What if, instead of calling it a recession, we call it a cracked tree that might someday maybe fall on your neighbour’s house?
This past Wednesday, Bank of Canada Governor Stephen Poloz, as was widely expected, announced that the Bank would be lowering its overnight interest rate by 0.25%, down to a mere half-percent, which by historical standards is extremely low. The move comes amidst increasing signs of a slowdown in the Canadian economy, with bank analysts from TD and Bank of America, among others, projecting that Canada entered a recession in the first half of 2015.
While we won’t have the final statistics until September (just in time for the federal election campaign!), the emerging consensus is that growth in Canada has been at best stagnant so far this year. So market analysts were keen to hear what Poloz had to say when he announced the new rate.
Poloz has been extremely careful with his language as of late, ever since he found himself in hot water for (accurately) describing the outlook for the Canadian economy as “atrocious” this past March in an interview with the Financial Times. Though the first-quarter numbers turned out to be worse than even the pessimistic Poloz projected, the backlash against his comments was so strong that he’s been striving to strike a tone of cautious optimism ever since.
So perhaps it was no surprise that he went WAY out of his way to avoid actually uttering the word “recession” this week.
But the disingenuousness – and sheer politicality – of his cautious language deserves calling out.
Let’s let the man speak for himself (while the CBC’s Terry Milewski gently mocks him):
See, he finds the conversation about whether or not Canada’s in a recession “quite unhelpful”, although he acknowledges that Canada’s economy “experienced a mild contraction in the first half” of the year.
Here is the textbook definition of a recession:
The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country’s gross domestic product (GDP).
But calling this particular recession what it actually is is unhelpful, says Poloz, because this particular
recession mild contraction has its roots in a relatively narrow area of the economy, see, so therefore…yeah.
It’s an argument that isn’t actually fully enunciated, and when one tries to fill in the blanks for Poloz, one comes up short. Consider, for instance, the 2001 dot-com bubble recession in the United States. Caused almost entirely by grossly overvalued tech stocks returning down to realistic levels, it nonetheless was called what it was, a recession.
Or consider Canada’s most recent recession, from late 2008 to early 2009. It lasted a mere seven months, according to the experts, barely crossing that two-quarter threshold, but it is still well-established historically as a recession.
So what does Poloz hope to gain by trying to paper over this economic slump and pretend it’s not really happening?
Well, as I wrote earlier this week, the Bank of Canada is in a pretty tight spot lately. They’re quite likely concerned about the health of the Big Five Canadian banks, and the overall consumer debt load in the economy, and they don’t really have many good options. From Monday’s post:
To be fair, the economy is barely into negative territory – but shrinkage (or “negative growth”, as expansionistically fixated economists insist on calling it) is shrinkage, and it’s not self-correcting.
Not when there’s so many things that could go wrong.
See, reducing the interest rate is, in theory, supposed to reduce the cost of borrowing for businesses and consumers like you ‘n me. But there’s two big problems with that.
One is that the Bank of Canada is already concerned that Canadians are in too much debt – and it’s not hard to see why. As the Financial Post notes, Canadians owe on average $1.64 for every $1 they earn, and Deutsche Bank estimates that our housing market is overvalued by as much as 63%. Giving Canadians cheaper access to credit so we can indebtedly spend our way back to marginal economic growth doesn’t seem like a good long-term strategy for success.
(The second is that Canada’s big banks are quite likely in trouble – a big story but not super-germane to today’s post, so see the full article for the deets.)
And indeed, Poloz struggled to square this circle in his press conference on Wednesday. You can watch the whole thing here if you’re a big monetary policy geek like yrs truly, but here’s a partial transcript of a key point:
POLOZ: And to see all the – parable about the big old tree that has a crack in it – that makes it vulnerable. Is it a risky tree? Well, only if there’s a trigger that causes that branch to fall on your neighbour’s house. And so when we analyze household indebtedness and housing markets in particular in the FSR, we talk about those things as vulnerabilities.
So if you have a lot of debt, and you’re servicing it no problem, that’s great. But when you lose your job, then it becomes a risk – to you, and therefore to the economy. So what we say here is that there is a possibility that this cut in interest rates will add to those vulnerabilities, measured in some way. I argued before that it’s not necessarily a clear case, that maybe the households that borrow at this lower rate are those that don’t have any debt today, so they’re just as stable as the one next door. And that’s usually the way we think of it.
And so it’s simply not a mechanical thing that we’re trying to say there. But of course in cutting rates we are taking a risk that those vulnerabilities could edge higher. And that means that if there were a trigger, someday, there’d be a higher chance that there’d be a problem for the economy as people adjusted to it.
However, what we have right in front of us is a potential trigger, which is the oil price decline and its fallout on the economy. And so by addressing that, we are addressing the trigger part, while taking a bit of a chance that there may be some edging higher of the vulnerabilities. And [unintelligible] getting the economy back to full capacity, with more people with jobs, et cetera, is the most important way of making financial stability risks more manageable.
