Last fall, Bill Morneau did a rare thing in modern politics. Instead of running away from responsibility, he embraced it. “Let me be clear,” Morneau told the Toronto Board of Trade. “At the end of the day, I am ultimately responsible for supporting financial security, and the stability of the financial system.”
The remarks didn’t receive much attention, but they should have. What Morneau did that day was confirm that he would be the decider of what would be done—or not done—to deflate Canada’s various housing bubbles. He had taken some steps to curb demand during his first year in office, such as raising the minimum downpayment for homes priced higher than $500,000. The public was supposed to be reassured that what happened in the U.S. a decade earlier wouldn’t happen in Canada.
“I will continue to act to ensure that household debt levels are sustainable, that lenders are acting prudently, and that increases in interest rates or a housing market downturn don’t put at risk the economic growth we are working so hard to accelerate,” Morneau said.
Since that speech, Vancouver’s real estate mania has spread to Toronto, and household debt has continued its march to ever-more-worrisome levels. Yet Morneau has flashed less of the bravado he displayed that day at the board of trade. Instead he has appeared reluctant to do more than nudge local authorities to make tough decisions.
The governments of British Columbia and now Ontario have responded with a series of half measures that may help at the margins, but stop miles short of addressing the core drivers of Canada’s property frenzy.
Moral suasion has its limits.
It doesn’t have to be this way. For years, the International Monetary Fund and various other experts have pleaded with Canada’s federal government to invest in an independent body with the power to respond to financial threats. It is now received wisdom that central banks should operate at a distance from the executive or the legislative branch because politicians can’t be trusted to raise interest rates fast enough to stay ahead of inflation. In recent years, the writing of targeted rules to defuse ticking bombs in the financial system has risen to a similar status as setting interest rates. Yet few politicians have handed the job to technocrats. Morneau’s predecessors in Stephen Harper’s government, Jim Flaherty and Joe Oliver, ignored this advice. Both were ideologically opposed to adding new layers of government, no matter how potentially useful. Flaherty, who died in 2014, once told me in an interview that in a democracy, politicians must retain the ability to screw up.
Morneau is different. He’s open to creating new agencies (see: Canada Infrastructure Bank). And he has a soft spot for the advice of career policy wonks like those who inhabit the IMF and think tanks such as the C.D. Howe Institute, where Morneau was the chairman before entering politics.
But when it comes to the idea of putting technocrats in charge of asset-price bubbles, Morneau is no different than his immediate predecessors. In the aftermath of the financial crisis, the U.S. created a committee of agency heads led by the treasury secretary to keep an eye on markets and consider how best to manage threats. In the United Kingdom, the government handed over those powers to the central bank. But Flaherty was unmoved. “The minister of finance, supported by the Department of Finance, has ultimate responsibility for the financial system and authority for all financial sector legislation,” he said in a speech in Vancouver in 2009, slamming the door on the efforts of some in Ottawa, including former Bank of Canada governor Mark Carney, to create a more robust system of financial oversight.
The problem with Flaherty’s approach to what economists call “macroprudential” policy is that it isn’t as democratic as he argued it to be.
Flaherty, as is the case with Morneau, was advised by an informal committee of agency heads: the deputy minister of finance, the governor of the Bank of Canada, the superintendent of financial institutions, the president of Canada Deposit Insurance Corp., and the commissioner of the Financial Consumer Agency of Canada. In Ottawa, this group is known as SAC, or Senior Advisory Committee, and the chief executive of Canada Mortgage and Housing Corp. attends when invited.
These are the people you want in the room for an assessment of what’s happening in financial markets. (The absence of a securities regulator is a problem, but Ottawa doesn’t have one.) However, the SAC has no authority, and it operates far from view. The committee never releases anything for public consumption. Ask for its agendas under the Access to Information Act, as I once did, and you receive pieces of paper with nothing but the date and time of the meetings. The committee’s advice is for the finance minister only. None of Flaherty, Oliver, or Morneau ever have felt compelled to share what the government’s foremost experts on economics and finance think about financial stability. That could be because the politicians don’t always like what the SAC has to say. After the last election, both Bloomberg News and the National Post reported that Oliver rejected calls from officials to cool the housing market. The Conservatives disliked the idea of making mortgages harder to get on the eve of an election campaign.
Not so democratic, at least if your notion of democracy includes being able to hold elected officials accountable between elections. The lack of transparency around macroprudential policy feeds confusion and doubt. The debate over what to do about housing prices is hobbled by a lack of reliable data. An independent agency with the stature of the Bank of Canada, or even the elevation of the SAC to a formal committee answerable to Parliament, would have the authority to cut through the noise. That matters because politicians struggle to act when there is no public consensus. Canada Mortgage and Housing Corp. insists that international buyers are only partly responsible for the price surges in Vancouver and Toronto. Yet for the most part, non-residents are the only culprits British Columbia and Ontario have pursued with vigour. Policies that would more effectively attack speculation, such as subjecting home sales to capital-gains taxes, don’t even appear to be on the table. That’s because such a move would irritate some voters and all real-estate lobbyists.
And so Ottawa is sticking in with the status quo. “I’m convinced we have something in place that’s working,” Morneau told reporters in Washington on April 21. We’ll have to take his word for it. There’s no other way to know.