Monday, November 26, 2012

Carney goes...what now?

What should we expect from Carney's departure to London and is his reputation for 'saving Canada' from the worst of the Financial mess deserved?

He came to the B of C in October 2007 from Goldman Sachs, in the midst of the Bear Sterns collapse which ended with it's tax-payer subsidized sale to JPMorgan. A bad time to take the reigns that's for certain. Did he call for tighter scrutiny of the investment cartel? I don't recall such.

Of course Goldman Sachs has a very poor reputation for honesty which is well outlined by Matt Taibbi's excellent articles in Rolling Stones.

When Lehman collapsed and the US Federal Reserve cut rates aggressively, Carney followed along with every other Central Banker in cutting rates and setting off other speculative imbalances. One of these was our own housing bubble, which was starting to correct in 2008/2009.

House prices stopped dropping and instead took flight as a result of the lower interest rates and of the Federal Government doubling the CMHC lending capacity. Who knows which had a bigger effect, but they both added kindling to the fire. In Vancouver and Toronto, we also had the influx of Chinese money. China had embarked on it's own big program of spending to ward off a slow-down.

Much of this money found it's way into the hands of a few thousand well-connected individuals and from them into Vancouver and Toronto real estate.

Carney was pretty much silent on this build up as far as I recall. The solidity of the banks is a given once rates to depositors are near zero, and where all risky loans are pre-packaged and passed on to the tax-payer.

I do not recall Carney commenting on the huge future liability to tax-payers incurred by the ruinous actions of the CMHC.

Finally, approximately two years ago, Carney started to make comments about the growing consumer debt mountain. He kept reminding us that rates would not remain so low for much longer, but then did not really raise rates aggressively enough to put fear into borrowers. Of course he is in a bind since the rate set by the B of C is used both for businesses (which he wants to benefit from low rates) and consumers (whom he wants to exercise restraint!)

Those consumers that did follow his advice may have better balance sheets, but found themselves increasing priced out of RE by those who did not.

Finally Carney became more strident about debt and came out with out-right dire warnings, which I believe did start the process of bringing consumers to their senses, since banks certainly have shown no restraint in their lending.

I also believe his hectoring on debt also dragged Flaherty and Co. into bringing in the mortgage changes, rather belatedly, which the RE industry is still fighting aggressively.

So all-in-all I would rate him a B-. He followed the play-book of excessive easing, realised the debt-monster he helped build too late...but he did ring enough alarm bells for consumers to start thinking about their situation and he pushed the politicians into doing what they hate- pulling back speculators.

As to the 'strength' of the Canadian banks, we know that they have benefitted greatly from their near monopolistic situation, zero borrowing costs and the passing of risk onto the shoulders of tax-payers, not from prudent regulators.

And the fact we have weathered the last few years better than the US or Europe has much more to do with deficit spending and the rebound in China than the actions of a Central Banker. We are also in a situation that any slow-down in China or housing or double-dip in the US, will leave us with few bullets in the chamber.

However, his B- makes him seem like a hercules compared to the C and Ds the others like Greenspan and Bernanke and King would get.

Let us hope his successor strives for an A.