Category: Banking

Banking, Canada, Finance, Inflation

Why we can’t just ‘stop printing money’ to get inflation down

Jacqueline Best
https://images.theconversation.com/files/457998/original/file-20220413-26-h1sbqm.JPG?ixlib=rb-1.1.0&rect=0%2C343%2C6352%2C3176&q=45&auto=format&w=1356&h=668&fit=crop

With the Bank of Canada announcing an oversized interest rate hike this week, it might seem like central banks are coming to rescue us from inflation once again. Yet while they did play an important role in mitigating a COVID-induced recession, central banks don’t have the power to solve our inflation problem.

There’s no question that the inflation outlook today is worrying. With inflation hitting 5.7 per cent in March, we are facing a perfect storm of inflationary pressures from a combination of supply chain bottlenecks, pent-up demand and massive increases in energy prices from Russian sanctions.

As politicians start to make noise about inflation, we need to be careful not to accept the outdated assumption that central banks can control inflation by limiting the money supply.

Conservative Party leadership hopeful Pierre Poilievre recently asserted that the solution to inflation is to “stop the central bank from printing money to pay for government spending.” This is not only factually incorrect (the Bank of Canada stopped purchasing large amounts of government bonds back in October of last year), but also outdated.

The legacy of monetarism

Back in the late 1970s and early 1980s, Ronald Reagan and Margaret Thatcher capitalized on public anxiety around rising prices by bringing their conservative governments into power on the promise of getting tough on inflation using monetarism.

We should not be too surprised, then, to see the legacy of this outdated economic policy living on in members of the Conservative Party of Canada.

Poilievre has resurrected the age-old theory — let’s call it quack monetarism — that inflation is caused by too much money circulating in the economy and that the solution is to reduce the central bank’s money creation. Inflation has never only been about money; central banks can’t just wave a magic wand and get it down again.

The limits of monetary policy

While central banks do play an important part in getting inflation under control by setting interest rates, they don’t have all the tools needed to get inflation down this time around — particularly when some of the dynamics driving price increases will not respond to changes in interest rates.

As writer Adam Tooze points out, monetary policy can’t improve bottlenecks in the supply of microchips — which are driving car prices higher — or increase the supply of gas.

Even when monetary policy is effective in getting inflation down, there is always the risk of the central bank overshooting its aims and pushing the economy into a recession — as a growing number of policymakers worry may happen today.

Quack monetarism

So why do conservative politicians like Poilievre want us to believe we can solve this problem by getting the central bank to stop printing money? This is the kind of “zombie idea” that won’t die, in spite of being proven wrong, because its simplicity is so politically appealing.

This claim harks back to Milton Friedman’s famous dictum that inflation is “always and everywhere a monetary phenomenon.” The monetarist theory that Friedman advocated and which became very influential in the 1970s and early 1980s assumed the solution to inflation was to limit the expansion of the money supply.

What’s wrong with this idea? American banker Henry Wallich famously responded to Friedman’s statement by replying, “inflation is a monetary phenomenon in the same way that shooting someone is a ballistic phenomenon.” In other words, an excess of money may be partly to blame for inflation, but if you want to truly solve it, you need to understand the underlying causes of the problem.

As political economist Matthew Watson has shown, economists keep changing their minds about the broader causes of inflation: shifting from pointing a finger at international balance of payments shocks in the 1960s to the oil crisis in the 1970s, the “wage-push” inflation in the 1980s, governments’ lack of anti-inflation credibility in the 1990s and finally the problem of unanchored inflation expectations in the past few decades.

Even if today’s inflation had similar causes to the 1970s, we don’t want to try monetarism again. Central banks in Canada, the United States and the United Kingdom all tried it in the late 1970s. By 1982 they had given up on it because monetarism simply did not work.

Most money is actually created by private banks and so attempts by the central bank to limit the money supply are doomed to failure. The bank can influence the demand for money by increasing or decreasing interest rates, but does not control the money supply itself.

Monetary policy is a blunt instrument

What finally did get inflation down in the 1980s was a combination of punishingly high interest rates — over 21 per cent in Canada — and the most painful recession since the Great Depression, with unemployment rising to 12.8 per cent in Canada. This is not an experience that we want to repeat.

If the economic trauma of 1970s and 1980s teaches us anything, it’s that monetary policy can be a very blunt instrument. To be truly effective, it must often be brutal.

