MARK Carney, the Bank of England’s new governor, will leave his current position as governor of the Bank of Canada with a sterling reputation. The widespread acclaim he has attracted is based on his Bank’s deft handling of the beginning of the financial crisis, and his recent appointment as head of the G20’s Financial Stability Board. But despite this praise, a more comprehensive understanding of his legacy will take time to emerge.
Carney was appointed governor of the Bank of Canada in early 2007, just before the financial crisis began to unfold. Under his leadership, the Bank’s initial handling was impeccable. It lowered interest rates to record levels and helped coordinate the global response of central banks that mitigated the risk of contagion.
And Canada weathered the storm fairly well. Alone among the major industrialised nations, its financial system emerged unscathed, although this largely reflects steps taken by federal agencies before his appointment as governor. These notably included regulations by the Office of the Superintendant of Financial Institutions and the Department of Finance (which rejected proposed bank mergers). As the recovery unfolded, Canada’s image as a safe haven helped attract billions of dollars of investment from countries with more troubled financial systems.
However, Carney’s successes need to be viewed against his failings in the bully pulpit. His Bank has regularly scolded Canadian households for borrowing too much, when its record low interest rates created the conditions that encouraged record indebtedness. In the end, it was concrete actions taken by the Department of Finance and the Canada Mortgage and Housing Corporation to tighten lending standards and shorten amortisation periods that blew the speculative froth off the housing market. But even now, households are still borrowing more for other durable goods. Car sales are at their highest level since the recession, for example, as households continue to take advantage of low rates.
Carney may also have worn out his welcome within corporate Canada. He has hectored the country’s companies for not spending enough and for holding on to too much “dead money”, as he inelegantly put it. In particular, he singled out the energy sector for not investing aggressively, citing the “massive opportunities” provided by emerging markets.
The problem is that almost all of Canada’s energy exports go to the US, where prices for both oil and gas are much lower than elsewhere in the world. And the rapid growth of shale production in the US has added to the air of uncertainty. ARC Financial Corp of Calgary projects a 10 to 15 per cent drop in cash flow for the oil and gas sector next year, making lower capital spending inevitable despite the wishes of the central bank. In these circumstances, it is not surprising that Carney’s exhortations to spend more were met by project deferrals and cancellations.
Carney’s legacy as a sound steward of monetary policy has not yet stood the test of time. After five years of record low interest rates, he has been reduced to using words as the main tool of monetary policy. Carney should perhaps have listened to the critique of ultra-easy monetary policy recently offered by former Bank of Canada deputy governor William White. He noted that, while a central bank could never run out of ammunition, low interest rates were now causing more damage to some areas of the economy than they were preventing elsewhere. His concerns centred on some sectors gorging themselves on debt, while others (like pension funds and insurance) were starved of capital.
Like Alan Greenspan at the Federal Reserve, Carney has proven adept at implementing a stimulative monetary policy in response to severe economic shocks. Looking forward, taking away the punch bowl after the party is getting started – by raising interest rates and unwinding the extraordinary stimulus of recent years – will prove the difficult part. Only when this is done can we know the true legacy of Carney.
Philip Cross is research coordinator at the Macdonald-Laurier Institute and the former chief economic analyst at Statistics Canada. He blogs for the Centre for Policy Studies at www.cps.org.uk/blog