Authored by Caleb McMillan via Mises Canada,
"Beneath the symbol
We’ll all assemble
Oh how we’ll fly
Oh how we’ll tremble”
— Captain Beefheart, “Ice Cream for Crow”
If interest rates are the symbol beneath which we all assemble, then there are some bad times ahead.
But Canada’s “leading economists,” say interest rates are “too blunt a tool” to cool the housing market.
This week, Governor Stephen Poloz as expected did not raise rates, but continues to face tough questions about the connection between low rates and the “hot” housing market.
Of course, he deserves every hard question thrown at him. And it’s nice that journalists are actually starting to question the obvious connection between low-interest rates and the housing bubble.
With Canadians across the country locked out of their local housing markets, and with foreign buyers using Canadian property to protect their wealth from destructive communist dictatorships, frustration needs an outlet and it looks as if Poloz and the BoC are, finally, in the crosshairs.
But that doesn’t mean Poloz will listen. After all, the central bank is supposed to remain “independent” from democratic government and popular opinion. Poloz is making his decisions based on his misunderstanding of the economy, not the will of the mob.
As Avery Shenfeld, CIBC Capital Markets’ chief economist, told BNN in an email, “The Bank of Canada will likely stick to its view that house prices are best dealt with through macro-prudential policies particular to that market, with the interest rate setting used to steer the economy overall."
Meaning, let the banks and federal government deal with the issue. The BoC will do what it can, but it will not include raising rates.
Raising interest rates will certainly “cool” the housing market, but it will also lead to some unintended consequences that would “hurt” the overall economy.
Remember, the BoC is stacked with Keynesians, who regard the “hangover theory” as implausible as the irrefutable Say’s Law.
So if the Bank can’t or won’t raise rates, and leaving the price of interest to the free market isn’t even on the table, then what about a rate cut?
Doug Porter, chief economist at BMO Capital Markets, also told BNN, “The BoC should cease and desist with talk of possible further rate cuts, which simply fuel the sense that rates are never going higher, and instead start warning that rates will someday rise.”
That would be smart, we’ll have to see what the weeks ahead bring.
So far, Bank of Canada governor Stephen Poloz has left real estate to the experts, meaning, not him.
Capital Economics Senior Canada Economist David Madani told BNN that the “Bank of Canada needs to pay more attention to the housing issue because it is a huge threat to the entire economy.”
But Poloz, like his predecessor before him, prefers “moral suasion.” Madani thinks the Bank should be using “much stronger language.”
Oh, how we’ll fly, oh how we’ll tremble.