I'm currently reading a really awful book*, "Empire of Debt", by Bill Bonner, the founder of the Daily Reckoning website. Much of it is gibberish, the writing style is overwrought and at times it veers alarmingly close to outright racism. I'm only persisting with it because it gives me a bit of insight into what passes for thought among the US libertarian fringe. They're the kind of people who agree with Margaret Thatcher that "there's no such thing as society", and they probably think that the Tea Party are a bunch of communists. Bonner holds just about everyone in the utmost contempt: Abe Lincoln, President Roosevelt (both of them), Ronnie Reagan, Alan Greenspan and a whole panoply of lesser lights come in for sustained abuse.
Bonner's right about one thing, though: if central banks make money essentially free, as they have for the last half decade and more, rational people will stop saving and start borrowing. And if you further convince those people that a house is not just a place to live, but a foolproof treasure trove of wealth that will ensure a comfortable retirement, then you'll just about guarantee that house prices will spiral into the stratosphere. Which is, of course, what happened in the US prior to the 2008 crisis, and is still happening in the UK and Canada.
Canada's main financial regulator, the Office of the Superintendent of Financial Institutions (OSFI) is worried about this. One of its head honchos gave a speech in Toronto this week warning that the level of home prices poses a serious risk to the entire economy. Although he made reassuring noises about the strong capital base of the major Canadian banks, he also offered the less comforting statistic that sixty percent of Canadian bank lending is real estate-related.
That's right: the main impact of the ultra-easy monetary policy pursued by the Bank of Canada in recent years has been to create an unproductive and potentially hazardous housing bubble. It hasn't boosted business investment, as Mark Carney regularly noted when he railed against the "dead money" sitting on corporate balance sheets. It hasn't even boosted home building in any material way, except for shoebox condominiums in Toronto and Vancouver. It's just inflated the value of the existing housing stock, making large numbers of homeowners unjustifiably smug about their "wealth" while excluding millions of others from the market altogether.
Back when I was still living in the UK, I wrote a couple of times that the policy mix there was wrong: what was needed was a bit less fiscal rigor and a bit more monetary discipline. The same is true in Canada today. Well, less fiscal rigor is on the horizon: the federal Tories are quite open about the fact that they will introduce a big tax cut just before next year's general election. Will we also get some monetary tightening? There is a growing number of people (count me as one) who feel that the Bank of Canada is altogether too relaxed about the recent rise in CPI. But there's no sign that Governor Stephen Poloz will raise rates any time in 2014, and once next year rolls around, he may shy from doing anything to frighten the horses in the run-up to the election. It's starting to get just a little bit worrisome.
* My excuse, and I do feel I need one, is that I bought it at a charity stand in the local mall.
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