While there are no simple solutions to our current inflationary challenges, it’s clear we need a holistic approach. U.S. President Biden’s recent strategy provides one promising alternative. His goal is to tackle inflation by pressing companies to reduce costs, rather than wages, and by making prescription drugs, energy and childcare more affordable.

So the next time a politician tries to sell you on a quack monetarist remedy for our current inflationary woes, ask them if they’re willing to make us all pay the costs of another historic economic blunder.

This blog was first published on The Conversation on April 13, 2022.

Banking, Canada, Economics, Finance

The Bank of Canada must seize the pandemic’s historic moment and embrace innovation

Jacqueline Best

Peter Dietsch & Jacqueline Best

The Bank of Canada, like central banks around the world, is currently facing enormous upheaval and uncertainty due to the enduring COVID-19 pandemic.

Will its leadership seize the moment as an opportunity to innovate and respond to the challenges ahead, including rising inequality and climate change? Or will it treat the present crisis as a temporary exception, hoping to return to business as usual once the pandemic recedes?

This spring, the bank released the results of its consultations with Canadians as part of its current mandate review. This is a historic opportunity for our central bank and the federal government to make the bank work better for the Canadian people.

As academics specializing respectively in philosophy and economics, and politics, we’d like to highlight two key themes that emerged in the Bank of Canada’s consultations with Canadians.

Wealth inequality, climate action

First, many Canadians are deeply concerned about the increasingly unequal distribution of wealth in this country — particularly by the way it has been driven by skyrocketing house prices. Second, some Canadians would like to see the Bank of Canada take the threat of climate change seriously as it plays its key role in ensuring price and financial stability.

How could the bank do better in tackling these two core problems — the scourge of rising inequality and the future shocks of climate change?

On inequality, there are many useful models around the world. Although Canadians like to think that we’re more progressive than our neighbour to the south, the United States is actually well ahead in rethinking the role of their central bank. Its recent shift towards what’s known as average inflation targeting, a strategy that seeks to balance inflation and growth over the medium term, gives it more flexibility to promote employment.

Such a strategy, potentially combined with a dual mandate of price stability and employment, would allow the Bank of Canada to pay more attention to the needs of all Canadians. The bank’s consultations with Canadians suggest that there is in fact considerable support for such a move.

While this would be a first and important step in modernizing the central bank’s mandate, we need to go further and take a more careful look at some of the unconventional policy tools that the central bank has been using in the last year.

Quantitative easing

Since the COVID-19 crisis took hold, the Bank of Canada joined other central banks in engaging in what’s called quantitative easing, initiating massive purchases of financial assets. As a result, its balance sheet has increased by close to 500 per cent since March 2020.

Such liquidity injections by central banks are clearly necessary. The question is how this liquidity should be injected.

Suppose your doctor prescribes you a drug that is known to have serious side effects. Wouldn’t you want her to look into alternative treatments? The experience with quantitative easing since 2008 shows that it has two serious side effects, both of which speak to some of the core concerns of Canadians.

First, it exacerbates inequality. While the central bank may want to see a good portion of the injected liquidity used to stimulate real economic activity, this is not something it can control. Instead, a lot of the liquidity has ended up in stock markets and housing markets, benefiting wealthy asset owners and helping to push the cost of owning a house beyond the means of many Canadians.

As Mark Carney, then governor of the Bank of England, acknowledged in 2014, “the distributional consequences of the response to the financial crisis have been significant.” The same is true today.

Second, when quantitative easing includes buying corporate bonds, it facilitates access to capital markets for the firms in question. Central banks appeal to the idea of “market neutrality” and claim that an asset purchase that reflects current bond volumes on capital markets does not favour anyone in particular. But in countries like Canada, when you buy a basket of corporate bonds proportional to the outstanding bonds on the market, you inevitably reinforce the status quo with its many companies that have large carbon footprints. That inevitably slows the transition to a more sustainable economy.

Politics comes with the territory

Some will caution that independent central banks should not get involved with such deeply political issues. The answer to this is simply: It’s too late for that. Political decisions come with the territory of central banking today, and we better develop innovative policy instruments to reflect this reality.

Other central banks are adapting already. In December, the Swiss National Bank announced that its asset purchases will exclude all companies primarily active in coal mining.

Perhaps more significantly, since Christine Lagarde has taken over as president of the European Central Bank, the institution has vowed to take a more active stance on climate change.

