Forgive me, Father, for I have defaultedFATHER RAYMOND J. DE SOUZA
One of the important public policy shifts of the past generations has been the realization by governments that personal virtue has public consequences.
There have been at least two big exceptions to this. Family policy has been rather laissez-faire or even non-existent, even though family structure is the number-one predictor of poverty. In an age of sexual libertinism though, it's been considered a step too far for the state to reward family stability and penalize family disintegration.
The other large public policy area unconcerned with private virtue has been – to date – macroeconomic policy.
People respond directly to economic incentives and trade-offs. Cultural differences also have been noted. (E. g., even at negative real interest rates, Japanese households used to have a higher savings ratio than other countries.) But the moral quality of individual choices has not been a focus of macroeconomic policy.
Now something new is emerging. Just before Christmas, Mark Carney, Governor of the Bank of Canada, gave an address in which he surveyed the challenges of "living with low for long" – a reference to long-term low interest rates.
"Experience suggests that prolonged periods of unusually low interest rates can cloud assessments of financial risks, induce a search for yield, and delay balance-sheet adjustments," Carney said. Households borrow too much, firms undertake unsound risks, and banks "evergreen" bad loans rather than write them off, delaying the day of reckoning.
So what to do about that? The Governor suggested "three lines of defence" (the first of which is discussed below).
The second line is "enhanced supervision of risk-taking activities," which means regulatory enforcement of more conservative leverage ratios and liquidity standards. Carney called the "third line" of defence "macro-prudential measures" – which include the stricter mortgage standards recently announced by the federal government.
So playing defence in macroeconomic policy means using regulation to force more conservative behaviour onto firms, households and banks. Nothing surprising there. But what about the first line of defence?
Carney's "first line" is that individuals, firms, banks and governments have to be more careful, more prudent and more cautious in their decision-making. That's not a policy response; it's a moral exhortation. Indeed, throughout 2010, Carney sounded more and more like a preacher, which is no small achievement, given the less than sonorous cadences usually employed by central bank governors.
Yet what can he do, except preach the necessity of private virtue? The standard macroeconomic toolkit – with the bank's rate at 1% – is exhausted by the requirement that it meet the inflation targets without killing a fragile recovery. Macroeconomic policy needs more tools. Moral exhortation is one of them. Perhaps the Bank of Canada should have a chaplain.
The financial crisis revealed that private self-interest was not enough to prevent the most foolhardy risks from being taken. Will private virtue, after the lessons learned, be sufficient? The macroeconomists are praying that it is so.
Father Raymond J. de Souza, "Forgive me, Father, for I have defaulted." National Post, (Canada) January 27, 2011.
Reprinted with permission of the National Post and Fr. de Souza.
Photo: Kwan Choo, ARPS
Father Raymond J. de Souza is chaplain to Newman House, the Roman Catholic mission at Queen's University, Kingston, Ontario. Father de Souza's web site is here. Father de Souza is on the advisory board of the Catholic Education Resource Center.
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