canadian households. It is also a big problem to the economy, since the day when those people won´t be able to pay it is approaching. When it arrives, there will be a downturn in consumption and in my opinion, it is probable that Canada will enter into recession.

    1. I agree. Consumption driven by high debt is just consumption that is borrowed from the future and has to be retrenched once the debts are due or have reached a non-sustainable level % of income.

      The only way out is to get the populace highly leveraged and then inflate the debt away, hoping the accompanying higher interest rates don't kill the economy even more. That's the ponzi scheme we have been playing since Greenspan took the helm and the mini-greenspans took over the rest of the Central Banks.

      Before that we had a firm hand on the till, Volker, who would not hesitate to raise rates to curb borrowing or inflation. he also wanted strict regulation of the cowboys on wall street, while Greenspan lobbied to have their regulations lifted.

  3. Interesting read at "Whispers" wrt the recent 1-day sold-out pre-sales. The conniving sales tactics so pre industrialisation are being deployed in the 21st Century. Other developing countries have since moved on to transparent and honest transactions. Right! If the systems ain't broken, why fix it!
    Don't believe the world notice it. They just stop to convene at BPOE.

  4. No SFH sales in West Van today. HAM missing today.

  5. This is such an interesting story at it gives in-depth information to the reader as well. Good thing you have it shared. weed