Unconventional policies can also be used to alleviate — instead of exacerbating — inequality. One idea is to transfer money to citizens through so-called helicopter money, rather than rely on institutional investors to translate quantitative easing measures into economic stimulus. The policy response to COVID-19 actually provides an interesting blueprint for this.

The overall tone of the Bank of Canada’s consultations report seems to suggest that the bank is more comfortable with the status quo than with serious innovation. Although this may sound very Canadian, our central bank actually has a history of being an innovator in monetary policy. It was among the first central banks to adopt monetarism in 1975, and the second to adopt inflation targeting in 1991 when it was still an untested approach. To confront today’s many challenges, the Bank of Canada needs to rediscover that innovative zeal.

This blog was originally published on The Conversation, May 4, 2021.

Banking, Canada, COVID-19

Can the Bank of Canada come to the rescue again?

Jacqueline Best
Bank of Canada headquarters.
Bank of Canada headquarters – from globalnews.ca

Like central banks around the world, the Bank of Canada has cut its target interest rate in order to tackle the economic effects of the novel coronavirus.

Does that mean that central bankers are once again our knights in shining armor coming to save the day in an economic crunch? Or is this finally the right time to recognize that we can’t keep counting on the Bank of Canada to do all of the economic heavy lifting in a crisis?

This rate cut does signal the central bank’s willingness to do what it can to counteract the economic consequences of the virus’s spread. Yet there is only so much that lower rates can do. They can make it easier for people and businesses to borrow and they will reduce payments on a flexible rate mortgage. But low rates won’t help companies continue to make the products that rely on parts made in hard-hit countries like China and South Korea, and they won’t help people afford to take time off of work if they get sick.

While it isn’t yet clear yet how serious the economic effects of the virus will be, this is a good time to take stock of what tools we have to respond to the next economic crisis.

Ever since 2008 financial crisis, the Canadian government, like governments around the world, has relied an awful lot on the super-powers of the central bank. G7 politicians decided that they didn’t want to have to keep using fiscal policy to stimulate the economy and started treating central banks like “The Only Game in Town,” as former Bank of England Deputy-Governor, Paul Tucker, put it.

Yet the last decade has made it clear that there are very real drawbacks to assuming that central banks can always save the day.

The Bank of Canada has had to keep interest rates very low for a very long time to keep the economy going. While this has worked, to a point, it has had perverse consequences. Canadians took advantage of the low interest rates to go on a spending spree—building up debts worth as much as 177% of their annual income. This borrowing binge and the housing bubble that has gone with it has limited the Bank of Canada’s options moving forwards: by cutting rates, they run the risk of pushing debt even higher, but by increasing rates they could precipitate a crisis for the many families who can barely make their interest payments.

Given these limits, one option for the Bank of Canada would be to pursue unconventional monetary policy. In doing so it would be following the lead of the US, Japanese, British and European central banks that have dabbled in more esoteric monetary policies after the 2008 crisis, including “quantitative easing,” which has central banks creating new money to buy up government and private sector bonds and securities.

While these unconventional tools may be useful and even necessary, they do produce winners and losers. Top-down strategies like quantitative easing have actively contributed to growing inequality (by increasing the value assets that are mostly held by the wealthy), and has accelerated the climate crisis by disproportionately investing in carbon-intensive firms. On the other hand, bottom-up strategies, like “helicopter money,” where the central bank distributes new money to individuals, have been overlooked to date.

Politicians had hoped in the last crisis that they could avoid making difficult political decisions by passing the buck to central bankers who are insulated from the democratic process. Unfortunately, this past decade has taught us that there is no such thing as an apolitical solution to an economic crisis. Whatever role the Bank of Canada plays, it needs to be guided by democratic—and not just technocratic—priorities.

We do need central banks to play their part now—and we will need them again in the future. But we also need to make sure political leaders stop waiting for their knight in shining armor to come to the rescue and take responsibility for their own role in responding to economic shocks.

This blog post was original published as an opinion piece in the Ottawa Citizen on March 11.

Accountability, Banking, Economics, Measurement, Political economy, Uncategorized, Uncertainty

Why we need better central bank accountability

Jacqueline Best

As pundits debate whether the US Federal Reserve will raise interest rates again this summer or fall, we are reminded of just how much of the economy’s direction hinges on central bankers’ decisions.

Since the 2008 financial crisis, the power of central banks has grown, as they have used unorthodox tools to stimulate the economy, taken a greater role in financial regulation, and put themselves in more politically sensitive positions, including the tough debt negotiations with Greece.

