“Once crisis tools have served their purpose, central banks should scale them back.”
The Bank of Canada will unwind its crisis liquidity facilities, will further reduce its purchases of Government of Canada bonds, which it already started tapering in October, will let short-term assets “roll off” the balance sheet when they mature, and will as a result reduce its total assets from C$575 billion now to $C475 billion by the end of April, announced Bank of Canada Deputy Governor Toni Gravelle in a speech today.
Most of the speech was focused on the reasons for the QE and liquidity programs that the Bank of Canada unleashed starting in mid-March last year, in a two-fold role: In its role as “lender of last resort,” to deal with the “extreme stress” in the markets, as liquidity dried up and markets weren’t functioning or had “seized completely” as everyone was trying to sell everything in a mad “dash for cash.” And in its role as provider of stimulus as the economy that was spiraling down.
But these actions ballooned the balance sheet fourfold, to C$575 billion, and it created the possibility of “moral hazard.”
“Moral hazard emerges whenever market participants or other economic actors feel that they can engage in risky behavior without bearing consequences if things go wrong,” Gravelle said, a year after moral hazard became forever the guiding principle of the markets.
But moral hazard can be limited “by ensuring that such actions have a predetermined expiry date or are unwound when they’re no longer needed,” he said.
“Once crisis tools have served their purpose, central banks should scale them back to show that they are emergency measures and don’t reflect business as usual,” he said.
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wolf richter, central banks, bank of canada, wolfstreet, canada, housing bubble, mortgage bubble, interest rates, qe, quantitative easing