By Andrew Hepburn - Tuesday, November 27, 2012 - 0 Comments
Andrew Hepburn is a former hedge fund analyst. He’s a commodities bear and a keen observer of financial speculators. For Maclean’s he blogs about the economy and financial markets.
The mourning has already begun. Mark Carney’s departure is “bittersweet” said Finance Minister Jim Flaherty.
Such is the loftiness of his reputation (Central Bank Governor of the year, no less!), that the Brits would even consider poaching Carney from the Bank of Canada.
But just how justified is Mark Carney’s figurative stock price?
Is it based on what economists like to call “fundamentals,” i.e. real world factors, or inflated perceptions—have we been witnessing something of a Mark Carney bubble in the last few years?
I’m sorry to disappoint those in the Mark Carney fan club, but signs point to the latter. The odds are that history will not judge Carney as kindly as we are now.
As the governor prepares to leave office, Canada faces the possible bursting of two large asset bubbles, both of which could do serious harm to our economy.
First, and most obvious, is the housing bubble, along with the household debt that pumped it up. For now, housing prices have been cooling rather slowly, but should the bubble burst, it will have severe consequences for everything from residential construction to consumer spending.
Canadian house prices have been rising for over a decade (granted with a small correction during the financial crisis), and their ascent now rivals that of the U.S. in its bubble days. As CIBC noted, Canada’s “household debt-to-income ratio is now above the level seen at the eve of the big American crash.”
The second bubble Canada is faced with is a global commodities bubble. On that, too, we are on borrowed time. Resource prices have always gone through booms and busts, and the last ten years have been quite the boom, as Maclean’s pointed out last year:
These are no small bubbles: without housing and resource prices soaring anew after the 2008-2009 meltdown, it’s very difficult to believe that our economy would be as strong as it’s been recently. Put another way, the strength of the Canadian economy in the last few years might not have been the product of anything sustainable.
How much blame does Carney deserve for this?
In the case of housing, certainly a bit. His policy of ultra-low interest rates unquestionably made mortgages cheaper and encouraged many Canadians to borrow.
In fairness, though, Carney was between a rock and a hard place with interest rates. Keep them at rock-bottom and people will pile on debt, set them much higher and our currency—which has already become a bit of a safe haven after the financial crisis—soars even more, increasing the pain on exporters, who haven’t yet fully recovered from the Great Recession.
There’s also the matter of the Canada Mortgage and Housing Corporation’s balance sheet expansion and its impact on the housing market, a decision made not by Carney but the minister of finance. The CMHC has significantly augmented the value of mortgage insurance it issues, in effect allowing banks to grant new housing loans while the risk of default rests on the government’s shoulders.
How about commodities?
Again, one can’t fault the governor for failing to tame the boom—they are global markets, after all.
But to the extent his job is to provide a sober look at economic trends and urge caution when exuberance abounds, Carney appeared to be doing the opposite. In early 2011 he all but uttered the most dangerous words in finance: This Time It’s Different. Thanks to the rise of China and India and their thirst for resources, the boom, he said last year, “ could go on for some time.”
Interestingly, others at the Bank of Canada, including Deputy Governor John Murray, have been warning that what goes up must come down.
Nearly seven years ago, as another famous central banker prepared to leave office, the Economist magazine mused: “Among ordinary Americans he enjoys almost rock-star status… Does he really deserve such uniform praise? And after the accolades have faded, what will economists conclude about his tenure?”
To be sure, Mark Carney is no Alan Greenspan. He has not ignored our housing bubble and our burgeoning private sector debt. And, unlike the former Fed chair, he does not have blind faith in markets to police themselves without proper regulation.
And yet, the similarities are inescapable: both central bank chiefs left in good times as trouble neared, and both enjoyed near-rock star popularity.
Maybe there’s something about being at the monetary levers in good times that causes reputations to exceed reality.
Maybe Mark Carney has been something of a bubble all along.
By Andrew Hepburn - Monday, July 23, 2012 at 4:59 PM - 0 Comments
I wrote about the private-sector side of the LIBOR scandal in my previous article for Maclean’s. Now let’s turn to the more intriguing part of the whole affair: How the Bank of England itself at one point supposedly started to encourage Barclays to fiddle with the numbers.
Even if the allegations proved to be true, you’d be excused for scratching your head in puzzlement. What’s the big deal with a central bank engaging in manipulation for the sake, supposedly, of the health of the financial system?
With governments trying to contain the effect of the financial crisis first and now the eurozone mess, we hear of central banks tampering with the markets almost every day. And, really, governments have always intervened in the economy to influence–manipulate if you will–outcomes. When a central bank adjusts short term interest rates, it is using its longstanding, legitimate power to artificially tip the market one way or the other. And, in a closer-to-home example, rent control is another form of market manipulation at the hands of the government.