In spite of this powerful role, central bankers are remarkably insulated from democratic oversight. As a recent “Buttonwood” column notes in The Economist, “Janet Yellen and Mario Draghi are very important players in the world economy, arguably more important than the US President or the German chancellor. And yet they are not elected; if voters do not like the job they are doing, they cannot get rid of them.”

There is a great deal at stake in decisions about monetary policy, as I suggest in a recently published article in Ethics & International Affairs. Central banks not only define the broad direction of the economy but also create winners and losers. Consider, for instance, the disparate reactions of a prospective first-time home buyer and a retired couple living on their savings to the prospect of yet another drop (or increase) in the interest rate.

Central bank independence in its current form is relatively recent. Elected leaders exercised considerable influence over monetary policy in the post-war era, seeking to achieve the right “trade-off” between full employment and inflation. It was only in the 1980s that policymakers moved away from this kind of Keynesianism and embraced the ideas of Milton Friedman, who advocated the creation of an independent monetary authority.

Friedman and other economists believed that if governments were given any discretion over monetary policy they would adopt inflationary policies because these were more likely to be popular with the electorate. They argued that the only way to ensure price stability was to radically limit the government’s influence over monetary policy by making central banks autonomous and requiring them to stick to a simple rule, such as an inflation target. By the late 1990s, central banks in over thirty countries had gone down this path and were using some form of inflation targeting.

The current model of central bank governance does provide for a certain kind of accountability—but only a very narrow one. Ensuring accountability generally involves three elements: broadly-agreed upon standards, information on whether they are met, and sanctions if they are not. Because the principle of central bank independence involves a very limited set of standards—specifically, the achievement of an inflation target—and very few opportunities for sanction, the main mechanism for accountability is provided by publishing information about the bank’s activities. Hence we have seen the rapid expansion of central banks’ commitment to providing more and better information about their models and decisions in recent years.

Unfortunately, while this informational form of accountability may have worked during the stable years of the “Great Moderation” (from the mid-1980s to the 2008 crisis), it is no longer up to the task in the volatile post-crisis era.

Bank of Canada Governor Stephen Poloz and US Federal Reserve Chair Janet Yellen have both suggested that growing economic uncertainty has reduced the effectiveness of simple models and rules. What these bank governors have not acknowledged (unsurprisingly) is the challenges that this growing uncertainty poses for existing forms of accountability.

If uncertainty limits the effectiveness of rule-based policy, then it ultimately requires greater discretion on the part of policymakers. This is not a problem in itself (here I would disagree with those Republican lawmakers who would bind the Fed even further with more stringent rules). More discretion does, however, require a more robust form of accountability.

There are three basic principles that should underpin any such reforms.

1) Fostering more deliberation and dissent

While the informational model of accountability obligates decision-makers to explain their actions, it reduces this process to a simple publication of data. What is missing is the back and forth of question and answer—the process of genuine debate and deliberation. By the mid-2000s, central bankers were being treated like oracles, with Alan Greenspan as the most revered among them. There must be more room for dissent—both among those with the power to set monetary policy and in the wider society that is affected by those policies.

2) Ensuring that central banks are answerable to the wider public

Because financial issues are complex and their impacts are often diffuse, monetary policy questions rarely become salient enough to mobilize public action. In this context, the power of sanction actually shifts away from the two groups to whom central bankers should be accountable—the government and the public—and toward financial actors, who can impose very serious sanctions on central banks if they disagree with their policies. Without overly politicizing monetary policy, we need to find creative ways of ensuring that central banks are more accountable to the wider public.

3) Broadening the objectives against which their actions are judged

One way of ensuring that monetary policymakers are accountable to the public is to ensure that the issues that affect citizens are reflected in the standards that guide bank policy. At present, most of these issues are not officially on the agenda, which is constrained by the goal of achieving a very low level of inflation.

A number of commentators have recognized this dilemma and have suggested that today’s inflation targets may no longer be appropriate. A recent Federal Reserve working paper suggests that increasing the current inflation target and supplementing it with a nominal GDP target makes economic sense. Such moves to broaden the objectives used to guide central bank decisions would also go some way toward increasing their accountability.

As central banks take on an increasingly powerful role in our political and economic lives, it is time to find new ways of ensuring that they are more fully accountable.

This blog first appeared on the Carnegie Council’s Ethics & International Affairs website.

