Carney indulges fantasy about cause of housing bubble

Few things are more aggravating than these central bankers who come out with pabulum-fed bullshit observations about the economy while being treated like the Oracle of Delphi. as if mere words will decidedly shape economic outcomes.

So Mark Carney is warning about housing prices again. He alludes to nothing concerning interest rate policy, which is no surprise, but he does indulge in a fantasy about “greedy speculators and investors” and desperate families driving up prices such that there are “excesses” in some markets. And in this wacky bubble-fueled markets, like Vancouver,  home ownership creates special  “financial vulnerabilities.”

Oh come on. I understand the whole public perception issue, and how Carney cannot admit that he has any role in this housing bubble. Still, Carney’s statements are amazing in the way they must reveal either his ignorance of reality or how he simply pretends not to know. You see, in this world, there are always greedy speculators and investors. Always. By itself, the existence of greedy people does not account for asset bubbles.

No one has ever been able to show with real economic reasoning how greed systematically creates distortions. Neither does greed’s foil, fear, systematically create distortions. Greediness and fear are answers to the question of why people do things, which is an issue for psychology. When we wish to understand economic law, we build upon the fact that people do things as such, rather than why people do things.

What can be shown with economic reasoning is that manipulating the money supply causes interest rates to change. If the central bank expands the money supply, then interest rates will fall and more money will be lent than before. This new money is used to bid up the prices of goods and services, especially capital goods, to higher levels than would otherwise be the case.

Carney probably knows this, and thinks his mighty words alone will help assuage bubble. He does not want to raise interest rates. But the damage has been done. While the BoC’s balance sheet has contracted to pre-crisis levels and been relatively stable for some time now, Canada’s economy was not allowed to rebalance itself in a real recession and therefore myriad distortions remain.

Devastating financial collapse — and a complete implosion of housing prices — still to come, no matter how much Carney warns about distortions. What a fool.