Douglas P. Welbanks: Conventional wisdom overrides logic when it comes to hiking Canadian interest rates

    1 of 1 2 of 1

      The recent Interest rate hike in Canada represents conventional wisdom that works well for lenders and banks, but not so much for a nation of debtors up to their assets in debt. In an instant the banks vacuum up millions of dollars from debtors. In makes one wonder how many seconds it would take for each major bank to reach a million dollars.

      The logic for the rate increases represents a Jekyll and Hyde approach to the Canadian economy.

      For Dr. Jekyll, there is a strong economy and the interest rate increase will fuel investment and protect Canada from inflation.

      Mr. Hyde and the cash-strapped middle- and lower-income families who owe $600 billion in consumer debt (excluding mortgages) suffer the most from the interest rate increase. This supports the greatly feared financial collapse predicted if the household debt is not paid down and borrowing drops.

      Dr. Jekyll and the few who own most of the wealth in Canada approve of the interest rate hike.

      Mr. Hyde and the middle class that only owns 17 percent of the wealth in Canada scramble for every penny and stay awake at night worried about how to make ends meet.

      Undoubtedly, the interest rate increase will contribute to additional borrowing—and the continued rise of consumer debt (excluding mortgages) that has progressed unabated from $20 billion in 1975 to the $600 billion today—a troublesome climate threatening the financial security for Canadians in the future.

      Officials and experts say that household debt in Canada keeps them up at night, but at the end of the day, a nation of debtors suffer. Dr. Jekyll gets the nod of approval and Mr. Hyde is sent to the bedroom to haunt the dreams of debtors and those who ignore the majority of Canadians struggling with debt.

      The logic is a tough sell for the indebted. It seems to be a modern theoretical hybrid of the trickle-down theory best articulated by the earlier old horse and sparrow hypothesis: if you feed the horse enough oats, some will pass through to the road for the sparrows.

      I can’t understand why economists haven’t figured out the only way to bring down the debt in Canada is to reduce interest rates, not increase them. And to decisively address the root causes of the indebtedness—affordable housing, the cost of child-rearing and day care, excessive postsecondary education expenses, and net incomes sufficient to meet all of the annual and monthly expenses, including inflation and taxation.

      I love what Edgar R. Fiedler said: ask five economists and you'll get five different answers—six if one went to Harvard.

      Douglas P. Welbanks is a former director of debtor assistance and debt collection for the B.C. government and the author of several books, including Unbreakable: The Ujjal Dosanjh Story and Julius Seizure: The Secret World of Bankruptcy, Debt Collection and Student Loans.

      Comments