Stephen Poloz, New Bank Of Canada Governor, Predicted Financial Crisis, Blamed Housing Bubble On 9/11

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Stephen Poloz, the newly-appointed governor of the Bank of Canada, struck many as reserved and, well, boring during his press conference with Finance Minister Jim Flaherty earlier this week. But his record as an economist holds some surprisingly colourful anecdotes.
Stephen Poloz, the newly-appointed governor of the Bank of Canada, struck many as reserved and, well, boring during his press conference with Finance Minister Jim Flaherty earlier this week. But his record as an economist holds some surprisingly colourful anecdotes.

Stephen Poloz, the newly-appointed governor of the Bank of Canada, struck many as reserved and, well, boring during his press conference with Finance Minister Jim Flaherty earlier this week.

But boring may be exactly what you want from a central banker, and in any case Poloz' record as an economist holds some surprisingly colourful anecdotes.

For one thing, Poloz, who most recently was the head of Export Development Canada, has in the past argued that Canada is suffering from Dutch Disease -- the whittling away of a country's manufacturing base due to an overly strong currency caused by oil exports.

"The bottom line? Symptoms of Dutch Disease are beginning to appear, with profit margins expanding in the energy sector and contracting in a number of manufacturing sub-sectors," he wrote in 2005.

That's an assertion he likely won't be making too frequently now that he's the governor of Canada's central bank. The issue of whether manufacturing is suffering due to the resource economy has become so politicized that suggesting it will quickly get you a smack-down from a Western premier.

Poloz has made other arguments that are even more likely to raise eyebrows. As the financial crisis unfolded in 2008, he wrote an article positing a very interesting theory for what caused the crash: Blame 9/11, he said.

Arguably, the turmoil we are experiencing today is linked directly to the trauma of Sept. 11, 2001,” he wrote in a 2008 article for Business Edge. “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.”

The borrowing and spending boom was indeed unprecedented, but the theory that it was spawned by 9/11 is “novel,” as the Financial Post puts it.

Many economists, looking at the bursting of the U.S. housing bubble and the subsequent financial crisis, blamed the problem on excessively low interest rates in the wake of the 2000-2001 economic slowdown, when the U.S. Federal Reserve dropped interest rates to one per cent, the lowest in half a century.

The excessively low rate encouraged irresponsible borrowing and lending, and created an asset bubble that inevitably had to burst, the line of reasoning goes.

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Poloz, too, had concerns about the U.S.’s housing market, and about the health of the U.S. financial system overall — concerns he voiced a decade before the collapse of Bear Stearns and Lehman Brothers tipped the global financial system into crisis.

As Maclean’s reports, Poloz predicted an avalanche of financial system bailouts back in 1998, after the collapse of Long-Term Capital Management. He suggested the hedge fund manager’s bankruptcy would be just the first in a long line of failures due to trading in complex derivatives.

“I think there will be lots more” fund failures, he said.

Yet at other times, Poloz appeared — in retrospect — far too optimistic about the state of the world economy, predicting in 2004 that rising interest rates would take a bite out of U.S. house prices, but “by all accounts the demand for housing has increased for fundamental, and lasting, reasons.”

Two years later, the U.S. housing market began a half-decade-long slide that would wipe one-third off the average face value of U.S. homes.

And in 2007, as the U.S. housing market was slumping and its financial institutions were headed towards catastrophe, Poloz declared, “The world truly is in better shape than in the late 1990s, and should prove resilient to financial turbulence.”

So hardly a perfect record of economic divination.

At his inaugural press conference in Ottawa this week, Poloz declared the post-crisis economic recovery “is not as robust as was anticipated,” and “we will have to stimulate the economy for a certain amount of time” — a clear sign he intends to keep Canada’s interest rate near rock bottom for some time yet.

That makes him sound a lot like the old BoC boss, Mark Carney — minus, of course, the speculation on terrorist attacks and their effect on consumer spending.

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