Part of the immeasurable majesty of Canada is its federal form of government which on a good day should be about the provision of public goods in a decentralized fashion that tailors them to local preferences but in a cooperative and coordinated fashion. On a bad day, Canadian federalism is about tiers of government going their merry way enacting measures and policies that impact other levels while jealously guarding their jurisdictions and finger pointing as problems come home to roost. The housing portfolio is a particularly good example of the latter.
For the most part, a federal system is an institutional arrangement that allows regional diversity in an environment whose rules foster both cooperation and competition. Part of that institutional environment is ongoing political negotiations and discussions as well as lobbying as municipalities interact with provincial/territorial and federal governments, provinces/territories interact with municipalities and the federal government as well as each other and of course the federal government interacts with everyone with an eye to overarching interests. Along with regional diversity tailored to local preferences, there are also needs to be some national rules or standards that help create a common economic space that affords everyone a larger economic space and the economic benefits thereof.
Which brings us to monetary policy and the current trend for politicians to speak their minds and essentially “lobby” the central bank on the eve of a rate announcement. As most first year economic students eventually learn, the role of the central bank is to promote the economic and financial welfare of Canada via the conduct of monetary policy designed to keep inflation low and stable. This role includes using the levers of monetary policy, safeguarding the integrity of the financial system, and issuing and managing our currency. This is a technical process and run by highly trained specialists in economic theory and monetary policy. When push comes to shove, the federal government of the day ultimately is in charge of our central bank, but it must use that policy sparingly because the stability and effectiveness of our financial system depends on day-to-day operations of the bank being insulated from political flavors of the day.
Pity then the current governor of the Bank of Canada who came into the job during the pandemic and has had to unwind oodles of quantitative easing, steer the financial system through the Scylla and Charybdis of first deflation and then inflation, and engineer a soft landing as interest rates rose to deal with inflation – interest rates that when compared to much of nineteenth and twentieth century economic history were ridiculously low and fostered a war on savers by loaning their money out to fund a housing asset surge. Indeed, taking money from savers at rates approaching zero and giving it to people to finance their spending could be considered a form of theft. Rising interest rates are having their intended effect on inflation but they are indeed creating financial pressure on households.
It is not unreasonable for informed business and economic commentators to discuss and critique monetary policy and offer policy advice as media performances in the face of a slowing economy have recently illustrated. However, it is less reasonable when politicians begin to weigh in on what the Bank of Canada should do in interventions that are essentially public lobbying efforts for input into monetary policy engineered for political optics.
In recent days, we have seen the premier of British Columbia call of the Bank of Canada in a public letter to halt “further increases” because people are hurting. The Ontario premier has also gotten in on the act with a letter released yesterday calling on the Governor of the Bank of Canada to stop raising interest rates. In their last meeting, the premiers collectively opined that they are not in favour of these rate increases because of the harm they are causing as people renew their mortgages. And at the federal level, the prime minister himself is trying to assuage monetary pain by stating that these rate increases are bad news for Canadians and shifting some of the blame for high housing costs on the central bank. And who can forget the leader of the opposition who in Herod-like fashion wants to deliver the governor’s head on a political platter.
In going after key institutions with attacks motivated by short-term political gain, politicians are essentially undermining important institutions. They are all bright enough to realize that recent interest rates were abnormally low and that they should not be fueling fantasies that somehow, we are going to revert to 1 percent interest rates. As a former bank governor recently remarked, though interest rates will eventually come down, it is unlikely we are returning to pre-pandemic interest rates. Yet, federal, and provincial politicians have become like snakes in the garden of federalism with their calculated crocodile tears of concern for the average Canadians and whispers of consolation while pursuing actions or lack of action that makes problems worse - again, housing comes to mind. After all, what they are really after is short term political credit if the Bank of Canada holds the line on interest rates and the rocket fuel of righteous indignation if they don’t. They are not at all concerned about the long-term consequence of undermining key institutions.
After all, if the average Canadian politician were concerned about long-term economic welfare, we would not have half the problems we currently have.
