Pontius Pilate was the Roman governor of Judaea from 26 CE to 36 CE; in this capacity, he was responsible for the execution of Jesus of Nazareth.
According to the gospels, Pilate refused to condemn Jesus of Nazareth but was forced to execute him by a hysterical Jewish crowd. In Matthew, Pilate acquiesces to the crowd's demands and washes his hands of the entire affair, reluctantly sending him to his death.
After re-reading last Monday's Bank of Canada speech, I can't help but wonder... is Mark Carney pulling a Pontius Pilate and washing his hands of the Canadian housing bubble?
As mentioned earlier this week, a significant portion of Monday's speech was dedicated to the housing market. Canadians are reminded several times that rate policy is to be used to control inflation, and that housing is only one factor of many that affects inflation.
- “As Canada’s economic growth moves towards its potential, it is expected that a robust housing market, supported by exceptionally low interest rates, will continue to work as an important engine pulling the Canadian economy out of recession. This has implications for monetary policy, which, as I’ve said, aims to achieve the Bank’s inflation target of 2 per cent over the medium term. It’s important to remember that this target is symmetrical; that is, we are equally concerned about whether inflation is above target or below target – as we expect it to be until 2011. The revival of the housing market is one factor that is helping us to achieve our inflation target, and it is a powerful means through which monetary stimulus affects the economy. Of course, we need to keep a close eye on the housing market, along with all other sectors of the Canadian economy, to ensure that we are providing the right amount of monetary stimulus. In setting monetary policy, we view housing – or the exchange rate, the energy sector, the auto industry, or any other factor – through the prism of our inflation target.”
As mentioned in Tuesday's post, after refusing to raise the bank rate to deal with the housing bubble, the Bank of Canada then very deftly laid responsibility for the developing mess in housing directly at the feet of Finance Minister Jim Flaherty.
It came at this point in the speech:
- “An array of supervisory and regulatory instruments can be used by the government to restrain a buildup of systemic risks. These include capital requirements for institutions, leverage ratios, loan-to-value ratios, terms and conditions for mortgage insurance, and a variety of other measures. These instruments can be targeted to risks to the entire financial system that stem from particular markets or institutions.
Using these instruments to safeguard the whole financial system – not just individual institutions – is the essence of the macroprudential approach. Macroprudential supervision is one of several concepts in a current global initiative to strengthen supervision and regulation in the wake of the global financial crisis. In Canada, a system-wide, or macroprudential, approach is the shared responsibility of the Department of Finance and all of the federal financial regulatory authorities, including of course the Bank of Canada, the Office of the Superintendent of Financial Institutions, and the Canada Deposit Insurance Corporation. Ultimately, it is the Minister of Finance who is responsible for the sound stewardship of the financial system.”
That last line is the killer and it begs the question... what gives?
Carney has, for the past two months, been just like a little blogosphere perma-bear with the alarms he's been sounding on the damage that will be caused by the inevitable rise in interest rates.
He's warned Canadians that they need to be 'prudent' and urged them to remember that "households need to assess their ability to service these debt obligations over their entire maturity, taking into account likely changes in both income and interest rates."
Now, in one swift move, he's dropped all of it at the feet of the Minister of Finance.
I wonder if it has anything to do with this little gem from Monday's speech?
- “Using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase, the simulation generates a scenario indicating that, by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks.”
The day of reckoning is coming fast and Carney can see it.
In just over 2 years, the Bank of Canada forecasts that 1 in 10 of us will be in serious debt trouble.
And when the interest rate tide changes, the Canadian financial system is going to drown all of them and pull down many others as real estate values crash.
Seeing what's coming and sensing the inevitable fallout, 'Pontius' Carney has effectively said "pass the soap."
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