Dear England

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(Canadian Watchdog illustration)

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In 2005 Stephen Harper won an election, in part, because he promised never to goose the taxes on high-paying, popular income trusts. On Halloween night the next year he did just that. Poor F was pushed in front of the TV cameras and fed live to the voracious media. He claimed the feds would lose “billions” in taxes if trusts weren’t spanked, but never proved it.

Behind the scenes was a smart but stealthy civil servant at the Department of Finance who was responsible for this shocking reversal – a dude named Mark Carney. Within months the Conservative government rewarded him with an appointment to head the Bank of Canada, promoting the tender 42-year-old over the heir apparent at the Bank, Paul Jenkins. It soon became clear on Parliament Hill that Carney was a close confidant of F’s, and the guy was untouchable.

At the meeting of the Parliamentary Finance Committee called to confirm his appointment, I started asking weasel questions about the trust affair, before seeing if Carney approved of 40-year mortgages with zero down payments. The Conservatives on the body hooted me down while the chairman (now the junior finance minister) ruled me out of order. Later they all beat the crap out of me in the parking lot.

But this is now behind us. The youngest-ever central bank czar in the history of the western world is preparing the next bullet point on his CV – governor of the Bank of England. He’s the first non-Brit in the 318-year history of the bank, and will soon have more power over the economy there than the government. The UK is the sixth biggest economy in the world, and we’re tenth. Britain matters bigtime to the fate of Europe, and the global GDP. We, on the other hand,  just hope the NHL settles soon and are trying to remember where we put the sled keys.

Of course there’s some curiosity across the pond as to what this Carney guy might do for the $993,000 salary he’ll be collecting. Here’s Adrian:

I enjoy your blog, and the parallels between the Canadian housing bubble and the one we’ve been, ah, enjoying, for the past few years.

I’m in England and have just found that your Mr Carney is taking over next year as Governor of the Bank of England – an organisation that has worked hard to protect the interests of home-owners over here by keeping interest rates too low so that prices stay high.

Is his appointment likely to improve matters here, do you think, or to allow the bubble to continue?

Well, Adrian, Carney’s clever and ambitious. He apprenticed at Goldman’s, squirmed his way to the top of Finance in Ottawa, realized early that F was weak and malleable, and played his cards adroitly. He scored the London gig based on his stirling rep as the central banker that kept Canada from imploding in the GFC. Without a doubt, he provided a stable hand on the tiller while the elected politicians waffled and obfuscated. But he also let us down.

A year before economies imploded in a real estate-induced frenzy, ripping into financial markets and bringing capitalism to the brink, I asked Carney – soon to become bank governor – if he was worried about the housing market. He said no. His subsequent actions proved that. In fact the guy could be called the architect of the situation we have today, when the average Toronto family can’t afford the average home, Vancouver has been destroyed by land speculation and we’re on the verge of a nasty correction.

Mr. Carney said nothing when his pal F pushed through forty-year amortizations and allowed zero down payment loans to be covered by CMHC. It was that move, surprisingly shoehorned into the 2006 budget, which spread the fuel for an explosion of property prices. All it took to ignite was the spark of emergency interest rates, which Carney himself provided two years later.

The result you know. By the Spring of 2012 the average SFH in Vancouver cost $1.2 million, Toronto was a bidding-war battleground and urban Canadian real estate values had climbed 128% from pre-Carney days. So what did the Governor do? Yes, he embarked on a cross-country road trip to warn people they were borrowing too much. This was when five-year mortgages dropped to 2.99%, chartered banks were giving savingless couples down payments – plus 100% financing – and CMHC’s automated approval process was rubberstamping borrowings in seven seconds.

Can you say hypocrite?

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Adrian, you get the guy at a moment when – thanks to Mr. Carney and his sawed-off buddy – Canadian house prices are 49% higher than those in the States (with ten times the economic output) and our household debt has hit a record level higher than that which preceded  the US housing crash. Our savings rate has cratered during this period. One third of retirees will have a mortgage (first time ever), and four in ten families say they have trouble making monthly payments. Worse, a whole generation of people now in their thirties and forties are pretty much screwed unless real estate collapses, screwing their parents.

But, dammit, the macros look good.

The global meme is that Canada escaped the worst of the recession, while Britain grinds away with 8% unemployment and a budget deficit that next year could exceed that of Greece. The reality’s something else. There is social distress in Canada in the wake of our leaders’ decisions.

“Mark Carney is a quality governor,” the Chancellor of the Exchequer told the British House of Commons. “He is quite simply the best, most experienced and most qualified person in the world to be the next Governor of the Bank of England.”

Great. Can we also interest you in an elfin deity?

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avatarGarth Turner - The Greater Fool posted Monday, November 26th, 2012.

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