Vancity executive Chris Dobrzanski warns that debt repayments will lead to slower growth
Vancity banker Chris Dobrzanski takes a long view of the economy. This was apparent at a March 21 panel discussion at SFU Woodward’s, in which the credit union’s senior vice president of risk management and operations described the world economy.
“Since the 1970s, we’ve been growing our economy by creating artificial assets through debt much faster than our incomes,” Dobrzanski explained. “And we’ve had economic policies that have accommodated inflation.”
He likened home-equity loans to automated teller machines that allow repeated borrowing, increasing consumer debt. Meanwhile, governments have also put themselves deeply in hock, as witnessed by the debt problems plaguing Greece, Spain, Ireland, and other countries.
Eventually, Dobrzanski said, debtors are unable to repay loans because there isn’t enough money to service all their obligations. “This occurs in the capitalist market every 50 to 70 years,” Dobrzanski stated. “The last big one was in the 1930s in North America.”
He also cited a debt bubble that burst in the 1870s. Then, he talked about religious history. “How many of you have heard of the year of jubilee?” he asked, referring to a Biblical year of rest when slaves were freed and land was left untilled. “What was that about? It was debt restructuring in the Middle East.”
Dobrzanski, who's also president and CEO of Citizens Bank of Canada, added that even the Qur’an discourages financial speculation and charging interest, because it spurs the acceleration of credit. “Every time the market economy collapses,” he said, “we get tempted…to go the easy way out, which is to create inflation and credit that is unsustainable.”
But there inevitably comes a point where there’s a necessary tightening of credit to flush the accumulated debt through the system. He suggested that we’re in this phase now—that’s clear from the federal government shortening mortgage-amortization periods to 30 years and requiring higher down payments to buy homes. Dobrzanski suggested in the foreseeable future, repaying debts will assume greater prominence.
“More of our cash flow is going to be used now not for production and consumption, but for repayment of debt to get us back to a position where there’s greater sustainability,” he said.
As a result, Dobrzanski predicted that we’re in for a very long period of “very, very, very slow growth” to unwind all this debt.
What that means for housing costs is anyone’s guess. He noted that prices have fallen by 30 percent in the Squamish-Whistler area, and condo prices are off 20 percent in Surrey. But so far, there hasn’t been any significant decline in Vancouver.
“North America, in particular, is doing better in this deleveraging process,” he said. “And remember that—so don’t rush out and panic.”
Follow Charlie Smith on Twitter at twitter.com/csmithstraight.
Mar 28, 2012 at 5:27pm
Alternative headline: "Lender Warns Against Borrowing".
If only lenders could remember this when they lend ... but they never do.
Taxpayers R Us
Mar 28, 2012 at 11:41pm
Whose = who's
Mar 29, 2012 at 12:00am
Thanks. I fixed it.