Mark Carney says debt is too high; BMO asks, What does he know, anyway?

Mark Carney says debt is too high; BMO asks, What does he know, anyway?

Canadian debt loads are this big (Image: Sebastian Derungs, World Economic Forum)

Yesterday at the Economic Club of Canada, Bank of Canada governor Mark Carney warned in the strongest possible terms short of yelling “fire!” that Canadian personal debt loads are too high. The problem is that the cure for the last crisis (low interest rates to fight recession) is getting us ready for the next disease (a wallop in the wallet when interest rates start to go up again).

The National Post writes:

“Cheap money is not a long-term growth strategy,” Mr. Carney said in his loudest warning yet against the dangers of cheap credit. “Low rates today do not necessarily mean low rates tomorrow. Risk reversals when they happen can be fierce: The greater the complacency, the more brutal the reckoning.”

Trouble is, Mr. Carney has been warning about the situation for months without anyone doing anything about it. And it doesn’t look like that’s about to change anytime soon.

The Bank of Canada has some possible complicity in this: It has maintained low interest rates to propel the country out of the recession. That has spurred consumers to borrow more because it costs less to borrow. And banks, afraid to cede market share and profits, have been willing lenders.

Just in time, BMO Nesbitt Burns has come out and said that, actually, we have nothing to fear from the crushing debt burden, because it’s not just debt that’s gone up—personal assets have become more valuable, with the notable exception of the market crash in 2008. So if you look at debt-to-assets instead of debt-to-income, things are doing all right.

This argument from BMO is just the latest in a string of optimistic counter-arguments from the bank—though usually the argument has been about real estate, with such voices as the Economist and RBC arguing that we’re in a bubble and BMO arguing we’re not. Of course, if they’re right, then the party can keep on going. If BMO is wrong, we might want to try to clear off the holiday credit card debt a bit faster than normal.

• Nobody wants to crash this debt party [National Post]
• Five other things Carney said [National Post]
• ‘Crisis not over, central bank warns’ [Toronto Star]
• Canadians’ debt-to-income ratio now higher than Americans’ [Globe and Mail]
• Personal debt not as bad as it looks [Globe and Mail]