Consumer confidence is surging just as banks brace for defaults. What's going on?

It is an unfortunate rule that bad things also happen to optimistic people.

Just as new consumer confidence figures from the Conference Board of Canada show "a three month streak" of growing optimism, worrywarts from the commercial banks, the Canada Mortgage and Housing Corporation (CMHC) and the Bank of Canada, seem to be saying "not so fast."

For Canadians trying to make sense of a series of frightening headlines, the difficult question is whether the warnings of potential economic turbulence are a signal to take the crash position or if we should trust our fellow travellers who seem to be taking the distressing indicators with a grain of salt.

The gloomy warnings have been coming thick and fast. On Wednesday, the latest arrivals to the misery party were the Canadian commercial banks. BMO and Scotiabank were the first in what is likely to be a trend by all the Canadian banks to set aside extra hundreds of millions of dollars — more than a billion for BMO — to cover loans that borrowers cannot afford to pay back in full.

While those numbers are large, they are not as large as they would be if the taxpayer didn't cover mortgage default losses. This week, however, the government agency that has to pay out if mortgage loans go bad had warnings of its own. 

"We see early warning signs that more and more consumers are getting into financial difficulties," said CMHC's deputy chief economist Aled ab Iorwerth in a release on Tuesday.

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In the past, Canadians have been reliable in paying back their loans, especially the mortgages that make up so much of our borrowing. But as longtime financial advisor and author Hilliard Macbeth has warned in the past, this time could be different.

There are signs ab Iorwerth and the CMHC could be coming around to a similar perspective. While current debt levels  are not necessarily dangerous alone, ab Iorwerth said rising interest rates and the risk of a downturn that leads to unemployment could do serious damage to Canada's economy.

That was also the message from the Bank of Canada's annual Financial System Review (FSR) released last week.

A year ago, the bank warned rising interests would hurt the fortunes of those who bought homes when interest rates were low and prices were high. In the prior FSR, the bank warned Canadians were accumulating too much mortgage debt.

Among this year's warnings, there are concerns banks could face a shortage of cash reserves, if demand for money exceeded conventional sources, including the cash Canadians hold on deposit. Compounding the problem could be a global shortage of money, meaning that banks could have to restrict lending, even in emergencies.

"If global stresses were to return and persist, bank funding costs could rise beyond the higher levels intended by tighter monetary policy," said Rogers.

While central bankers insist there are no plans to reduce interest rates, a shock to funding costs is the kind of drastic situation where it could happen.