It is good news that the Bank of Canada, on behalf of Governor Mark Carney, has re-emphasized its moderate position on household debt and the real-estate sector, after a comment of his in Washington last Thursday, which did not seem quite consistent with the bank’s interest-rate announcement a day earlier.
In general, monetary policy should not be mainly targeted at specific economic sectors, even such large ones as the housing or equity markets. Interest rates and credit conditions, however, are truly macroeconomic; that is, they affect the whole economy.
On Wednesday, Mr. Carney spoke favourably of “the constructive evolution of imbalances in the household sector.” The next day, answering a question about whether there is a housing bubble in Canada, before a full house at the National Press Club in Washington, he pointed out that the federal government had taken regulatory steps, such as tightening of mortgage underwriting standards, but went on to speak of “the potential consequences for the path of interest rates; in other words, they could be higher sooner, if this isn’t adjusted in a more timely way.” After a news story on this, the bank promptly reasserted its view that the household sector is making satisfactory progress.
Adam Posen, a former member of the Bank of England’s monetary policy committee, now the president of the Peterson Institute for International Economics, has written more than once about central banks and asset-price bubbles. In his opinion, they should not try to burst bubbles, because (among other things) it is very difficult to recognize whether a large rise in the prices of one asset class really is a bubble, until it is over. The “I know when I see it” test – applied to obscenity in 1964 by Justice Potter Stewart of the U.S. Supreme Court – does not work in this context, if it does in any.
Mr. Posen looked at dozens of stock-market and real-estate booms. He found that most of them did not burst quickly or turn into recessions. He concluded that this could be determined only in hindsight.
Consequently, Mr. Carney and his colleagues have been quite right to express their worry about household debt, but have been wise to leave it to the regulators to take specific measures on the housing market.