Friday, September 8, 2017

The End of Canada's Zero Interest Rate Policy

2 MIN READ - The Cautious Optimism Correspondent for Economic Affairs and other Egghead Stuff reflects on Fed/Central bank policy/effectiveness across the US and The Great White North.

The Bank of Canada building has added floors since 1935
On Wednesday the Bank of Canada raised its overnight lending rate for the second time in two months to 1%--meaning its next rate hike will end over eight years of 1% or lower interest rate policy and signal the end of an unprecedented era of cheap money that many believe has fueled real estate bubbles in key Canadian metro areas.

By contrast, Canada's banking system going back to the late 18th century had been largely free of government control and nearly totally unregulated, functioning without a central bank all the way until 1935—well after the Great Depression had already bottomed out.

Lacking restrictions on branch banking that had plagued American unit banks for over a century, and free from distorting controls imposed on US banks by the National Bank Acts (1862-1913) and the First and Second Banks of the United States (1791-1811, 1816-1836), Canada never suffered a systemic banking crisis in its entire history versus the roughly fifteen that the United States has endured reaching back to 1797.

Under its freer and less regulated system, Canada also did not experience a single bank failure during the Great Depression compared to the nearly 10,000 failures the United States suffered from 1929 to 1933 under the watchful eye of the Federal Reserve.

(click here to read's report on the historical contrast between the Canadian and American systems

However, in the decades since the Bank of Canada opened its doors in 1935, Canada's banking system has increasingly mirrored its southern neighbor's with a powerful central bank issuing monopoly fiat money and centrally planning interest rates and monetary policy.

And while Canada has benefited from its citizens' traditionally conservative household finances and absence of the affordable housing crusades that flowed from Washington, DC during the 2000's, the Bank of Canada's ultra-easy money policy of the last eight years and the real estate bubbles it has blown in major metro areas raises doubts as to whether Canada can avoid its first full-fledged financial crisis.

Even if it survives this tightening cycle, is an end to Canada's remarkable lifetime streak of zero bank crises coming in our lifetimes given its abandonment of free banking policies for central planning in money?

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