The bottomline? Economists' models cannot explain consumer bubbles, tech bubbles or commodity bubbles. Nor can they predict a post-bubble future.
- Stephen Poloz
As is well known, Goldman's Mark Carney is leaving the Bank of Canada on June 1 to take over the UK money printer in a few months, at which point he will proceed to create about GBP25 billion per month out of thin air, pushing the total monthly G-7 liquidity injection to a healthy $200 billion (an annualized rate of $2.5 trillion). Which meant that a successor had to be found. Moments ago we learned just who that is, and surprisingly it does not appear to be yet another Goldman Sachs Partner, MD or even Vice President. Carney's replacement is Stephen Poloz, the former head of Export Development Canada.
Promptly upon the announcement Poloz noted that flexible inflation targeting no threat to credibility, and Canada's monetary policy has helped through crisis, and that experience at EDC gives him a feel for Canada's economy. If nothing else, at least he has held a real job. Unlike those mandarins in the Marriner Eccles building. Either way, his monetary stance is largely unknown, although it will hardly be a hurdle to the other lunatics who have taken over the money printing asylum.
[15]
From the Times Colonist: [16]
The appointment to a seven-year term follows a lengthy five-month search process set in motion by Finance Minister Jim Flaherty after Carney announced he would step down June 1.
"Stephen Poloz has a long and distinguished career in the public and private sectors with 30 years experience in financial markets, forecasting and economic policy,” Flaherty said in a statement.
"I am confident he has the skills and experience required to lead the Bank of Canada at a time of global economic uncertainty."
Poloz has been president and chief executive at EDC since 2011. He joined the organization in 1999 as vice-president and chief economist, and in 2004 was named senior vice-president, corporate affairs.
Poloz spent five years with Montreal-based BCA Research, and 14 years with the Bank of Canada in various capacities. He holds degrees in economics from the University of Western Ontario and Queen’s University.
"This has been an extremely thorough process as we sought the best candidates from around the world," Flaherty said.
"Mark Carney has been a visionary leader, an economic partner and a friend. Over the past few years we have faced some unprecedented economic challenges and we surmounted."
Carney, who is leaving to take over the top job at the Bank of England, won respect across the global financial community for his leadership and deft handling of the challenges wrought by the recession.
The early favourite to replace him had been Tiff Macklem, 51, the second-in-command at the bank who had apparently been groomed for the prestigious post.
The position comes with a salary of between $431,800 and $507,900.
So... not Goldman? Not even as a first year analyst? Maybe him and Kuroda went to a summer camp together, run by Robert Rubin, because this abdication to its global domination role is very much unlike Goldman.
Scotia already has a quick profile on the new head, and (not) surprisingly, it appears to be another dove.
New BoC Governor Stephen Poloz’s views on monetary policy are “unknown quantity,” Scotiabank economists Derek Holt and Dov Zigler write in client note.
Markets may take appointment as “dovish nod”; background in export sector may be seen as govt emphasizing challenges facing Canadian exporters, including elevated currency
Poloz has “generally avoided public commentary” on monetary policy; last speech was April 26, 2012, dealt with Canada-Japan trade relations
That said, anyone hoping that Poloz will be the first to buck the trend of the central bank chart presented previously [17], and hike rates is advised to not hold their breath. The CAD is certainly not worried, and promptly weakened to 1.01
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Finally, for those curious, some thoughts on the the financial crash from none other than Poloz, where he expressed a surprisingly objective view of the world. It remains to be seen just how his G-7 colleagues will pervert this.
From BusinessEdge [18]:
How did we fall so fast? Look back to 9/11 trauma
A better question to ask, perhaps, would be: "Where did it begin?" A fuller understanding of the fundamentals of the crisis would almost certainly provide an insight into how it might end. Many would point to the first failed rollover of mortgaged-backed commercial paper in August 2007 as the catalyst to the crisis.
Fair enough, but the root of the matter goes deeper, and much longer ago, than that.
Arguably, the turmoil we are experiencing today is linked directly to the trauma of Sept. 11, 2001. We now know that 9/11 spawned a "live for the moment" boom in U.S. consumer spending and borrowing, the likes of which have never been seen before.
This caused a major upswing in real estate prices, on the basis of which lenders created a balloon of consumer debt, including extending credit into the subprime space. Key to this lending was the presumption that any future debt service difficulties could be buried in a refinancing package based on the rising equity value of the home.
Nor was this expansion of leverage restricted to the U.S. housing market. The extended period of strong global growth fostered a belief that investment risks had become a thing of the past.
Investors - particularly professional fund managers - were therefore encouraged to leverage their investments in order to boost overall returns.
Investors competed for deals, rather than deals competing for investors, and risk premiums were driven even lower in the process.
The U.S. housing bubble broke back in 2006, but it would be August 2007 before the house of cards would really start to come down.
With home prices on the decline, sub-prime mortgage holders were better off simply walking away fromtheir houses.
Doubt crept into the mortgage-backed commercial paper market, and fromthere, into the interbank market. We now are faced with a global desire to reduce leverage, and governments have provided mountains of liquidity to keep things orderly.
There are now signs of healing and every reason to believe that the credit crunch will fade over time.
So, where will it end? The most important implication of the above interpretation of events is that the credit crisis is the product of an underlying economic downturn, not the other way around.
At the heart of that downturn is a shift in U.S. consumer psychology, away from"living for the moment" and back to "saving for tomorrow.”
That shift will take time to complete, and its real impact is now being felt everywhere, fromGermany to Chile to Russia to China and all points between.
In other words, even after the credit crunch is sorted out, we will be left with a traditional downswing in the global business cycle. Such cycles have a lot of common characteristics: Repricing of risk, widening interest rate spreads, weak commodity prices and a rising U.S. dollar.
These symptoms are likely to persist until the global business cycle runs its course - and given the revision that has taken place in U.S. consumer psychology, that bottomis likely to be at least a year away, probably longer.
The bottomline? Economists' models cannot explain consumer bubbles, tech bubbles or commodity bubbles. Nor can they predict a post-bubble future.
However, business cycles do have a natural rhythm, and that means the outlook will remain challenging for at least the next 12-18 months.