Banking, Economics, Exception, Finance, Political economy, Risk, Uncertainty

Central banks are facing a credibility trap

Jacqueline Best

Quite a few commentators have noted that central bankers have become rather less boring of late. Since the 2008 financial crisis, central banks have taken on new roles and responsibilities. They have experimented with a whole range of unconventional monetary policies. And, in the process, they have gained considerably in power and influence.

There has been less attention to a key paradox underlying central bankers’ new roles on the world stage: they are being forced to govern through exceptions in an era in which rule-following (particularly the holy grail of the 2% inflation target) has become the ultimate source of policy credibility. Where central bankers are supposed to stick to the rules, they have found themselves endlessly making exceptions, promising that one day things will return to normal.

This paradox poses real challenges for efforts to foster a sustained global economic recovery. Governing through exceptional policies is always a politically-fraught undertaking, particularly over the long-term, but it is even more difficult in a context in which the dominant convention is one of strict rule-following.

Since the early experiments with monetarism in the late 1970s and early 1980s, most central banks have moved towards an increasingly rule-based approach to monetary policy, with inflation targeting becoming the norm in many countries in recent years.

Yet today we are faced with a situation in which the rules no longer apply but are still being invoked as if they did.

A recent Buttonwood column notes that the Bank of England has missed its inflation target “almost exactly half the time” since 2008. The European Central Bank (ECB) has effectively expanded its narrow mandate, which formally requires it to make price stability its top priority, by arguing that employment and other issues are crucial to achieving it. Yet the ECB and the Bank of England continue to act as if the old rules still apply.

If we look beyond the narrow rules that are supposed to be governing central bank actions and examine the wider changes in their recent policies, we find similar patterns. Scratch an unconventional monetary policy and you will find a kind of economic exceptionalism: an argument that the crisis that we face is extreme enough that it requires a radical but temporary suspension of economic rules and norms.

Most of the unconventional monetary policies that have been tried to date, and just about all of those that have been proposed as future possibilities if we face a renewed global recession, break quite radically with existing norms. Negative interest rates weren’t even supposed to be economically possible (until they were tried), while quantitative easing (a central bank’s buying up bonds by massively increasing the size of its balance sheet) still carries a whiff of irresponsibility linked to its past as a way for governments to avoid fiscal retrenchment by “printing money.”

More recent proposals include helicoptering money into the government’s or the public’s accounts, abolishing cash to make low interest rates effective, and even introducing a reverse incomes policy—a government-enforced increase in wages (as opposed to the wage controls of the 1970s) to try to get inflation going.

All of these existing and potential policies break with current economic norms, and all are being pitched as temporary, exceptional measures that are (or may be) necessary in the face of an extreme crisis.

Ironically, rule-following was designed precisely to avoid this problem. It came into its own as an influential approach to monetary policy in the wake of the destabilizing 1970s, with their stop-go economic policies and rampant inflation. Mainstream economists came to love rule-based monetary policy as did politicians—not just neoconservatives like Margaret Thatcher and Ronald Reagan who first championed the approach, but eventually the more centrist politicians who followed like Tony Blair and Bill Clinton, as well as today’s mixed lot.

A rule-governed approach to policy was designed to be both politically and economically stabilizing—to do away with the problem and even the possibility of exceptions by removing not only governments’ but even central bankers’ discretion: just stick to the rule, and everything will work out. A tidy, efficient, depoliticized (although certainly not apolitical) approach to monetary policy.

Yet rules only seem great until they don’t apply anymore. A rule that pretends it can always apply (or at least, as Colin Hay puts it in his introductory blog, in the 99.9% of times that seem relevant) inevitably runs serious problems when an exception becomes necessary.

Of course, as Alan Greenspan has noted, the victory of rules over discretion was never entirely true in practice. But it was an extremely powerful narrative—one that promised that central banks’ (and governments’) commitments to low inflation and economic stability was credible because they were constrained to follow the rules.

It was also a very effective narrative that has convinced markets that anything other that rule-following is likely to be destabilizing. As central banks begin to face the limits of those rules, their earlier persuasiveness has come back to haunt them: a recent paper from some Federal Reserve staff notes that although a higher inflation target would make sense in the United States, increasing it could well backfire if market actors believed that it would be too inflationary.

This fixation on rule-following has thus put central bankers into a credibility trap. If bankers admit that the rules no longer apply, then they risk losing their credibility as market actors have come to believe the mantra that rules—particularly low inflation targets—are the only way to ensure sound monetary policy. On the other hand if they don’t admit the limits of the rules, and continue lurching from exception to exception, they will eventually lose credibility as the gap between rhetoric and reality widens.

