April 10, 2012

One definition of cognitive bias describes a pattern of inaccurate judgments, illogical interpretations, premeditated distortions and poor judgments often triggered by a particular situation. This is a very appropriate depiction of what led to the U. S. credit crunch of 2007-08. The overarching faith in never ending high returns on investments was a bias shared by governments and major investment banks in the United States.

John Kenneth Galbraith gave an excellent definition of the corporate bias in the United States in 1992 in his book, The Culture of Entitlement, “Central to this culture of contentment was the attitude that it was in the nature of things, and especially of economic life, that all works out for the best in the end.”

We know, of course, this did not happen in the United States and in many parts of Europe. A debt crisis continues to threaten the world economy with further losses and recessions.

It comes as no surprise that our governor of the Bank of Canada, Mark Carney, last week verbalized into audio recognition the many whispers and innuendos about interest rates going up echoing around Canada. The reason: the household debt is too high in Canada.

As I have mentioned many times before, it is a bit late to ring the warning bells after a nation of people are up to their assets in debt. Why so late? Why did he have to wait for the US economy to crash and for a debt crisis to consume much of Europe?

The idea of the national bank to intervene and protect the economy from time to time makes perfect sense but to come along in 2012 when the debt is at a crippling high level and now raise interest rates makes me wonder – who does this help and who does this really hurt?

From one perspective, raising interest rates is a part of monetary policy that can encourage or discourage borrowing. Government supposedly discourages borrowing by making credit more expensive. However this well-accepted policy distorts the real problem of borrowing and indebtedness. Who is really in debt?

The second problem I have with Mr. Carney’s voice of salvation for the nation is the co-mingling of mortgage debt with consumer debt. Mortgage debt refers to home buyers and investors. Consumer debt tells a different story. One of a dependency upon credit for millions of people for basic things like cars, a post secondary education, credit cards and lines of credit. Most of the these people are in debt because they cannot afford to meet the basic expenses of life which include day care, the rising cost of gas, housing, technology and food.

Who does an interest rate increase hurt? It hurts the most vulnerable and an impoverished middle class struggling for survival. For them an interest rate hike will deepen their burden and cause even more shortages.

The question of affordable housing needs to be addressed by governments and unrestrained profiteering by oil companies that seem to be able to send a country into a downward spiral by unrestricted price increases.

You may call it cognitive or corporate bias but raising rates at a time when the world is hurting because of the growth of unrestrained debt problems until everyone hits the ceiling misses the underlying problems of consumer debt and the cost of housing in Canada. It’s time to get serious about debt – consumer debt and affordable housing.

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