We generally accept various forms of manipulations because we think the government can and ought try to influence certain markets in ways that produce beneficial outcomes for society. Take the case of monetary policy: The widespread consensus is that central banks can cushion recessions by lowering interest rates and help calm roaring inflation by raising them.
And because monetary policy is largely viewed as a reasonable area of government intrusion, interest rate changes are announced publicly. Market watchers and the general public may disagree about the need for rate cuts or hikes at any moment, but, for the most part, the government’s right to make the decision goes unquestioned.
Now, that’s not what happened with LIBOR. In this case, if the Bank of England did indeed instruct Barclays to submit artificially low rates, it had no choice but to convey such directions surreptitiously. According to the allegations, the very goal of Barclays providing false submissions during the financial crisis was to deceive the market into believing the bank was healthier than it truly was. Had the Bank of England publicly told Barclays to submit lower LIBOR figures, the charade would have been self-defeating. Everyone would know that LIBOR didn’t represent the true rate of borrowing.
By Alex Ballingall - Friday, September 2, 2011 at 8:00 AM - 0 Comments
Surprisingly, economists are not the best gamblers
The spectre of a double-dip recession is haunting the global economy. And like all spectres, nobody seems sure if it’s real.
A quick Google search of the phrase “recession odds” pulls up a slew of predictions. Goldman Sachs thinks there’s a one in three chance another U.S. recession occurs within a year. Fannie Mae calls it a “coin toss,” while TD Economics places the odds at 40 per cent.
Things weren’t much different last time around, in late 2007 and early 2008, when economists made a similar series of vague, non-committal guesses at the fate of the world’s largest economy. Former U.S. Federal Reserve chairman Alan Greenspan told CNBC at the time there was a 50 per cent chance the U.S. economy would slide into recession. Nearly one in three economists participating in a USA Today survey agreed with Greenspan, pegging recession odds at 50-50. Unbeknownst to all of them at the time, the recession was already upon them. According to the National Bureau of Economic Research, it officially started in December 2007.
By John Geddes - Sunday, July 11, 2010 at 1:02 PM - 0 Comments
Among the trickier stories to follow in the aftermath of the 2008 financial markets meltdown has been the debate over banking regulation. Clearly, something went catastrophically wrong, especially in the U.S., but exactly what?
Proponents of a largely unbridled market have argued—not persuasively, to my mind—that the core problem wasn’t lax regulation and permissive oversight, but rather perverse signals from government. They blame, for instance, U.S. government policies aimed at promoting home ownership for having skewed the mortgage market.
By By Sasha Issenberg - Monday, May 10, 2010 at 4:00 PM - 3 Comments
Once a source of awe, the U.S. Fed now faces financial reforms
Over his two decades as chairman of the Federal Reserve, Alan Greenspan repeatedly trekked to Capitol Hill to deliver testimony that developed an unlikely sense of majesty. News networks carried Greenspan’s remarks live, showing deferential senators transfixed by the chairman’s gnomic utterances. Markets rose and fell based on what he was perceived to believe about the economy’s direction. But Greenspan’s return last month to a Capitol Hill hearing room was a sad encore to those bravura performances. The 84-year-old arrived as little more than the president of an upstart consulting firm, Greenspan Associates LLC, and sheepishly took his seat. The agenda had changed, and Greenspan was no longer being asked to predict the future, but instead defend his past.
By selley - Friday, July 18, 2008 at 12:08 PM - 0 Comments
Must-reads: …Colby Cosh and Richard Gwyn on Fanny Mae and Freddie Mac; Peter Worthington
The Friday miscellany
Among other things, Ottawa is: too profligate, too callous, too bereft of tourists, and too scandal-obsessed, or possibly not obsessed about the right scandals.
Lorne Gunter, writing in the Edmonton Journal, has about ten different ways to say the Conservative government is spending too much damn money—and probably more than the 3.4 per cent increase, representing a total of $208 billion, at which Jim Flaherty promised to draw the line. Stephen Harper’s government is actually ramping up spending faster (gasp!) than Paul Martin’s, says Gunter, citing the Canadian Taxpayers Federation. And while he’s somewhat sympathetic to the entreaties of Tory MPs, who say ” their spending has been of real value”—as opposed, say, to funding a rutabaga farm in Papineau—he says $46 million for Quebec’s quadricentennial and $300 million for Bombardier “to build a plane for which there are no firm orders yet” are definite red-flag issues.
Lorne Gunter doesn’t exist, L. Ian MacDonald argues in the National Post—well, not really. But his statement that “for once, the English-and French-language media have been on the same page, celebrating Bombardier as the Canadian world champion it is” in the wake of its C-series announcement, has been sadly tarnished. But we should all be on the same page, he believes, since government lobbying and financial input are, like it or lump it, an intrinsic part of the plane-building business. It’s interesting too, he suggests, that “the auto industry in Ontario and the oil patch in Alberta have never been held to the same standard” as Bombardier.