Central banks are damned if they do admit the limits of rules and damned if they don’t.

Of course, the most viable solution to this trap is for governments to stop relying so heavily on central banks in the first place and start taking some responsibility for economic recovery through concerted fiscal action (something that the Canadian government has at least started to do). Yet for that kind of fiscal action to work, governments have to convince the markets that they believe in it enough to stick to their guns and follow through—a rather unlikely scenario in today’s austerity-driven times.

As the potential for renewed economic crisis continues to grow, this credibility gap will only widen—as central bankers and governments find themselves lurching from exception to exception, refusing to question the neoliberal rules that no longer seem to apply.

This blog was first posted on the Sheffield Political Economy Research Institute’s website.

Banking, Canada, Finance, International development, Risk, Uncertainty

Canada needs to do a better job of managing financial uncertainty

Jacqueline Best

Published in the Hill Times, May 25, 2015

As Canadians, we pride ourselves on how well our financial regulations coped with the 2008 financial crisis. Given this attitude, it’s not surprising that Canadian policymakers have avoided a major overhaul to our regulations in response.

Yet we need to make sure that this pride in our system does not lead to complacency. Rather than just looking backwards to how the Canadian financial system performed in the last crisis, we also need to look forwards and recognize how much the global economy is changing.

Those changes take two key forms. First, the economy has become much more uncertain since the crisis. And second, a number of other countries have raised the bar for financial regulation. If Canadians don’t catch up with these two major shifts, we may well find ourselves in trouble.

Whether we look at the International Monetary Fund’s latest Global Financial Stability Report, or the Bank of Canada’s recent Financial System Review, it is clear that both the global and national economies have become increasingly uncertain. That uncertainty defines some of the most important aspects of our economy, whether we look at the likely medium-term impact of the decline in oil prices, the potential for a hard landing in an overheated housing market, or the possibility that Canadians will wake up one day and realize that their household debt level is unsustainable.

This environment of profound uncertainty poses serious policy challenges.

In the good old days of the so-called “Great Moderation” from the mid-1980s to the financial crisis, policymakers were able to focus on what Donald Rumsfeld famously described as “known unknowns”—the kinds of risks to which policymakers could assign definite probabilities. Today, we are faced instead with a great deal of “unknown unknowns”—the kinds of uncertainty that resists formal modeling, as Bank of Canada Governor, Stephen Poloz noted in a recent paper.

How should we regulate financial markets in the face of this kind of uncertainty? Very carefully. As it becomes increasingly difficult to predict what kinds of complex risks the economy might face, we need to err on the side of caution.

As good Canadians we might assume that we already have some of the most cautious financial regulations around. Yet this is no longer the case.

Yes, Canada has implemented the capital adequacy standards set out in the Basel III accord very quickly. Yet our government has treated those requirements as the gold standard, when they were designed to be a bare minimum. On the other hand, the United Kingdom and the United States are in the process of implementing more demanding standards, including adopting higher and stricter leverage ratios. While Canada was one of the only countries with a leverage ratio requirement before the crisis, we now starting to look relatively lax.

Even more striking is the fact that Canada, unlike every other major country, has no central body responsible for coordinating efforts to manage systemic risk. The Canadian regulatory universe is fragmented, with important pieces of the regulatory puzzle managed by half a dozen agencies plus a multitude of provincial authorities. The Bank of Canada does an admirable job of identifying potential sources of systemic risk, but they have few tools for acting on them.

Canadian authorities have engaged in macroprudential regulation in recent years—most notably through their efforts to cool the housing market down. Yet, as a recent IMF report points out, those efforts have unintentionally encouraged those who no longer qualify for prime mortgages into the under-regulated world of “shadow lending,” potentially increasing systemic risk. In order to manage an uncertain economy, someone needs to be able to look at the system as a whole: to connect the dots that link regulations governing consumer credit, mortgages, interest rates, big, small and “shadow” banking institutions.

What about the usual financial sector response that more regulation will cost Canadian financial institutions, and thus the economy, more generally? We should have learned by now that the cost of another crisis would be much greater still. Given the triple threat of uncertain oil prices, a volatile housing market and rising consumer debt, another crisis would likely hit us harder than the last one. It’s worth being well prepared for that kind of risk.

Posted on the CIPS Blog June 5, 2015.