Forget Toronto mayor Rob Ford, Mark Carney just announced he was leaving the Bank of Canada to lead the Bank of England. Carney is expected to keep his current job until June, when he will then take over the BoE on July 1st.
I don't know how I feel about this. It'll be great to see this Goldman Sachs alumnus gone, but obviously he'll be replaced by someone else -- perhaps someone worse. In addition, he got a free ride from politicians and mainstream media. This is the man whose low-interest rate policies fuelled the credit/debt bubble Canadians find themselves in, yet is regarded as "very competent, very articulate, and a very credible man." This is man Finance Minister Jim Flaherty touted as keeping "Canada strong" during the recession.
I was hoping to see the Canadian economy crash while this guy was still at the helm. Of course, the blame will be pinned on individual Canadian borrowers anyway. Carney has been warning for months about household debts. We should have listened. Tisk tisk.....
But of course that's all nonsense. Canadian banks expand credit well beyond their assets, which is encouraged by Mark Carney's artificially low interest rates. This credit finds its way into the economy by increased borrowing for capital projects, such as housing. Projects which never would have been started, or started at a later date, now became profitable. However, because these projects are funded by artificial credit (rather than legitimate savings), they constitute a malinvestment. They increase demand for production materials and for labour and cause prices to rise. This then causes an increase of prices of consumption goods
But banks can’t increase credit forever. All resources are scarce, the means of production and labour which are diverted into housing have to be taken away from other sectors. There is no additional capital or labour, only credit and debt. Eventually a clash over resources becomes inevitable. As people continue to spend money on consumption goods, capital investors will find their projects to be unsustainable. Banks will then ask their borrowers for payment and credit conditions will start to deteriorate. The capital good industries, like housing construction, will find their investments to be in error. What they think is profitable will ultimately suffer from a lack of demand. Particular types of investments will be revealed to be “wrong” from the perspective of the long-term sustainability of the market. This is due to the distortion of price signals via the expansion of credit into the markets (i.e. Mark Carney's policy of artificially low interest rates and the Bank of Canada's coercive monopoly on money).
So let's allow Carney's parting to be an opportunity for Canadians to replace the Governor with no-one, and to abolish the Bank of Canada for good.
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