Canada’s Merchant Banker

I‘d arranged to meet a friend at Big Ben at noon on April 1. But when I arrived, a London bobby patrolling the base of the famous clock tower told me to move on. With the heavily anticipated G-20 Leaders’ Summit set for the next day, the city was teeming with anti-globalization protesters. Vans full of riot police sped through the downtown. “If you see trouble,” he advised sternly, “head the other way.”

I saw trouble soon enough. A police helicopter hovered noisily above as 5,000 protesters surged through the narrow streets of the Square Mile. The demonstrators had smashed the windows of the Royal Bank of Scotland, and they seemed unsettled by the riot squad. Some of them started rocking a police van, prompting the cops to push through the throng of onlookers in a series of flying wedges and cordon off several streets. No one was allowed to leave. When I appealed to one officer, telling him I was a Canadian reporter and didn’t want to get trapped in a riot, he looked at me dubiously and said in a Yorkshire brogue, “That’s what you come to see, in’t?”

Actually, no. What I’d come to London to assess was the influence of someone who was that same day making a speech about the worldwide economic crisis to an audience in Yellowknife. Though Mark Carney wasn’t in London, his fingerprints were all over the draft G-20 agreement, parts of which had been hammered out at a gathering of finance ministers and central bankers in mid-March.

Speaking in Yellowknife, the forty-four-year-old economist, scarcely a year into the job of running Canada’s central bank, had the summit on his mind as he sketched out how interconnected forces such as the sub-prime mortgage melt-down, massive trade imbalances, and speculation in high-risk financial instruments (“collateralized debt obligations,” “credit default swaps”) had created a cascading credit crunch that was “more than a cyclical shock.” Turning to Canada, he assured the audience that Ottawa’s aggressive fiscal and monetary policies would begin to bear fruit by fall. Despite the fact that he’d driven down the Bank’s key interest rate to an unprecedented 0.5 percent — soon to be 0.25 per-cent — since last fall’s earthquakes, he hinted he still had other “unconventional” stimulus tools at his disposal, if conditions continued to worsen.

But Carney was also looking past the recovery, to the humbled world emerging from the scariest downturn since the Great Depression. He’d grown convinced that governments needed to expand financial regulation to include hedge funds, private equity, and the other actors in the “shadow banking system.” “This week’s G-20 summit,” he predicted, “should provide the road map for a more stable and effective international financial system.” As one of the map-makers, Carney already knew that the future wouldn’t look anything like the past.

Going into what British prime minister Gordon Brown touted as the most crucial economic summit since the 1944 Bretton Woods Conference, which laid the ground rules for the postwar global economy, the world’s attention had been focused on the array of staggeringly large bailout packages — $5 trillion (US) was the number circulating at the summit — approved since the fall. As they arrived in London, the G-20 leaders were intent on preventing a reprise of what had befallen Japan in the 1990s, when a sluggish political response to a similar banking crisis led to a decade of stagnation.

Central bankers like Carney have found themselves in un-charted territory as they scramble to boost the flow of cash through their troubled economies. Starting in early 2008, the world’s major central banks slashed their target overnight rates to counter what they predicted would become a highly contagious credit crisis. A cut in the “overnight” lending rate — the target rate at which big banks, including central banks, make one-day loans to one another — makes it cheaper for companies and consumers to borrow. Even a tiny reduction is “a very big lever,” many times greater than the largest spending project, notes political scientist John Kirton, who runs the G-20 Research Group at the University of Toronto’s Munk Centre.

But by March, many central banks had pushed those rates to almost zero, meaning they’d exhausted one of the primary tools of traditional monetary policy (after all, central banks can’t lend for free, which is what a zero percent rate implies).

Led by US Federal Reserve chairman Ben Bernanke, central bankers are now resorting to drastic measures. They’ve relaxed their own lending criteria, and are also pursuing “quantitative and credit easing” policies — a form of sanctioned alchemy that allows central banks to inject billions into their economies by acquiring government and corporate bonds, mortgages, consumer debt, and even stocks. The primary purpose of these moves is to avert the hobgoblin of deflation. When consumers expect prices to fall, they delay purchases and can thereby send an economy into the kind of death spiral that turned into the Great Depression.

It’s an unfamiliar role for people in Carney’s position. For the past twenty years, central bankers have increasingly focused on adjusting interest rates to keep inflation in check — a legacy of the stagflation of the ’70s and ’80s, when prices churned upward and borrowing costs followed. Former Fed chairman William McChesney Martin once quipped that the job of the central bank was to take away the punch bowl just as the party gets going — but as of 2009, bank officials the world over have found themselves setting out shooters the morning after a drunken debauch.