More rate cuts?
Nouriel Roubini takes a dig at the Bank of Canada:
[Yesterday] the Bank of Canada started to get it by, unexpectedly, cutting its policy rate by 25bps; but 25bps is puny given the liquidity crunch in global markets that has also spread to the Canadian markets. 50bps or more was the minimum necessary to deal with a Loonie that is lunatically high and a massive financial contagion from the US to the Canadian financial markets.
Here’s a theory: this is all about perceptions and confidence, not whether a quarter-point cut is tinkering enough on the margins to change the general course of the Canadian economy. A few commentators on yesterday’s post seemed keen on a half-point cut and perhaps more in the months to come. I appreciate the underlying logic to those arguments, but a half-point cut – when the markets were anticipating a quarter-point, and with things shaky down south but still ticking along reasonably well up here – would have seemed like the Bank panicking and flip-flopping, and thus would risk freaking out the financial markets and other major economic actors.
In any event, the flow-through from the overnight rate to longer-term interest rates out there is far less than unity, and perhaps zero in areas where it might make a difference like consumer credit (my variable rate mortgage, notwithstanding). A more important reason is the high dollar, and if the spread widens between Canadian and US rates any more, it could turn today’s manufacturing hurt into serious chronic pain.
But a quarter-point was probably inevitable, given the dollar, the expectations in the markets and the high likelihood of the US cutting rates next week by at least a quarter point and perhaps a half point. I also think Dodge wants to leave room for action in the future, as it is smoother and better optics to steadily lower rates over time, and in so doing leaving some room for action by his successor as Governor.
Such “action” may rightfully be called pushing on a string should things get really out of hand. I’m all for a monetary easing but skeptical that rate cuts by central banks are going to be enough. Yes, Canadian monetary policy via interest rate cuts needs to keep pace with US rates to stabilize (or bring down somewhat) the Cdn dollar. But underlying this we are still holding onto the mythos of powerful central bankers at the helm, steadily adjusting course based on their measurements and understanding of the economic seas. Which comes back to the point about perceptions and confidence.
I’d like to see fiscal policy do more of the heavy lifting, and let’s face it, there is much work to be done on climate change, poverty, transportation, etc that necessitates the public spending as the vehicle for action.
Considering Mr. Bush’s drastic announcement today regarding the sub-prime mortgage freeze, one might want to start theorizing that the storm down south is a lot worse than originally believed. There is a lot of global talk of disjointedness or economic separation from the US economy and insulating oneself from its effects.
That would be a stretch for some European economies such as the UK, but for Canadian policy makers to reiterate these sentiments is pure wishful thinking. We are organically linked to the US, thanks to free trade. Why people on the hill mention such lunacy is beyond me, but lets stop fooling ourselves, a large majority of our export based economy is to the states. Our new soon to be central bank governor mentioned yesterday that he feels pegging ourselves to the US dollar is a bad idea. Well tell that to the Canadian community that keeps seeing their bottom line jumping around like rabbits on an energy drink!? Okay so we don’t have to peg forever, but how about during these times of turmoil we ride it out. Wait until this whole mess straightens itself out. Give the business world and the workers involved a break. We are only talking about vaporizing machinery, equipment, technology, thousands of high income jobs in both manufacturing and the high tech industries that support hem and the downstream jobs and companies that rely on a robust manufacturing sector. And this is forever. Why the bank did not act sooner like back in the summer is just another sign that Harper and his band of free marketers have not much in the way of ideas or pragmatism to handle something as complicated as an economy. This is there first real test within the challenges of directing and guiding a modern economy, and they are failing miserably. They are underestimating what is going on south of the border.
There is much speculation but today it was estimated that over 1.8 million mortgages in the US are sup-prime. The question is how big of a loss can we estimate and what will its effect on the economy be. I have yet to see much in the way of dead weight losses estimates plus the social costs of a large proportion of these people losing there homes plus factor in a certain proportion of non-mortgage sub-prime and the spill over from the non-sub-prime mortgage bankruptcies due to both the housing price devaluation and the economic shock to the construction industry. This slowing in the construction industry will be the final straw that breaks the recessionary camels back. The US has lost over 2 million manufacturing jobs since 2002 (almost the same proportion as Canada has lost) and similar to Canada the construction industry in the US had picked up some of the slack and drag onto the economy that the manufacturing losses had. If you take out the war in the US and the extra spending on that (hopefully it will end soon) and you factor in that Mr. Bush can no longer give out huge tax breaks as a way of stimulating the economy then there is no choice but to choose recession and a deep recession.
Oh course this only factors in the sane policy options that are available and considering that regime, I am sure something from the twilight zone of policy land may yet make its appearance. Kind of funny in a flash the free marketeers south of the border suddenly pull from their back pocket the biggest damn mortgage cheque book the US has seen in its history. I wonder what Mr Friedman would have advised?
Our central banker had better start dustiing off their inflationary fairy dust and start looking hard down south at the big recessionary monsters that are increasingly moving north and ravaging our lands of wealth generation and give us at least a half a point in January.
Pt.