Should Stephen Poloz be more worried about the Canadian economy?
Blandly reassuring, is Bank of Canada governor really ready if something bad happens?
I hope Bank of Canada governor Stephen Poloz was putting on a brave face.
Despite a warning that risks had increased, mostly due to the property market, the avuncular Poloz was blandly reassuring when he met with the media yesterday to discuss the bank's latest Financial System Review.
His senior deputy Carolyn Wilkins was even more hypnotically nerveless.
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Not that we wanted our two most senior central bankers to be wailing and rending their garments in despair. Of course it is nice to feel that Canada's financial system is in cool hands.
But is the governor lulling us to sleep when we need to be very wide awake?
We must just hope that behind the scenes, in the Bank of Canada war room, the soothing Poloz and ice-cool Wilkins expose themselves to a few more terrifying scenarios. Because a survey of credible sources says the world, and the Canadian economy, remain fraught.
While it may be nice for a firefighter to reassure you that modern houses seldom burn down, the fire chief you want racing to your flaming home is one who fears the worst and knows what to do when it happens. Chief central bankers should think like firefighters.
Even while upping the housing risk, Poloz played it down.
"Overvaluation remains a concern," he said in his prepared remarks. "But the probability that a sharp correction in house prices will occur remains low."
Even if that should happen, said Poloz and Wilkins, the systemic risk — that is, the risk for the wider Canadian economy — is reduced by the fact that the bad effects of overvaluation will only hit some households in some regions. Vancouver and Toronto, are "showing some strengths," said Wilkins, but outside those two centres prices are "easing quite nicely."
"It is important there because if it is a generalized thing, which we are not seeing, then that's a different problem than if it is localized," said Wilkins.
Everyone in the world has noticed that Vancouver and Toronto house prices are soaring absurdly. Even with a flood of cash escaping from China, an impact denied by the B.C. real estate industry, it is hard to imagine those prices can be sustained.
Just as the San Francisco earthquake of 1906 damaged the entire U.S. economic system, a property crash in one of Canada's two hot real estate cities, no matter how unlikely, would be felt coast to coast.
But the bankers' reassurances did not stop at real estate. On the financial system, reforms had made things more secure. Reforms had also made Europe more safe. On oil, things were moderating. On the global economy, the U.S. was pulling ahead.
Bankers aren't ready
On those same points, other analysts are far less sanguine. The cover story of this week's Economist, Watch out: the world is not ready for the next recession, warns that another global recession is on the way, and central bankers aren't ready.
Mark Carney, Poloz's predecessor, now at the Bank of England, has warned that the fossil fuel industry may be in a slide as the world wakes up to the dangers of global warming.
And while a recovery in the United States would indeed be nice to see, steadily rising interest rates would be devastating for over-borrowed Canadians and for the bond market.
In the past, Poloz has taken flack for calling the Canadian economy "atrocious" when it indeed turned out to be atrocious. He was pummelled for calling house prices seriously overvalued when they were less overvalued than they are today. But a fearless central banker should do more of that.
In a world where everyone wants to be reassuring, from real estate salesmen to financial advisers to politicians wanting your vote, we need a few trustworthy voices willing to remind us of the risks.
In nervous times, there is nothing wrong with hoping for the best. But we must also prepare for the worst.
We need Poloz to be the fire chief telling us to put up smoke alarms and keep the candles away from the curtains. And we must know that he knows what to do when, against all odds, the house starts to burn.
The most frightening thing about yesterday's news conference was that it wasn't frightening at all.
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