Does that help you?
Well, no, Mr Poloz, not exactly.
So first off, note all the obfuscatory minimizing language going on here. There’s a “possibility” (how possible?) that the interest rate cut will “add to” (add how much?) “vulnerabilities” (which are what exactly?). These vulnerabilities could “edge” higher (which would make them how vulnerable, exactly?). Something could trigger them “someday” (like when?), and then there’s be a “higher chance” that there’d be “a problem” (a big problem?) for the economy – but don’t worry, people would “adjust” to it (“it” meaning the trigger, or the economy, or the vulnerabilities?). We’re taking a “bit of a chance” (have you quantified it?) with this policy change. But who knows? Maybe only people who are completely debt-free will use this opportunity to take out loans! “That’s usually the way we think of it (i.e. irrational exuberance is baked into the cake)”.
(And note that the metaphorical “tree” (which represents the economy, I guess?) isn’t going to fall on your house (if it even falls at all) – it’s going to fall on your neighbour’s house, which is not all that scary, because that guy’s a bit of an asshole, IMNSHO.)
Poloz is trying to talk his way out of an untenable position here, which is that he’s facing two mutually contradictory problems. One is that the economy is contracting, due to the collapse in oil prices. The central banker’s handbook tells him that the thing to do in this situation is to cut interest rates, to spur lending, weaken the dollar (to spur exports) and increase employment.
But the other is that consumer debt, and particularly mortgage debt, is already way too high in this country. The central banker’s handbook’s solution to this dilemma is to raise interest rates, to discourage people from taking on even more debt and making the problem worse.
Clearly he can’t do both.
So he’s chosen the route that he thinks is more likely to lead to short-term economic growth – “getting the economy back to full capacity, with more people with jobs, et cetera, is the most important way of making financial stability risks more manageable.”
But he’s also trying to pretend that the contradiction here is at best trivial, with all of his minimizing and obfuscating. And no doubt he’s also desperately hope that there’s no “trigger” “someday” which will cause these “edged-up” “vulnerabilities” to suddenly become relevant – like, say, a crash in the housing market, or the stock market. Both of which are looking increasingly likely with each passing month.
Look, I’ll be real here. I think that the pro-perpetual-growth mania of capitalist economies and central bankers is absurd and unsustainable.
I think that the loss of tar sands jobs and tar sands production capacity over the past several months is great news for the world and all its inhabitants, regardless of whether it left them unemployed.
And I think that Poloz is being naive if he actually thinks that the issue of massive and growing consumer debt is going to be magically resolved by slightly lower interests rates and a barely-growing economy.
But I don’t think Poloz is naive. I think he knows exactly how big of a risk he’s taking by trying to increase debt loads to spur growth. Whatever is gained in the short term will only make the inevitable debt crisis that much worse.
I think he’s a relatively clever man who’s run up against a fundamental contradiction of late-stage capitalism and is in an effectively impossible position. Whatever he does is going to make the problem worse, either now or later. He’s opted for later, in the hope that he won’t get pinned with the blame for whatever winds up going wrong, and it’s hard to fault him for his choice, I suppose.
But his vain attempt to blandly reassure everybody that there’s no big problem here, no real recession, no big systemic risk to the economy, is ultimately making me, and other observers, that much more jittery.
Even the CBC is getting nervous – and I’ll give them the last word on this one:
In the past, Poloz has taken flack for calling the Canadian economy “atrocious” when it indeed turned out to be atrocious. He was pummelled for calling house prices seriously overvalued when they were less overvalued than they are today. But a fearless central banker should do more of that.
In a world where everyone wants to be reassuring, from real estate salesmen to financial advisers to politicians wanting your vote, we need a few trustworthy voices willing to remind us of the risks.
In nervous times, there is nothing wrong with hoping for the best. But we must also prepare for the worst.
We need Poloz to be the fire chief telling us to put up smoke alarms and keep the candles away from the curtains. And we must know that he knows what to do when, against all odds, the house starts to burn.
The most frightening thing about yesterday’s news conference was that it wasn’t frightening at all.
UPDATE: It just occurred to me that I didn’t finish connecting the dots. Using that classic investigative question, cui bono?, it becomes very immediately obvious that a downplaying of economic stressors and rosy prognosticating for our future prospects plays to the advantage of the governing Conservatives as we head into election season. No government wants to drop the writ amidst a recession, after all; far better to do it during a mild contraction, which the experts say we’re certain to pull out of very, very soon. What this says about the vaunted independence of the central bank is open to interpretation, and Poloz could be more concerned about protecting his own reputation than the government of the day, but it’s certainly noteworthy that Harper’s government has also vigorously resisted the epithet “recession” as mightily as they can.